Full text of "HISTORY OF ECONOMIC ANALYSIS BY JOSEPH ALOIS SCHUMPETER. EDITED BY ELISABETH BOOTY SCHUMPETER. 1386 PAGES. OXFORD UNIVERSITY PRESS. NEW YORK, 1954. HISTORIA DA ANALISE ECONOMICA. HISTOIRE DE L ANALISE ECONOMIQUE. PROF. DR. DARCY CARVALHO. FEAUSP. SAO PAULO. BRAZIL, 2016. STUDIES ON WORLD ECONOMIC THOUGHT"

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HISTORY OF ECONOMIC ANALYSIS #

HISTORY OF ECONOMIC ANALYSIS

JOSEPH A. SCHUMPETER

EDITED FROM MANUSCRIPT BY

Elizabeth Boody Schumpeter

PRINTED IN THE UNITED STATES OF AMERICA

Editor's Introduction

The History > of Economic Analysis, upon which Joseph A. Schumpeter worked
during the last nine years of his life and which he had not quite finished, was
the result of his intention to translate, revise, and bring up to date the ‘little
sketch of doctrines and methods' ( Epochen der Dogmen- und Methodenge-
schichte) written for the first volume of Max Weber's Grundriss, which was
published in 19 14. 1 This was a long essay (about 60,060 word§) of a little
more than a hundred pages which was divided into four parts or chapters. An
examination of the table of contents will show that these four parts or chap-
ters cover very briefly the same general .topics that are treated in much more
detail in Parts II, III, and IV of the 1200-page History of Economic Analysis.
The first two, which are concerned with (1) the development of economics
from the work of the philosophers and the popular discussion and (2) the dis-
coveries in economics associated with the physiocrats, Turgot, and Adam
Smith, are discussed in a single part in the present work (Part II: From the
Beginnings to 1790). The third and fourth divisions in the two works are
roughly parallel. The four main headings in the Epochen were as follows:

I. Die Entwicklung der Sozialokonomik zur Wissenschaft (The Develop-
ment of Economics as a Science).

II. Die Entdeckung des wirtschaftlichen Kreislaufs (The Discovery of the
Circular Flow of Economic Life).

III. Das klassische System und seine Auslaufer (The Classical System and
its Offshoots).

IV. Die historische Schule und die Grenznutzentheorie (The Historical
School and the Marginal Utility Theory).

The old essay had been out of print; it had never been translated from
German into English; many people had been interested in it and had urged
a translation. After herculean labor, J. A. S. had finished his monumental
Business Cycles in 1938 and sought relaxation in Capitalism, Socialism, and
Democracy, which he regarded as distinctly a ‘popular' offering that he ex-
pected to finish in a few months. He completed it some time in 1941. In the
meantime he began to give a half course in the History of Economic Thought
at Harvard. He gave this course for the first time in the fall term, 1939 and
for the last time in the spring term, 1948— -giving it in every year except in

1 Gmndriss der Sozialokonomik, 1. Abteilung, Wirtschaft und Wirtschaftswissenschaft,
pp. 19-124, published by J. C. B. Mohr (Paul Siebeck), Tubingen, 1914; 2nd ed. 1924.

editor’s introduction

1940 when he was on leave. This last development was probably the decisive
factor. He was once more teaching in a field which had always interested him.
It was natural to think of writing in that field. He would translate, revise, and
bring up to date the Epochen. In the beginning he did not stress so much
the purely analytic element in the writings of the economists discussed in his
course and about whom he wrote. In fact, for a long time I had the impres-
sion that he was writing a history of economic thought.

His original plan was not a very ambitious one. He certainly had no inten-
tion of spending nine or ten years on a history of economic analysis. At first he
probably thought of giving his spare time for a few months or a year to a little
book of three or four hundred pages. Later he thought of one large volume
of six or seven hundred pages. His main interest was his work on theory and
he planned to write his major contribution in this field. He worked constantly
at his mathematics because he believed it to be an indispensable tool of mod-
ern theory. He envisaged a theory which might some day synthesize dynamic
economics in the same way that the Walrasian system summed up static eco-
nomics. Eventually he modified this program to the extent that he would first
write a little Introduction to Theory which would be for this kind of theory
what the General Theory of Employment , Interest , and Money was for Keynes-
ian theory. He read the current theoretical literature (largely in periodicals),
worked at his mathematics, and assembled voluminous notes. The results of
this work are reflected in some of the later parts of the History , especially in
those parts which sum up modern developments.

It is hard to say just why his work on the History constantly became more
and more elaborate and took up more and more of his time. It was partly
because his interests were constantly broadening, and he found it increasingly
difficult to treat very briefly something which was to him a fascinating develop-
ment. (For example, the scholastics and the philosophers of natural law be-
came an absorbing interest in the early forties.) Here also he could weave to-
gether the threads of all his interests — philosophy, sociology, history, theory,
and such applied fields in economics as money, cycles, public finance, socialism.
I believe also that the war had something to do with it. I remember his telling
one or two friends that he found work on the History a rather soothing occu-
pation for wartime. It removed him temporarily from a grim reality which
grieved him beyond measure because he was convinced it would destroy the
civilization he loved.

As always he wrote out everything in his own hand and kept everything that
he wrote. It is possible to see, therefore,' how the early treatments became more
and more elaborate. He probably began writing the History in 1941. During
the years 1942 and 1943 he seems to have had typed a good many chapters
and sections, most of which were subsequently revised. The only substantial
parts of the History written in the early years which were not later rewritten
are the chapter The 'Mercantilist’ Literature, which was typed in June 1943,
the chapter on Sozialpolitik and the Historical Method, part of which was
typed in January 1943 and the rest in December 1943, and the section on
Senior’s Four Postulates at the beginning of Chapter 6 of Part III (General

editor’s introduction

vii

Economics: Pure Theory). These, too, would probably have been revised or
rewritten had J. A. S. lived to complete the History. Occasionally a few pages
of an earlier version were incorporated in later versions. This process is de-
scribed in some detail in the Appendix.

As time went on, he began to emphasize that this was a history of economic
analysis and not a history of economic thought. He makes this clear in a brief
description which he wrote early in 1949 for his English publishers, Allen &
Unwin, in which he stated:

’ This book will describe the development and the fortunes of scientific
analysis in the field of economics, from Graeco-Roman times to the pres-
ent, in the appropriate setting of social and political history and with
some attention to the developments in other social sciences and also in
philosophy. The ideas on economic policy that float in the public mind
or may be attributed to legislators and administrators, whether or not
embodied in elaborate systems, such as liberalism or solidarism and the
like, which are commonly referred to as economic thought, come in only
as part of that setting. The subject of the book is the history of the efforts
to describe and explain economic facts and to provide the tools for do-
ing so.

Since the very possibility of treating the history of economics like the
history of any other science is controversial. Part I of the book is devoted
entirely to the methodological questions that this approach raises and
especially to the question how far the distinction between scientific
economic analysis and economic thought is valid in spite of the interac-
tion between the two. Part II then tells the story of the growth of his-
torical, statistical, and theoretical knowledge of economic phenomena
from its beginnings in ancient Greece to the emergence of economics as
a recognized special field and to the consequent appearance in the sec-
ond half of the eighteenth century of systematic treatises, of which
A. Smith’s Wealth of Nations proved to be the most successful one.

Part III covers the period between 1776 [later changed to 1790] and
1870, and Part IV the period between 1870 and 1914. Part V is to help
the reader to relate the present state of economics to the work of the
past. Throughout, an effort has been made to make the most important
contour lines stand out without sacrificing correctness to simplicity of
exposition.

1 stated at the beginning that J. A. S. had been working on his History of
Economic Analysis during the last nine years of his life. In a larger sense, he
had been working on it all his life. Probably all of his writing and all of his
teaching contributed to the final result. The lecture which he gave on leaving
Czernowitz in 1911, for example, was entitled ‘Vergangenheit und Zukunft
der Sozialwissenschaften.’ 1 2 This was a brief outline of what first became the

2 ‘Tire Past and Future of the Social Sciences.’ A revised and enlarged version was
published by Duncker & Humblot (1915) in the Schriften des Sozialwissenschaftlichen
Akademischen Vereins in Czernowitz.

editor’s introduction

viii

Epochen and finally the History of Economic Analysis. His Presidential Ad-
dress before the American Economic Association in December 1948 — ‘Science
and Ideology’ — was concerned with some of these problems of methodology
which he takes up in Part I of the History. The course which he gave at Har-
vard on the History of Economic Thought covered essentially the period be-
tween A. Smith and A. Marshall, with special emphasis on the Ricardian
system of economic theory. In the course on Advanced Economic Theory 3
he discussed many of the problems which are written about in Part IV, Chap-
ter 7 (Equilibrium Analysis) and in Part V. He also taught at Harvard a course
on Socialism and sometimes a course on Business Cycles and the course on
Money. At the University of Bonn, J. A. S. held the Chair of Public Finance,
but also conducted a seminar which was concerned largely with theory, in-
cluding the theory of money, and with epistemology. While at Yale for a year,
he taught the course in International Trade. Not only his courses, but also
his many articles on almost every aspect of economics, his numerous book re-
views, his biographical essays, his books — all were part of the preparation for
writing the History of Economic Analysis. Even his reading for pleasure and
recreation— he loved to read biographies, preferably those in many volumes —
contributed to that fascinating knowledge of men, events, and backgrounds
which is apparent throughout the History and which will liven for some readers
sober discussions on fine points of economic analysis.

No part of the manuscript was in final form but some parts were more
nearly complete than others. The three main Parts (II, III, and IV) were prac-
tically finished, with the exceptions noted in the Appendix; the introductory
Part I and the concluding Part V were being written at the very end. The
last thing written, at the close of 1949, was apparently the chapter on Keynes
and Modern Macroeconomics at the end of Part V. This was left behind to
be typed when he went to Taconic for Christmas and to New York for the
meetings of the American Economic Association. On his return from the
meetings, he started to write up his address, ‘The March into Socialism,’ and
also to read the typescript of Part III of the History. He left several pages of
notes for revisions in the first three or four chapters in this part on ‘classical’
economics. His death on January 8, 1950, made it impossible for him ever to
carry out these revisions.

The entire History was first written in longhand. Some portions, such as the
early chapter on Money (Part II, ch. 6) and much of the material on the

3 At the beginning of the reading list for this course (Economics 203a) in the fall term
of 1948-9 occurs the following brief description:

The primary object of this course is to train the students in the art of concep-
tualizing the salient features of the economic process. But discussion of individual
problems will give the opportunity of rehearsing critically large parts of traditional
theory, old and new. The program for this term includes, first, a preliminary survey
of certain fundamental notions, especially determinateness and stability; second, the
general dynamics of economic aggregates; third, the general theory of the behavior
of households and firms. Though some knowledge of the calculus and of differential
equations is desirable, purely mathematical aspects will not be stressed.

editor's introduction

Walrasian system of equilibrium (Part IV, ch. 7, sec. 7), existed only in long-
hand and had never been typed. In a few cases there were even several alter-
native versions in longhand. Other portions had been typed but not -read by
the author after typing. Still others had been read in typescript and corrected
in pencil with notes and questions for subsequent revision. There were occa-
sional references to be filled in, and J. A. S. told me that the references needed
to be checked. I was to have helped at this task. The interested professional
reader will find more detailed information on these points in editorial notes
throughout the work and in the Editor's Appendix.

J. A. S. had no regular secretarial assistance during most of the period when
he worked on this book, but he did have people who knew his handwriting
and who typed for him. Occasionally he sent off a large batch of completed
manuscripts to be typed. He wrote most of his letters in his own hand. This,
of course, added immensely to the burden of his work and meant that his
material was never filed as an efficient secretary might have filed it. He did
not acquire a part-time secretary' until the summer of 1948, when he was
president of the American Economic Association and simultaneously carrying
on all his other work. Even then he was reluctant to take the time to instruct
her properly because the days and weeks were never long enough to do all
the things he planned to do— his teaching, his consultations, his reading, his
writing, his correspondence.

I conceived my editorial task to, be the simple one of presenting as com-
plete and accurate a version of what J. A. S. actually wrote as possible but not
to attempt to complete what he had not written. No outline of the whole work
existed, and I had read none of it before his death because J. A. S. wished
me to begin with the introduction, upon which he was working, and to read
the whole work in its proper order. The material was found in many places —
some of it in file boxes, some of it piled on shelves — in the Cambridge study
on Acacia Street, in the Taconic study, and a little of it in his office at Littauer
Center. It took me two or three months to discover that the History was nearly
completed, and sections or subsections kept turning up for some time. The
initial fitting together of the pieces was made difficult by the fact that the
manuscript pages were often not numbered at all, and that the typescript was
not numbered consecutively from the beginning but only in small batches as
typed. }. A. S. used only the first typescript for the publisher. He never both-
ered with a carbon copy for himself. Fortunately the various people who typed
the manuscript kept a carbon copy, and these carbon copies were stacked in
a room on the third floor of the Acacia Street house. Some of these — those
done in 1943 and 1944 especially — were dated. I kept looking until I found
manuscript and a first typescript to match the carbons. In a number of cases,
the carbons represented early treatments subsequently discarded or partially
incorporated in later versions. As I read the whole work over and over again
I found that, though no outline or table of contents had been written out,
such an outline existed within the text. There was a minor complication due
to the fact that the number of chapters originally planned was reduced from
eight to seven in the case of Part II and from ten to eight in the case of

editor’s introduction

Part IV. In the end, however, I had almost no difficulty in determining where
each section or subsection belonged or in deciding which was the latest of
two or more versions. These problems are discussed in the Appendix.

The task was immensely complicated by the length of the -book. Even
though I am an economist with some editorial experience, it was not easy to
put together so long a work dealing with so many economists, writing in so
many languages over so long a period. In general, the. procedure was as follows:
the sections still in manuscript were typed; then various assistants read the
manuscript to me from beginning to end while I corrected the typescript;
references were completed and checked; titles and subtitles were supplied
where necessary; after the Oxford University Press edited the typescript, I
went through it once more to pass on the changes made, to supply cross
references to other parts of the work, to check against a card catalogue of
authors; finally various assistants read the author’s copy to me from beginning
to end while I corrected the galley proofs. During each successive reading of
the History, more and more minor inaccuracies and uncertainties were cleared
up. Doubtless this process could have gone on indefinitely, but considerations
of time imposed a reasonable stopping place. It seems appropriate at this point
to acknowledge gratefully a gift from David Rockefeller and a grant from the
Rockefeller Foundation which made possible much of the secretarial and edi-
torial assistance outlined above.

One difficulty should perhaps be touched upon here. It applies especially
to the unfinished portions of the History. }. A. S. often started and abandoned
many treatments of the same subject; He kept all these trial efforts and his
original notes together with the finished bits of manuscript so that it was hot
always easy to know what was a more or less final version. Sometimes the date
of a reference or the incorporation of a page or two of an earlier version was
a clue. Another difficulty is that his plans or his notes for revision were often
in a mixture of English, German, and shorthand. Four pages of such notes
are reproduced in the Appendix (the plan and the final page for the money
chapter in Part II and two outlines for Part V). I made no effort to interpret
or carry into effect either such shorthand revisions or brief suggestions as to
revisions. I merely incorporated the straightforward corrections on the first
typescript. The original manuscript, the alternative versions, the. notes, and
the first typescript with corrections and suggested revisions in the hand of
J. A. S. will all be deposited in the Houghton Library at Harvard University,
where they may be consulted by the interested scholar.

Material has been added by the editor only for clarity or consistency, and
such additions are enclosed in square brackets. This applies especially to titles
and subtitles, editorial notes in the text, and editorial footnotes. In the be-
ginning, J. A. S. merely numbered his sections. As time went on, he added
titles for both sections and subsections. Occasionally he left a blank where he
had not made a final decision. The titles supplied by the editor were based on
the text and are all enclosed in square brackets. There are both author’s com-
ments and editor’s notes in square brackets, but it is almost always possible to
distinguish between them. The author’s comments are usually in the midst of

editor’s introduction

quotations, whereas the editor’s material occurs as complete sentences at the
end of notes., as complete footnotes, or as a complete paragraph in the text
printed in the footnote type. Where there is danger of confusion, the initiate
‘J. A. S.’ or the abbreviation ‘Ed.’ are used.

There are some repetitions, of which J. A. S. was well aware, and some omis-
sions of material promised ‘above’ or ‘below.’ For the most part, I did not
attempt to eliminate repetitions except such as were very close together and
obvious. When the same article was quoted several times in different connec-
tions or the same idea expressed several times in different parts of the text,
I did not feel competent to remove some references and leave others, although
the author himself would have done so. I have attempted to call attention in
footnotes to the more important omissions, which were the consequence Of
some parts of the work being -not quite complete. At the suggestion of Richard
M. Goodwin, I also called attention in footnotes to some of the other writ-
ings of the author which had a bearing on problems under discussion, since
J. A. S. hardly ever referred to his own work either in his teaching or in his
writing. Other people could doubtless have done this better but no one else
had the time to go through this long work again and again.

Occasionally it was impossible to read -a word or a word was omitted or a
sentence was incomplete. I dealt with such problems to the best of my ability.
The vocabulary used was extensive and many an Unusual English word had
to be tracked down in the great Oxford Dictionary. Many of the foreign titles
quoted were not to be found in any of the Harvard Libraries, UOr were they
listed by the Library of Congress. By using various foreign book lists and with
the help of scholars in this country and in Europe, I was able eventually to
verify almost all the authors and titles.

For the most part, J. A. S. was specific about the editions used where this
was important, but occasionally there was a little difficulty in this connexion*
because the author had worked in so many places over such a long period
that inevitably he had used different editions and printings of the works quoted.
He undoubtedly used European university libraries and his own extensive
library for his notes and writings before he came to Harvard in 1932. At that
time his library was packed up and stored in Jiilieh near Bonn. It Was not
brought to the United States before the war because at first he did not have
room for it and later there were various ‘practical difficulties’ (perhaps more
imaginary than real). Then came the war. Eventually it was destroyed in the
bombing of Jiilieh by the American Air Force. Only about a hundred books
(mostly English biographies) were salvaged from the rubble. After 1932, J. A. S;
used working books acquired in this country and my library of economics
books in Taconic. He spent much time during the War working quietly in thC
Kress Library of Business and Economics at the Harvard School of Business
Administration. (He also read extensively in the professional periodical litera-
ture, and he read the current books and reprints in many languages which
scholars everywhere sent him.) This may help to explain why both earlier and
later editions of the same work are listed in the History and why I found page
references to two different English translations of Volume I of Das Kapit'al

Xll EDITOR S INTRODUCTION

and to both English and American editions of Cairnes ( Some Leading Prin-
ciples) and Keynes ( Tract on Monetary Reform). The original work on Turgot’s
Reflexions was obviously done before the publication of the Schelle edition.

There is no attempt to present a bibliography with this History of Economic
Analysis. In a sense the whole history may be regarded as a bibliography. I do,
however, present a list of books frequently quoted where the edition used is
important and where this is not specifically mentioned on each occasion.
J. A. S. used the fourth edition of Marshall’s Principles (1898) because both
he and I owned this edition. (He had many qualms about this and wondered
if he shouldn’t shift to a later edition.) This list of books (with the edition
or printing used) is to be found at the end of the work, following directly
after the Appendix.

The reader may be puzzled by the significance of the indented material
which occurs in the first 566 pages of this work. It must be admitted at once
that this is an error, the consequence of a misunderstanding between the
printer and publisher on the one hand and the editor on the other. All the
indented material should have been set in footnote type (not indented) as
being supposedly of lesser interest to the average reader. It will be recalled that
j, A. S. was attempting to write a history which could be published in one
volume of possibly six or seven hundred pages. As time went on, however, his
treatment became more and 'more elaborate, and he was aware of the fact
that the book was getting too long — also that he was treating subjects which
might not interest the average reader. He therefore decided to write the book
on two levels, with the more or less technical material, the epistemological and
philosophical discussions, and the biographical sketches set in small type so
that they would take up less space and so that they could be easily skipped.
He indicated this by having them typed in single space like the footnotes. The
printer, having chosen an appropriate type for the book, decided that there
would be too much of the small or footnote type and evolved the plan of put-
ting this ‘secondary’ material in the text type but indented, thus reversing
what the author had intended to be the relative importance of this material.
Unfortunately this plan was not made clear to me and nearly half the History
was in galleys before I saw any proof. Resetting all this would have involved
both considerable expense and considerable delay. I therefore let it stand for
the most part and had only small sections of incomplete or very technical
discussion reset in small type. A glance at pages 414-18, 449-52, and 464-9,
where Comte, Mill’s Logic, and Longfield, Thiinen, and John Rae are dis-
cussed, will illustrate the kind of material which the author intended to have
subordinated. I am not sure that he was always right in his emphasis, espe-
cially with reference to the biographical sketches, which appeal to most
people who have read them.

In the rest of the History (the last two chapters of Part III and Parts IV and
V), I divided the ‘secondary’ material between the text type and the footnote
type, with only two or three ‘philosophical’ discussions indented as had been
done earlier. The biographical sketches, some of which were rather long, were
almost all printed in the larger rather than in the smaller type, as originally

editor’s introduction

xiii

intended. I did this because I was persuaded that it would be difficult to read
so much material in the very small footnote type already chosen, although this
change was, of course, contrary to my policy of publishing the History as nearly
as possible as J. A. S. had written it. The manuscript and first typescript de-
posited in the Houghton Library will show what the author planned in this
respect.

It is possible for me to mention here only a very small number of the people
without whose advice or assistance I could not have prepared the work for
publication. Arthur W. Marget was the first person to read the entire History
in typescript, to advise me about the unfinished sections, and to discuss gen-
eral editorial policy with me. He also put together and edited the chapter on
Value and Money in Part II. This chapter had never been typed, the manu-
script pages had not been numbered, and there was some uncertainty about
the order of the pages in a few cases. Gottfried von Haberler also read most
of the typescript and helped me check obscure references and any theoretical
points which troubled me. Paul M. Sweezy read all of the proof, made many
valuable suggestions, and caught several errors which had escaped me. Richard
M. Goodwin first put together for me the material in Part IV, Chapter 7, and
Part V, which were unfinished and upon which J. A. S. was working at the
time of his death. This was the important material upon equilibrium analysis
and upon modern developments. Alfred H. Conrad read some of the type-
script and much of the proof and checked mathematical formulations. Wil-
liam J. Fellner read some of the typescript, and Alexander Gerschenkron read
some of the proof. Frieda S. Ullian was both resourceful and indefatigable in
tracking down obscure authors. Anna Thorpe has helped at every stage of this
book from typing some of the early manuscript many years ago to helping me
read proof and prepare an index. Her familiarity with J, A. S.’s somewhat
difficult handwriting and his methods of work helped solve many a problem.
My gratitude goes out to these people and to all the others who helped me
in one way or another to edit this History of Economic Analysis.

Elizabeth Boody Schumpeter

Taconic, Connecticut
July 1952

Note: After Professor Schumpeter’s death and up to the last weeks of her prolonged
illness, Mrs. Schumpeter devoted most of her time to preparing this book for publica-
tion. At her death the author index was nearly finished, but the work on the subject
index had been barely started. Dr. Robert Kuenne undertook the difficult and extensive
task of preparing the subject index; he also completed the author index and co-ordinated
the two.

The publishers are deeply grateful to Professor Wassily Leontief for his help in mak-
ing publication possible.

miiiimwiiwiiifiiiiiiii 1 1 ' mnoi ninmiiriwiwii

Table of Contents

Editor's Introduction

Part I

INTRODUCTION
Scope and Method

Introduction and Plan 3

1. Plan of the Book, 3

2. Why Do W r e Study the History of Economics?, 4

3. But Is Economics a Science?, 6

Interlude I: The Techniques of Economic Analysis 12

1. Economic History, 12

2. Statistics, 13

3. ‘Theory,’ 14

4. Economic Sociology, 20

5. Political Economy, 21

6. Applied Fields, 22

Interlude II: Contemporaneous Developments in Other
Sciences 2 5

1. Economics and Sociology, 25

2. Logic and Psychology, 27

3. Economics and Philosophy, 28

The Sociology of Economics 33

1. Is the History of Economics a History of Ideologies?, 34

(a) Special Nature of 'Economic Laws,’ 34

(b) The Marxian Exposition of Ideological Bias, 3 5

(c) How Does a History of Economic Analysis Differ from a
History of Systems of Political Economy; from a History of
Economic Thought?, 38

(d) The Scientific Process: Vision and Rules of Procedure, 41
Part II

FROM THE BEGINNINGS TO THE FIRST CLASSICAL SITUATION

(To About 1790)

chapter 1 Graeco-Roman Economics 51

1. Plan of the Part, 51

2. From the Beginnings to Plato, 53

CHAPTER 1

CHAPTER 2

CHAPTER 3

CHAPTER 4

XVI

TABLE OF CONTENTS

CHAPTER 2

CHAPTER 3

3. Aristotle’s Analytic Performance, 57

4. On the Origin of the State, Private Property, and Slavery, 59
5- Aristotle’s 'Pure’ Economics, 60

(a) Value, 60

(b) Money, 62

6. Greek Philosophy, 65

7. The Contribution of the Romans, 66

(a) Absence of Analytic Work, 67

(b) Importance of Roman Law, 67

8. Early Christian Thought, 71

The Scholastic Doctors and the Philosophers of Natural Law 73

1. The Great Gap, 73

2. Feudalism and Scholasticism, 74

3. Scholasticism and Capitalism, 78

4. Scholastic Sociology and Economics, 82

(a) From the Ninth Century to the End of the Twelfth, 83

(b) The Thirteenth Century, 87

(a) The Ethico-Legal Concept, 108

(b) The Analytic Concept, no

6. The Philosophers of Natural Law: Natural-Law Analysis in the
Seventeenth Century, 115

(a) The Protestant or Laical Scholastics, 116

(b) Mathematics and Physics, 118

(d) Contribution to Economics, 122

7. The Philosophers of Natural Law: Natural-Law Analysis in the
Eighteenth Century and After, 122

(a) The Science of Human Nature: Psychologism, 123

(b) Analytic Aesthetics and Ethics, 126

(d) Historical Sociology, 134

(e) The Encyclop6distes, 137

(f) The Semi-Socialist Writers, 139

(g) Moral Philosophy, 141

The Consultant Administrators and the Pamphleteers '143

1. More Facts from Social History, 143

(a) Incidental Factors in the Emergence of the National
States, 144

(b) Why the National States Were Aggressive, 146

2. The Economic Literature of the Period, 155

(a) The Material Excluded, 156

TABLE OF CONTENTS

CHAPTER

CHAPTER 5

CHAPTER 6

(b) The Consultant Administrators, r 59

3. Sixteenth-Century Systems, 161

(a) The Work of Carafa, 162

(b) Representative Performances: Bodin and Botero, 164

4. The Systems, 1600-1776, 167

(a) Representatives of the Earlier Stages, 167

(b) Justi: the Welfare State, 170

(d) High Level of the Italian Contribution, 176

(e) Adam Smith and the 'Wealth of Nations, 181

5. Quasi-Systems, 194

6. Public Finance Once More, 199

7. Note on Utopias, 206

The Econometricians and Turgot

1. Political Arithmetick, 209

2. Boisguillebert and Cantillon, 215

3. The Physiocrats, 223

(a) Quesnay and the Disciples, 223

(b) Natural Law, Agriculture, Laissez-Faire, and l'Imp6t
Unique, 228

(d) The Tableau Economique, 239

4. Turgot, 243

Population, Returns, Wages, and Employment

1. The Principle of Population, 250

(a) The Populationist Attitude, 251

(b) Growth of Factual Knowledge, 253

2. Increasing and Decreasing Returns and the Theory of Rent, 258

(a) Increasing Returns, 258

(b) Decreasing Returns: Steuart and Turgot, 259

(d) Rent of Land, 263

3. Wages, 266

4. Unemployment and the 'State of the Poor,’ 270
Value and Money

1. Real Analysis and Monetary Analysis, 276

(a) Relation of Monetary Analysis to Aggregative or
Macroanalysis, 278

(b) Monetary Analysis and Views on Spending and Saving, 280

(d) Dearness and Plenty versus Cheapness and Plenty, 285

2. Fundamentals, 288

(a) Metallism and Cartalism: Theoretical and Practical, 288

TABLE OF CONTENTS

(b) Theoretical Metallism in the Seventeenth and
Eighteenth Centuries, 289

3. Digression on Value, 300

(a) The Paradox of Value; Galiani, 300
(h) Bernoulli’s Hypothesis, 302

(d) Codification of Value and Price Theory in the Wealth
of Nations , 307

4. The Quantity Theory, 311

(a) Bodin’s Explanation of the Price Revolution, 312

(b) Implications of the Quantity Theorem, 312

5. Credit and Banking, 317

(a) Credit and the Concept of Velocity: Cantillon, 318

(b) John Law; Ancestor of the Idea of a Managed
Currency, 321

6. Capital, Saving, Investment, 322

7. Interest, 327

(a) Influence of the Scholastic Doctors, 328

(b) Barbon: ‘Interest is the Rent of Stock,’ 329

(d) Turgot’s Great Performance, 332

The ‘Mercantilist’ Literature

1. Interpretation of the ‘Mercantilist’ Literature, 335

2. Export Monopolism, 338

3. Exchange Control, 340

4. The Balance of Trade, 345

(a) The Practical Argument: Power Politics, 346

(b) The Analytic Contribution, 347

(d) Serra, Malynes, Misselden, Mun, 353

(e) Three Erroneous Propositions, 359

5. Analytic Progress from the Last Quarter of the Seventeenth
Century: Josiah Child to Adam Smith, 362

(a) Concept of the Automatic Mechanism, 365

(b) Foundations of a General Theory of International
Trade, 367

(d) Benefits from Territorial Division of Labor, 373

Part III

FROM 1790 TO 1870
chapter 1 Introduction and Plan

1. Coverage, 379

2. Paraphernalia, 380

3. Plan of the Part, 383

4. Concerning the Marxist System, 383

TABLE OF CONTENTS

chapter 2 Socio-Political Backgrounds

1. Economic Development, 396

2. Free Trade and Foreign Relations, 397

3. Domestic Policy and Sozialpolitik, 399

4. Gladstonian Finance, 402

5. Gold, 405

chapter 3 The Intellectual Scenery

1. The Zeitgeist of the Period and Its Philosophy, 407

(a) Utilitarianism, 407

(b) German Philosophy, 411

2. Romanticism and Historiography, 418

(a) Romanticism, 418

(b) Historiography, 424

3. Sociology and Political Science: Environmentalism, 428

(a) The Natural-Law Sociology of Government and
Politics, 428

(b) The Historians’ Sociology of Government and Politics, 431

4. Evolutionism, 435

(a) Philosophers’ Evolutionism, 436

(b) Marxist Evolutionism, 438

(d) The Intellectualist Evolutionism of Condorcet and
Comte, 442

(e) Darwinian Evolutionism, 444

5. Psychology and Logic, 446

(a) Associationist and Evolutionist Psychology, 446

(b) Logic, Epistemology, and Cognate Fields, 448

6. Pre-Marxian Socialism, 452

(a) Associationist . Socialism, 454

(b) Anarchism, 457

chapter 4 Review of the Troops

1. The Men Who Wrote above Their Time, 463

2. The Ricardians, 469

3. Malthus, Senior, and Some of Those Who Also Ran, 480

(a) Malthus, 480

(b) Archbishop Whately and Professor Senior, 483

4. France, 490

5. Germany, 501

6. Italy, 510

7. United States, 514

8. Factual Work, 519

(a) Tooke’s History of Prices, 520

(b) Collection and Interpretation of Statistical Materials, 521

XX TABLE OF CONTENTS

chapter 5 General Economics: A Cross Section

1. J. S. Mill and his Principles. Fawcett and Caimes, 527

2. Scope and Method: What Economists Thought They Were
Doing, 534

(a) Definitions of the Science, 534 .

(b) Methodology, 536

3. What Mill’s Readers Actually Got, 541

4. The Institutional Frame of the Economic Process, 544

(a) The Institutions of Capitalist Society, 544

(b) The State in 'Classic’ Economics, 548

5. The ‘Classic’ Schema of the Economic Process, 554

(a) The Actors, 554

(b) The Agents, 557

6. The ‘Classic’ Conception of Economic Development, 570

chapter 6 General Economics: Pure Theory

1. Axiomatics. Senior’s Four Postulates, 575

(a) The First Postulate, 576

(b) The Second Postulate: the Principle of Population, 578

2. Value, 588

(a) Ricardo and Marx, 590

(b) The Opponents of the Labor-Quantity Theory of
Value, 598

3. The Theory of International Values, 605

4. Say’s Law of Markets, 615

5. Capital, 625

(a) Terminological Squabbles about Wealth and Income, 625

(b) The Structure of Physical Capital, 631

(d) J. S. Mill’s Fundamental Propositions Respecting
Capital, 640

6. The Distributive Shares, 645

(a) Profits, 645

(b) Marx’s Exploitation Theory of Interest, 647

(d) The Productivity Theories of Interest, 655

(e) The Abstinence Theory of Interest, 659

(f) The Wage-Fund Doctrine, Precursor of Modern
Aggregative Analysis, 662

(g) Rent, 671

(h) Distributive Shares and Technological Advance, 679

chapter 7 Money, Credit, and Cycles
1. England’s Problems, 688

(a) War Inflation, 1793-1815, 690

TABLE OF CONTENTS

XXX

(b) The Question of the Standard, 692

2. Fundamentals, 698

3. Gleanings from the Discussions on Inflation and Resumption, 706

4. The Theory of Credit, 717

(a) Credit, Prices, Interest, and Forced Savings, 718

(b) Gains from the Controversy about Peel’s Act of 1844, 7 2 S

5. Foreign Exchange and International Gold Movements, 731

6. ’The’ Business Cycle, 738

Part IV

FROM 1870 TO 1914 (AND LATER)

chapter 1 Introduction and Plan 753

1. Coverage, 753

2. Paraphernalia, 754

3. Plan of the Part, 757

chapter 2 Background and Patterns 759

1. Economic Development, 759

2. The Defeat of Liberalism, 761

3. Policies, 766

(a) Free Trade and Foreign Policy, 766

(b) Domestic Policy and Sozialpolitik, 767

(d) Money, 770

4. Art and Thought, 771

(a) Bourgeois Civilization and Its Recalcitrant Offspring, 771

(b) Bourgeois Civilization and Its Philosophy, 772

chapter 3 Some Developments in Neighboring Fields 781

1. History, 781

2. Sociology, 783

(a) Historical Sociology, 785

(b) Prehistorical-Ethnological Sociology, 786

(d) Autonomous Sociology, 792

3. Psychology, 796

(a) Experimental Psychology, 796

(b) Behaviorism, 797

(d) Freudian Psychology, 798

(e) Social Psychology, 799

chapter 4 Sozialpolitik and the Historical Method 800

1. Sozialpolitik, 800

(a) Influence upon Analytic Work, 801

(b) Verein fur Sozialpolitik, 803

TABLE OF CONTENTS

2. Historism, 807

(a) The 'Older’ Historical School, 808

(b) The 'Younger’ Historical School, 809

(d) The 'Youngest’ Historical School: Spiethoff, Sombart,
and M. Weber, 815

(e) Economic History and Historical Economics in
England, 821

The General Economics of the Period: Men and Groups

1. Jevons, Menger, Walras, 825

2. England: The Marshallian Age, 829

(a) Edgeworth, Wicksteed, Bowley, Cannan, and Hobson, 830

(b) Marshall and His School, 833

3. France, 840

4. Germany and Austria, 843

(a) The Austrian or Viennese School, 844

(b) The Elder Statesmen, 850

5. Italy, 855

(a) The Elder Statesmen, 856

(b) Pantaleoni, 857

6. The Netherlands and the Scandinavian Countries, 861

7. The United States, 863

(a) The Men Who Prepared the Ground, 865

(b) Clark, Fisher, and Taussig, 867

8. The Marxists, 877

(a) Marxism in Germany, 879

(b) Revisionism and the Marxist Revival, 882

General Economics: Its Character and Contents

1. Outposts, 886

(a) The Sociological Framework of General Economics, 886

(b) Population, 889

2. The Vision, Enterprise, and Capital, 891

(a) The Vision, 892

(b) Enterprise, 893

3. The Revolution in the Theory of Value and Distribution, 909

(a) The Theory of Exchange Value, 911

(b) Cost, Production, Distribution, 912

4. Marshall’s Attitude and Real Cost, 920

5. Interest, Rent, Wages, 924

(a) Interest, 924

(b) Rent, 932

TABLE OF CONTENTS XXlii

6. The Contribution of the Applied Fields, 944

(a) International Trade [Heading only; section not written.],

945

(b) Public Finance [Not finished.], 945

(d) Agriculture [Heading only; section not written.], 948

(e) Railroads, Public Utilities, ‘Trusts,’ and Cartels, 948

chapter 7 Equilibrium Analysis 951

1. Fundamental Unity of the Period’s Economic Theory, 952

2. Cournot and the ‘Mathematical School’: Econometrics, 954

(a) The Service Mathematics Rendered to Economic Theory,

955

(b) The Contribution of Cournot, 958

3. The Concept of Equilibrium, 963

(a) Statics, Dynamics; the Stationary State, Evolution, 963

(b) Determinateness, Equilibrium, and Stability, 967

4. The Competitive Hypothesis and the Theory of Monopoly, 972

(a) The Competitive Hypothesis, 973

(b) The Theory of Monopoly, 975

5. The Theory of Planning and of the Socialist Economy, 985

6. Partial Analysis, 990

(a) The Marshallian Demand Curve, 991

(b) Elasticity Concepts, 992

7. The Walrasian Theory of General Equilibrium, 998

(a) Walras’ Conceptualization, 999

(b) The Theory of Exchange, 1003

(d) Walras’ Theory of Production, 1009

(e) The Introduction of Capital Formation and of Money,

1016

8. The Production Function, 1026

(a) The Meaning of the Concept, 1027 '

(b) The Evolution of the Concept, 1032

(d) Increasing Returns and Equilibrium, 1045

(e) Tendency toward Zero Profits, 1048

Appendix to Chapter 7

Note on the Theory of Utility, 1053

1. The Earlier Developments, 1054

2. Beginnings of the Modem Development, 1053

3. The Connection with Utilitarianism, 1036

4. Psychology and the Utility Theory, 1037

5. Cardinal Utility, 1060

6. Ordinal Utility, 1062

TABLE OF CONTENTS

7. The Consistency Postulate, 1066

8. Welfare Economics, 1069

Money, Credit, and Cycles

1. Practical Problems, 1074

(a) The Gold Standard, 1075

(b) Bimetallism, 1076

(d) Stabilization and Monetary Management, 1077

2. Analytic Work, 1080

(a) Walras, 1082

(b) Marshall, 1083

(d) The Austrians, 1085

3. Fundamentals, 1086

(a) Nature and Functions of Money, 1086

(b) Knapp’s State Theory of Money, 1090

4. The Value of Money: Index Number Approach, 1091

(a) Early Work, 1092

(b) The Role of the Economic Theorists, 1092

5. The Value of Money: the Equation of Exchange and the
'Quantity Approach/ 1095

(a) The Definition of the Concepts, 1096

(b) Distinction between the Equation of Exchange and the
Quantity Theory, 1099

6. The Value of Money: the Cash Balance and Income
Approaches, 1108

(a) The Cash Balance Approach, 1108

(b) The Income Approach, 1109

7. Bank Credit and the 'Creation’ of Deposits, 1110

8. Crises and Cycles: the Monetary Theories, 1117

9. Non-Monetary Cycle Analysis, 1122

(a) Juglar’s Performance, 1123

(b) Common Ground and Warring ‘Theories/ 1125

Part V

CONCLUSION

A Sketch of Modern Developments
chapter 1 Introduction and Plan

1. Plan of the Part, 1139

2. The Progress of Theoretical Economics during the Last
Twenty-five Years, 1140

(a) Introductory Lecture on the Scope of the Course, 1140

(b) The Marshall-Wicksell System and Its Development,
1142

TABLE OF CONTENTS

XXV

(d) Income Analysis, 1143

(e) Summary of the Course, 1144
3. Background and Patterns, 1145

chapter 2 Developments Stemming from the Marshall-Wicksell
Apparatus

1. The Modern Theory of Consumers’ Behavior and the 'New’
Theory of Production, 1148

2. Theory of the Individual Firm and Monopolistic Competition,
1150

chapter 3 Economics in the 'Totalitarian’ Countries

1. Germany, 1154

2. Italy, 1156

3. Russia, 1157

chapter 4 Dynamics and Business Cycle Research

1. Dynamizing Aggregative Theory: Macrodynamics, 1161

2. The Statistical Complement: Econometrics, 1162

3. The Interaction of Macrodynamics and Business Cycle
Research, 1163

chapter 5 Keynes and Modern Macroeconomics

1. Comments on the Wider Aspects of Keynes’s Work, 1171

2. The Analytic Apparatus of the General Theory, 1174

3. The Impact of the Keynesian Message, 1180

Editor’s Appendix

List of Books Frequently Quoted

Author Index

Subject Index

1 148

1153

1160

1170

1185

1205

1209

1231

CHAPTER 1

[Introduction and Plan]

1 . Plan of the Book 3

2. Why Do We Study the History of Economics? 4

3. But Is Economics a Science? 6

1. Plan of the Book

By History of Economic Analysis I mean the history of the intellectual ef-
forts that men have made in order to understand economic phenomena or,
which comes to the same thing, the history of the analytic or scientific aspects
of economic thought. Part 11 of this book will describe the history of those
efforts from the earliest discernible beginnings up to and including the last two
or three decades of the eighteenth century. Part hi will go on through the
period that may be described, though only very roughly, as the period of the
English ‘classics’ — to about the early 1870’s. Part iv will present an account
of the fortunes of analytic or scientific economics from (speaking again very
roughly) the end of the ‘classic’ period to the First World War, though the
history of some topics will, for the sake of convenience, be carried to the
present time. These three Parts constitute the bulk of the book and embody
the bulk of the research that went into it. Part v is merely a sketch of modern
developments, relieved of some of its cargo by the anticipations in Part iv that
have been just mentioned, and aims at nothing more ambitious than helping
the reader to understand how modern work links up with the work of the past.

In facing the huge task that has been attempted rather than performed in
this book we become aware immediately of an ominous fact. Whatever the
problems that, to snare the unwary, lurk below the surface of the history of
any science, its historian is in other cases at least sure enough of his subject
to be able to start right away. This is not so in our case. Here, the very ideas
of economic analysis, of intellectual effort, of science, are ‘quenched in' smoke/
and the very rules or principles that are to guide the historian’s pen are open
to doubt and, what is worse, to misunderstanding. Therefore, Parts 11 to v will
be prefaced by a Part 1 that is to explain as fully as space permits my views
on the nature of my subject and some of the conceptual arrangements I pro-
pose to use. It has further seemed to me that a number of topics should be
included that pertain to the Sociology of Science — to the theory of science
considered as a social phenomenon. But observe: these things stand here in
order to convey some information about the principles I am going to adopt
or about the atmosphere of this book. Though reasons will be given for my
adopting them, they cannot be fully established here. They are merely to
facilitate the understanding of what I have tried to do and to enable the reader
to lay the book aside if this atmosphere be not to his taste.

I: SCOPE AND METHOD

2. Why Do We Study the History of Economics?

Well, why do we study the history of any science? Current work, so one
would think, will preserve whatever is still useful of the work of preceding
generations. Concepts, methods, and results that are not so preserved are pre-
sumably not worth bothering about. Why then should we go back to old
authors and rehearse outmoded views? Cannot the old stuff be safely left to
the care of a few specialists who love it for its own sake?

There is much to be said for this attitude. It is certainly better to scrap
outworn modes of thought than to stick to them indefinitely. Nevertheless, we
stand to profit from visits to the lumber room provided we do not stay there
too long. The gains with which we may hope to emerge from it can be dis-
played under three heads: pedagogical advantages, new ideas, and insights
into the ways of the human mind. We shall take these up in turn, at first with-
out special reference to economics and then add, under a fourth head, some
reasons for believing that in economics the case for a study of the history of
analytic work is still stronger than it is for other fields.

First, then, teachers or students who attempt to act upon the theory that the
most recent treatise is all they need will soon discover that they are making
things unnecessarily difficult for themselves. Unless that recent treatise itself
presents a minimum of historical aspects, no amount of correctness, originality,
rigor, or elegance will prevent a sense of lacking direction and meaning from
spreading among the students or at least the majority of students. This is
because, whatever the field, the problems and methods that are in use at any
given time embody the achievements and carry the scars of work that has
been done in the past under entirely different conditions. The significance and
validity of both problems and methods cannot be fully grasped without a
knowledge of the previous problems and methods to which they are the
(tentative) response. Scientific analysis is not simply a logically consistent
process that starts with some primitive notions and then adds to the stock in a
straight-line fashion. It is not simply progressive discovery of an objective
reality — as is, for example, discovery in the basin of the Congo. Rather it is
an incessant struggle with creations of our own and our predecessors 7 minds
and it 'progresses , 7 if at all, in a criss-cross fashion, not as logic, but as the
impact of new ideas or observations or needs, and also as the bents and tem-
peraments of new men, dictate. Therefore, any treatise that attempts to render
'the present state of science 7 really renders methods, problems, and results
that are historically conditioned and are meaningful only with reference to the
historical background from which they spring. To put the same thing some-
what differently: the state of any science at any given time implies its past
history and cannot be satisfactorily conveyed without making this implicit
history explicit. Let me add at once that this pedagogical aspect will be kept
in mind throughout the book and that it will guide the choice of material for
discussion, sometimes at the expensfe of other important criteria.

Second, our minds are apt to derive new inspiration from the study of the

INTRODUCTION AND PLAN

history of science. Some do so more than others, but there are probably few
that do not derive from it any benefit at all. A man’s mind must be indeed
sluggish if, standing back from the work of his time and beholding the wide
mountain ranges of past thought, he does not experience a widening of his
own horizon. The productivity of this experience may be illustrated by the fact
that the fundamental ideas that eventually developed into the theory of
(special) relativity occurred first in a book on the history of mechanics. 1 But,
besides inspiration every one of us may glean lessons from the history of his
science that are useful, even though sometimes discouraging. We learn about
both the futility and the fertility of controversies; about detours, wasted efforts,
and blind alleys; about spells of arrested growth, about our dependence on
chance, about how not to do things, about leeways to make up for. We learn
to understand why we are as far as we actually are and also why we are not
further. And we learn what succeeds and how and why — a question to which
attention will be paid throughout this book.

Third, the highest claim that can be made for the history of any science
or of science in general is that it teaches us much about the ways of the
human mind. To be sure, the material it presents bears only upon a particular
kind of intellectual activity. But within this field its evidence is almost ideally
complete. It displays logic in the concrete, logic in action, logic wedded to
vision and to purpose. Any field of human action displays the human mind
at work but in no other-field do we get so near the actual methods of working
because in no other field do people take so much trouble to report on their
mental processes. Different men have behaved differently in this respect. Some,
like Huyghens, were frank; others, like Newton, were reticent. But even the
most reticent of scientists are bound to reveal their mental processes because
scientific — unlike political — -performance is self-revelatory by nature. It is for
this reason mainly that it has been recognized many times — from Whewell
and J. S. Mill to Wundt and Dewey — that the general science of science (the
German Wissenschaftslehre ) is not only applied logic but also a laboratory
for pure logic itself. That is to say, scientific habits or rules of procedure are
not merely to be judged by logical standards that exist independently of them;
they contribute something to, and react back upon, these logical standards
themselves. To convey the point by the useful device of exaggeration: a sort
of pragmatic or descriptive logic may be abstracted from observation and for-
mulation of scientific procedures — which of course involve , or merge into, the
study of the history of sciences.

Fourth, it stands to reason that the preceding arguments, at least the ones
that have been presented under the first two headings, apply with added
force to the special case of economics,. We shall attend presently to the im-
plications of the obvious fact that the subject matter of economics is itself a
unique historical process (see sec. 3 below) so that, to a large extent, the
economics of different epochs deal with different sets of facts and problems.

1 Ernst Mach, Die Mechanik in ihrer Entwicklung: historisch-kritisch dargestellt (1st
ed., 1883; see Appendix, by J. Petzoldt, to the 8th ed.); English trans. by T. J. Mc-
Cormack, containing additions and alterations up to the 9th (the final) ed., 1942.

6 I; SCOPE AND METHOD

This fact alone would suffice to lend increased interest to doctrinal history.
But let us discard it for the moment in order to avoid repetition and to empha-
size another fact. As we shall see, scientific economics does not lack historical
continuity. It is in fact our main purpose to describe what may be called the
process of the Filiation of Scientific Ideas — the process by which men’s ef-
forts to understand economic phenomena produce, improve, and pull down
analytic structures in an unending sequence. And it is one of the main theses
to be established in this book that fundamentally this process does not differ
from the analogous processes in other fields of knowledge. But, for reasons
that it is also one of our purposes to make clear, this filiation of ideas has
met with more inhibitions in our field than it has in almost all others. Few
people, and least of all we economists ourselves, are prone to offer us congratu-
lations on our intellectual achievements. Moreover our performance is, and
always was, not only modest but also disorganized. Methods of fact-finding
and analysis that are and were considered substandard or wrong on principle
by some of us do prevail and have prevailed widely with others. Although it
is possible nevertheless — as I shall try to show — to speak for every epoch of
established professional opinion on scientific topics and although this opinion
has often stood the test of being proof against strong differences in political
views, we cannot speak with as much confidence about it as can physicists or
mathematicians. In consequence we cannot, or at least we do not, trust one
another to sum up 'the state of the science’ in an equally satisfactory manner.
And the obvious remedy for the shortcomings of summarizing works is the
study of doctrinal history: much more than in, say, physics is it true in eco-
nomics that modern problems, methods, and results cannot be fully under-
stood without some knowledge of how economists have come to reason as they
do. In addition, much more than in physics have results been lost on the way
or remained in abeyance for centuries. We shall meet with instances that are
little short of appalling. Stimulating suggestions and useful if disconcerting
lessons are much more likely to come to the economist who studies the his-
tory of his science than to the physicist who can, in general, rely on the fact
that almost nothing worth while has been lost of the work of his predecessors.
Why, then, not start in at once upon another story of intellectual conquest?

3. But Is Economics a Science?

The answer to the question that heads this section depends of course on
what we mean by 'science.’ Thus, in everyday parlance as well as in the lingo
of academic life — particularly in French and English-speaking countries — the
term is often used to denote mathematical physics. Evidently, this excludes all
social sciences and also economics. Nor is economics as a whole a science if
we make the use of methods similar to those of mathematical physics the
defining characteristic ( definiens ) of science. In this case only a small part of
economics is 'scientific.’ Again, if we define science according to the slogan
'Science is Measurement,’ then economics is scientific in some of its parts and
not in others. There should be no susceptibilities concerning 'rank’ or 'dignity’

INTRODUCTION AND PLAN 7

about this: to call a field a science should not spell either a compliment or
the reverse.

For our purpose, a very wide definition suggests itself, to wit: a science is
any kind of knowledge that has been the object of conscious efforts to improve
it . 1 Such efforts produce habits of mind — methods or 'techniques’ — and a
command of facts unearthed by these techniques which are beyond the range
of the mental habits and the factual knowledge of everyday life. Hence we
may also adopt the practically equivalent definition: a science is any field of
knowledge that has developed specialized techniques of fact-finding and of
interpretation or inference (analysis). Finally, if we wish to emphasize* socio-
logical aspects, we may formulate still another definition, which is also practi-
cally equivalent to the other two: a science is any field of knowledge in which
there are people, so-called research workers or scientists or scholars, who en-
gage in the task of improving upon the existing stock of facts and methods
and who, in the process of doing so, acquire a command of both that differ-
entiates them from the 'layman’ and eventually also from the mere 'practi-
tioner.’ Many other definitions would be just as good. Here are two which I
add without further explanations: (1) science is refined common sense; (2)
science is tooled knowledge.

Since economics uses techniques that are not in use among the general pub-
lic, and since there are economists to cultivate them, economics is obviously
a science within our meaning of the term. It seems to follow that to write the
history of those techniques is a perfectly straightforward task about which
there should be no doubts or qualms. Unfortunately this is not so. We are not
yet out of the wood; in fact, we are not yet in it. A number of obstacles will
have to be removed before we can feel sure of our ground — the most serious
one carrying the label Ideology. This will be done in the subsequent chapters
of this Part. Just now, a few comments will be presented on our definition
of science.

First of all we must meet what the reader presumably considers a fatal ob-
jection. Science being tooled knowledge, that is, being defined by the cri-
terion of using special techniques, it seems as though we should have to in-
clude, for instance, the magic practiced in a primitive tribe if it uses tech-
niques that are not generally accessible and are being developed and- handed
on within a circle of professional magicians. And of course we ought to include
it on principle. This is so because magic, and practices that in the relevant
aspect do not differ fundamentally from magic, sometimes shade off into what
modern man recognizes as scientific procedure by imperceptible steps: astrol-
ogy was astronomy’s mate until the beginning of the seventeenth century.

1 We shall reserve the term Exact Science for the second of the meanings of the
word Science enumerated above, i.e. for sciences that use methods more or less similar
in logical structure to those of mathematical physics. The term Pure Science will be
used in contrast to Applied Science (the French used the same term, for instance, me-
canique or economic pure, but also the term mecanique or economic rationnelle ; the
Italian equivalent is meccanica or economic pura, the German reine Mechanik or
Okonomie). ,

O I: SCOPE AND METHOD

There is however another and still more compelling reason. The exclusion of
any kind of tooled knowledge would amount to declaring our own standards
to be absolutely valid. for all times and places. But this we cannot do . 2 In prac-
tice we have indeed no choice but to interpret and to appraise every piece of
tooled knowledge, past as well as present, in the light of our standards, since
we have no others. They are the results of a development of more than six
centuries , 3 during which the realm of scientifically admissible procedures or
techniques has been more and more restricted in the sense that more and more
procedures or techniques have been ruled out as inadmissible. We mean this
critically restricted realm only when we speak of ‘modern’ or ‘empirical’ or
‘positive’ 4 science. Its rules of procedure differ in different departments of
science and, as we have already seen above, are never beyond doubt. Broadly,
however, they may be described by two salient characteristics: they reduce the
facts we are invited to accept on scientific grounds to the narrower category
of ‘facts verifiable by observation or experiment’; and they reduce the range of
admissible methods to ‘logical inference from verifiable facts.’ Henceforth we
shall put ourselves on this standpoint of empirical science, at least so far as its
principles are recognized in economics. But in doing so we must bear this in

2 The best way of convincing ourselves of this is to observe that our rules of pro-
cedure are, and presumably always will be, subject to controversy and in a state of
flux. Consider, e.g., the following case. Nobody has proved that every even number
can be expressed as the sum of two prime numbers, although no even number that
cannot has been discovered so far. Suppose now that this proposition someday leads to
a contradiction with another proposition which we agree to accept. Would it follow
from this that there exists an even number that is not the sum of two primes? ‘Classic’
mathematicians would answer Yes, ‘intuitionist’ mathematicians (such as Kronecker and
Brouwer) would answer No; that is, the former admit and the latter refuse to admit
the validity of what are called indirect proofs of existence theorems , which are widely
used in many fields and also in pure economics. Evidently, the mere possibility of such
a difference of opinion on what constitutes valid proof suffices to show, among other
things, that our own rules cannot be accepted as the last word on scientific procedure.

3 This estimate refers to Western Civilization alone and in addition takes account of
Greek developments only so far as they entered scientific thought in western Europe
from the thirteenth century on, as an inheritance, but not of those developments them-
selves. As a landmark, we choose the Summa Theologica of St. Thomas Aquinas, which
excludes revelation from the philosophicae disciplinae, that is, from all sciences except
supernatural theology ( sacra doctrina; natural theology is one of the philosophicae dis-
ciplinae). This was the earliest and most important step in methodological criticism
taken in Europe after the breakdown of the Graeco-Roman world. It will be shown
below how exclusion of revelation from all sciences except the sacra doctrina was
coupled by St. Thomas with the exclusion from them of appeal to authority as an ad-
missible scientific method.

4 The word ‘positive’ as used in this connection has nothing whatever to do with
philosophical positivism. This is the first of many warnings that will have to be issued
in this book against the dangers of confusion that arise from the use, for entirely dif-
ferent things, of the same word by writers who themselves sometimes confuse the
things. The point is important and so I shall mention instances at once: rationalism,
rationalization, relativism, liberalism, empiricism.

INTRODUCTION AND PLAN

mind: although we are going to interpret doctrines from this standpoint we do
not claim any ‘absolute’ validity for it; and although, reasoning from this
standpoint, we may describe any given propositions or methods as invalid —
always of course with reference to the historical conditions in which they were
formulated — we do not therefore exclude them from the realm of scientific
thought in our original (broadest) sense of the word or, to put it somewhat
differently, deny to them scientific character 5 — which must be appraised, if
at all, according to the ‘professional’ standards of every time and place.

Second, our original definition (‘tooled knowledge’) indicates the reason
why it is in general impossible to date — even by decades — the origins, let alone
the ‘foundation,’ of a science as distinguished from the origins of a particular
method or the foundation of a ‘school.’ Just as sciences grow by slow accretion
when they have come into existence, so they emerge by slow accretion, grad-
ually differentiating themselves, under the influence of favorable and inhibiting
environmental and personal conditions, from their common-sense background
and sometimes also from other sciences. Research into the past, clarifying those
conditions, can and does reduce the time range within which it is in each
case about equally justifiable to aver or to deny the existence of a body of
scientific knowledge. But no amount of research can eliminate altogether a
zone of doubt that has always been broadened by the historian’s personal
equation. As regards economics, bias or ignorance alone can explain such state-
ments as that A. Smith or F. Quesnay or Sir William Petty or anyone else
‘founded’ that science, or that the historian should begin his report with one
of them. But it must be admitted that economics constitutes a particularly
difficult case, because common-sense knowledge goes in this field much far-
ther relatively to such scientific knowledge as we have been able to achieve,
than does common-sense knowledge in almost any other field. The layman’s
knowledge that rich harvests are associated with low prices of foodstuffs or
that division of labor increases the efficiency of the productive process are ob-
viously prescientific and it is absurd to point to such statements in old writings
as if they embodied discoveries. The primitive apparatus of the theory of de-
mand and supply is scientific. But the scientific achievement is so modest,
and common sense and scientific knowledge are logically such close neighbors
in this case, that any assertion about the precise point at which the one
turned into the other must of necessity remain arbitrary. I use this opportunity
to advert to a cognate problem.

To define science as tooled knowledge and to associate it with particular
groups of men is almost the same thing as emphasizing the obvious importance
of specialization of which the individual sciences are the (relatively late)

5 All this is very inadequate and of course completely fails to do justice to the deep
problems that we have been touching superficially. Since, however, it is all that can be
done in the available space, I wish to add only that the interpretation above will be
seen to be as far as possible removed from (a) a claim to professorial omniscience; (b)
a wish to ‘grade’ the cultural contents of the thought of the past according to present
standards; and especially (c) to appraise anything but techniques of analysis. Some re-
lated points will become clearer as we go along.

lO I: SCOPE AND METHOD

result . 6 But this process of specialization has never gone on according to any
rational plan — whether explicitly preconceived or only objectively present— so
that science as a whole has never attained a logically consistent architecture;
it is a tropical forest, not a building erected according to blueprint. Individ-
uals and groups have followed leaders or exploited methods or have been
lured on by their problems, as it were, cross country, as has been already ex-
plained in Section 2. One of the consequences of this is that the frontiers of
the individual sciences or of most of them are incessantly shifting and that
there is no point in trying to define them either by subject or by method.
This applies particularly to economics, which is not a science in the sense in
which acoustics is one, but is rather an agglomeration of ill-co-ordinated and
overlapping fields of research in the same sense as is 'medicine.’ Accordingly,
we shall indeed discuss other people’s definitions — primarily for the purpose
of wondering at their inadequacies — but we shall not adopt one for ourselves.
Our closest approach to doing so will consist in the enumeration presented
below of the main ‘fields’ now recognized in teaching practice. But even this
epideiktic definition 7 must be understood to carry no claim to completeness.
In addition we must always leave open the possibility that, in the future,
topics may be added to or dropped from any complete list that might be drawn
up as of today.

Third, our definition implies nothing about the motives that impel men to
exert themselves in order to improve upon the existing knowledge in any field.
In another connection we shall presently return to this subject. For the mo-
ment we only note that the scientific character of a given piece of analysis is
independent of the motive for the sake of which it is undertaken. For in-
stance, bacteriological research is scientific research and it does not make any
difference to its procedures whether the investigator embarks upon it in order
to serve a medical purpose or any other. Similarly, if an economist investigates
the practices of speculation by methods that meet the scientific standards of
his time and environment, the results will form part of the scientific fund of
economic knowledge, irrespective of whether he wishes to use them for rec-
ommending regulatory legislation or to defend speculation against such legis-
lation or merely to satisfy his intellectual curiosity. Unless he allows his pur-
pose to distort his facts or his reasoning, there is no point in our refusing to

6 Let me add at once that within such groups of fellow workers a specialized lan-
guage is sure to develop that becomes increasingly un-understandable to the lay public.
This effort-saving device could even be used as a criterion by which to recognize the
presence of a science if it were not the fact that very often it is adopted, only long
after a science in our sense has grown to respectable size, under pressure of the intoler-
able inconvenience incident to using concepts of everyday life that serve but ill the
purposes of analysis. Economists in particular, much to the detriment of their field,
have attached unreasonable importance to being understood by the general public, and
this public even now displays equally unreasonable resentment toward any attempt to
adopt a more rational practice.

7 An epideiktic definition is the definition of a concept, say the concept ‘elephant,’
by pointing to a specimen of the class denoted by the concept.

INTRODUCTION AND PLAN

accept his results or to deny their scientific character on the ground that we
disapprove of his purpose. This implies that any arguments of a scientific
character produced by ‘special pleaders' — whether they are paid or not for
producing them — are for us just as good or bad as those of ‘detached phi-
losophers/ if the latter species does indeed exist. Remember: occasionally, it
may be an interesting question to ask why a man says what he says; but what-
ever the answer, it does not tell us anything about whether what he says is
true or false. We take no stock in the cheap device of political warfare — un-
fortunately too common also among economists- — of arguing about a proposi-
tion by attacking or extolling the motives of the man who sponsors it or the
interest for or against which the proposition seems to tell.

CHAPTER 2

Interlude I: [The Techniques of Economic Analysis]

[1. Economic History] 12

[2. Statistics] 13

[3. 'Theory’] 14

[4. Economic Sociology] 20

[5. Political Economy] 21

[6. Applied Fields] 22

The last paragraph of the preceding chapter points toward momentous prob-
lems, which will, under the heading of Sociology of Science, be touched upon
in Chapter 4. Now we break off our argument and turn aside in order to hunt
two hares whose paths diverge sometimes in a disconcerting manner: on the
one hand, it is necessary to define the relations of economics to some of the
fields of tooled knowledge that have or have had influence upon it or have
border zones in common with it 1 (ch. 3); on the other hand, it is convenient
to use this opportunity to explain right now some of the concepts and principles
that will govern our exposition of the history of economic analysis. This will
be done in the current chapter.

Let us begin in a thoroughly common-sense manner. What distinguishes
the 'scientific’ economist from all the other people who think, talk, and write
about economic topics is a command of techniques 2 that we class under three
heads: history, statistics, and 'theory.’ The- three together make up what we
shall call Economic Analysis; [Later in this chapter, J. A. S. added to these
three a fourth fundamental field. Economic Sociology.]

[1. Economic History]

Of these fundamental fields, economic history — which issues into and in-
cludes present-day facts — is by far the most important. I wish to state right
now that if, starting my work in economics afresh, I were told that I could
study only one of the three but could have my choice, it would be economic
history that I should choose. And this on three grounds. First, the subject mat-
ter of economics is essentially a unique process in historic time. Nobody can
hope to understand the economic phenomena of any, including the present,

1 This clumsy phrasing has been chosen in order to avoid the unrealistic suggestion
of sharp and permanent border lines.

2 The word 'technique' should be understood in a very wide sense: mere command
of the facts of some field, systematically acquired and such as to be beyond the range
of knowledge than can be gained by practicing in that field, is sufficient to constitute
scientific level, even though cultivation of the field does not require any elaborate
methods that the layman could not understand.

THE TECHNIQUES OF ECONOMIC ANALYSIS

epoch who has not an adequate command of historical facts and an adequate
amount of historical sense or of what may be described as historical experi-
ence . 3 Second, the historical report cannot be purely economic but must in-
evitably reflect also 'institutional’ facts that are not purely economic: therefore
it affords the best method for understanding how economic and non-economic
facts are related to one another and how the various social sciences should be
related to one another . 4 Third, it is, I believe, the fact that most of the fun-
damental errors currently committed in economic analysis are due to lack of
historical experience more often than to any other shortcoming of the econo-
mist’s equipment. History must of course be understood to include fields that
have acquired different names as a consequence of specialization, such as pre-
historic reports and ethnology (anthropology ). 5

Two ominous consequences of the argument above should be noticed at once. First,
since history is an important source — though not the only one — of the economist’s
material and since, moreover, the economist himself is a product of his own and dll
preceding time, economic analysis and its results are certainly affected by historical
relativity 6 and the only question is how much. No worth-while answer to this question
Can be got by philosophizing about it, but it will be one of our major concerns to work
one out by detailed investigation. ’This is why sketches of The spirit of the times’ and, in
particular, of the politics of each period will preface our exposition of the economic
analysis in the subsequent Parts. Second, we have to face the fact that, economic his-
tory being part of economics, the historian’s techniques are passengers in the big bus
that we call economic analysis. Derivative knowledge is always unsatisfactory. Hence,
even economists who are not economic historians themselves and who merely read the
historical reports written by others must understand how these reports came into being
or else they will not be able to appraise the real meaning. We shall not be able to live
up to the program that follows from this. In principle however let us remember: Latin
palaeography, for instance, is one of the techniques of economic analysis.

[2. Statistics]

It stands to reason that for economics, statistics, that is, the statistical fig-
ure or series of figures must be of vital importance. In practice this has been

3 This does not render Theory,’ in the sense to be explained below, either impossible
or useless — economic history itself needs its help.

4 Owing to the unreliability of Theories’ on this subject, I personally believe the
study of history to be not only the best but the only method for this purpose.

5 In this book, unless warning to the contrary is given, anthropology means physical
anthropology only. Above it has the usual meaning which makes it synonymous with
the study of primitive tribes, their behavior patterns, language, and social institutions.
We call this ethnology.

6 This is one of several meanings of that much misused word, relativity. Here we
mean by it no more than (a) that we cannot use more material than we have and that
in consequence some or all of our results may not stand up in the light of further ex-
perience (a fact that must of course be duly allowed for in the interpretation of the
economists of the past); and (b) that economists’ interests in the problems of their
epoch and also their attitudes to these problems condition their general views on eco-
nomic phenomena. See ch. 4. This has nothing to do with philosophic relativism.

I: SCOPE AND METHOD

recognized at least since the sixteenth and seventeenth centuries when a large
part of the work of the Spanish politicos, for example, consisted in the col-
lection and interpretation of statistical figures — not to mention the English
econometricians, who were called political arithmeticians, and their fellow
workers in France, Germany, and Italy . 1 We need statistics not only for ex-
plaining things but also in order to know precisely what there is to explain.
But a comment has to be added that is analogous to the comment made in
the preceding paragraph on the subject of history. It is impossible to under-
stand statistical figures without understanding how they have been compiled.
It is equally impossible to extract information from them or to understand
the information that specialists extract for the rest of us without understand-
ing the methods by which this is done — and the epistemological backgrounds
of these methods. Thus, an adequate command of modern statistical methods is
a necessary (but not a sufficient) condition for preventing the modern econo-
mist from producing nonsense, though very much more so in some fields than
in others: our stake in these methods is too great for us to leave judgment on
the virtues or shortcomings, say, of the variate-difference method to specialists,
even if they were unanimous about it. Again, we shall not be able to live up to
the program that follows from this. But again, we shall recognize, in principle
at least: statistical methods are part of the tools of economic analysis even
when not specially devised to meet its particular needs; and Jacques Bernoulli's
Ars conjectandi or Laplace's Theorie analytique stand in the history of many
sciences but they have their places also in the history of our own . 2

[3. "Theory']

The third fundamental field is "theory.' This term carries many meanings
but only two of them are relevant so far as our own usage in this book is con-
cerned. The first and less important one makes theories synonymous with
Explanatory Hypotheses. Such hypotheses are of course essential ingredients of
historiography and statistics also. For instance, even the most fiercely factual
historian, economic or other, can hardly avoid forming an explanatory hypothe-
sis or theory, or several explanatory hypotheses or theories, on the origins of

1 It is therefore only as a curiosum that we notice the fact that the simple and ap-
parently unchallengeable statement in the first sentence of the paragraph above has
been staunchly denied by some economists to this day.

2 Lest the reader should throw up his hands in despair at the range of competence
which the historical and statistical requirements seem to indicate, let me point out that
these requirements can be easily fulfilled by every graduate student who has had a
tolerably good undergraduate training in history or mathematics. Only the student with-
out any training in either will have to realize that, as an all-round economist, he is
suffering from a handicap and that he can move with assurance only within narrow
portions of the science unless he is prepared to make up for his deficiencies by a heroic
effort for which one or two years of graduate study are altogether inadequate. But it
also takes more than that to become a scientifically competent lawyer or engineer or
doctor.

THE TECHNIQUES OF ECONOMIC ANALYSIS 1$

towns. The statistician must form a hypothesis or theory, say, on the joint
distribution of the stochastic variables that enter into his problem. All that
needs to be said about this is that it is an error — though a widespread one —
to believe that the sole or main business of the economic theorist consists in
formulating such hypotheses (some may wish to add: out of the blue sky).

Economic theory does something entirely different. It cannot indeed, any
more than can theoretical physics, do without simplifying schemata or models
that are intended to portray certain aspects of reality and take some things
for granted in order to establish others according to certain rules of procedure.
So far as our present argument is concerned, the things (propositions) that we
take for granted may be called indiscriminately either hypotheses or axioms or
postulates or assumptions or even principles , 1 and the things (propositions)
that we think we have established by admissible procedure are called theorems.
Of course a proposition may figure in one argument as a postulate and in an-
other as a theorem: Now, hypotheses of this kind are also suggested by facts —
they are framed with an eye to observations made — but in strict logic they are
arbitrary creations of the analyst . 2 They differ from the hypotheses of the first
kind in that they do not embody final results of research that are supposed
to be interesting for their own sake, bub are mere instruments or tools framed
for the purpose of establishing interesting results. Moreover, framing them is
no more all the economic theorist does than framing statistical hypotheses is
all that the statistical theorist or in fact any theorist does. Just as - important
is the devising of the other gadgets by which results may be extracted from
the hypotheses — all the concepts (such as ‘marginal rate of substitution,’
‘marginal productivity,’ ‘multiplier,’ ‘accelerator’), relations between concepts,
and methods of handling these relations, all of which have nothing hypothet-
ical about them . 3 And it is the sum total of such gadgets — inclusive of stra-
tegically useful assumptions — which constitutes economic theory. In Mrs.
Robinson’s urisurpassably felicitous phrase, economic theory is a box of tools.

The rationale of this conception of economic theory is very simple and the
same as in all other departments of science. Experience teaches us that the
phenomena of a given class — economic, biological, mechanical, electrical, and
what not — are indeed individual occurrences each of which, as it occurs, re-

1 By ‘principle’ we shall mean in this book any statement that we (or the authors
under discussion) do not propose to challenge. But it may be a proposition that we
(they) have established as well as a proposition that we (they) have postulated or as-
sumed. The same holds for the objectionable term ‘law,’ the emergence and use or
misuse of which will have to be carefully considered: we speak of the ‘law’ of decreas-
ing returns or of Keynes’s ‘law’ of the propensity to consume, which are assumptions,
but also of the Marxist ‘law’ of the falling rate of profit, which is a proposition that
Marx thought he had established.

2 To use J. H. Poincare’s simile: tailors can cut suits as they please; but of course
they try to cut them to fit their customers.

3 Example: theoretical mechanics proceeds upon a number of assumptions (or hy-
potheses in this sense); but evidently the.: list of these assumptions is not the whole of
theoretical mechanics but only constitutes, where explicitly assembled, its first chapter.

lO I: SCOPE AND METHOD

veals peculiarities of its own. But experience also teaches us that these indi-
vidual occurrences have certain properties or aspects in common and that
a tremendous economy of mental effort may be realized if we deal with these
properties or aspects, and with the problems they raise, once and for all. For
some purposes it is indeed necessary to analyze every individual case of pricing
in an individual market, every case of income formation, every individual busi-
ness cycle, every international transaction, and so on. But even where this is
necessary we discover that we are using, in each case, concepts that occur in
the analysis of all. Next we discover that all cases, or at least large sets of indi-
vidual cases, display similar features which, and the implications of which,
may be treated for all of them together by means of general schemata of
pricing, income formation, cycles, international transactions, and so on. And
finally we discover that these schemata are not independent of one another
but related, so that there is advantage in ascending to a still higher level of
‘generalizing abstraction' on which we construct a composite instrument or
engine or organon of economic analysis — though not the only one, as we have
seen — which functions formally in the same way, whatever the economic
problem to which we may turn 4 it. Richard Cantillon’s 5 work is the first
in which awareness of this last truth is clearly discernible, though economists
took over a century to realize all its possibilities — Leon Walras was in fact the
first to do so (see below Part iv, ch. 6, sec. 5b).

Although it is neither possible nor desirable for us to embark upon an
epistemology of economics and although some of the topics pertaining to
that field will receive attention both in the subsequent chapters of this
Part and in all the subsequent Parts, it will be helpful to insert here a
few additional remarks in the hope that .they will do something to scale
down possible barriers between myself and my readers.

First, then, a qualification should be added to the preceding argument,
about the nature and functions of economic theory. This argument ran in
terms which are applicable, substantially at least, to all sciences that have
any all-purpose apparatus of analysis. But there are limits to this parallel-
ism and the most important of them are represented by the two follow-
ing facts. Economics lacks the benefits that physics derives from lab-
oratory experiments — when economists talk about experimenting they
mean something quite different from experimenting under laboratory
conditions — but enjoys instead a source of information that is denied to
physics, namely, man’s extensive knowledge of the meanings of economic
actions. This source of information is also a source of controversies that
will bother us repeatedly on our journey. But its existence can hardly
be denied. Now, when we speak, for example, of motives that are sup-
posed to actuate individuals or groups, our source of information may
be roughly identified with knowledge of psychic processes, conscious or

4 The statement above is a brief rendering of E. Mach’s doctrine that- every (theo-
retical) science is a device for effecting economy of effort (D enkokonomie) .

5 See below Part n, ch. 4, sec. 3.

THE TECHNIQUES OF ECONOMIC ANALYSIS 1 J

subconscious, which it would be absurd not to use, although, as I shall
never cease to emphasize, this is not the same thing as trespassing upon
the field of professional psychology— any more than stating the ‘law’ of
decreasing returns from land implies trespassing upon the realm of
physics- There is, however, also another way of interpreting our knowl-
edge of meanings which is more akin to logic. If I state, for example,
that — under a number of conditions — instantaneous gains of a firm will
be maximized at the output at which marginal cost equals marginal
revenue (the latter equaling price in the case of pure competition), I
may be said to be formulating the logic of the situation and a result
that is true, just as is a rule of general logic, independently of whether
or not anyone ever acts in conformity to it. This means that there is a
class of economic theorems that are logical (not, of course, ethical or po-
litical) ideals or norms. And they evidently differ from another class of
economic theorems that are directly based upon observations, for ex-
ample, on observations as to how far expectations of employment oppor-
tunity affect workmen’s expenditure on consumers' goods or how varia-
tions in wages affect the marriage rate. It would no doubt be possible to
assimilate both types of theory by interpreting the logical norms also as
‘purifying’ generalizations from observational data, if need be, from ob-
servations that are subconsciously stored up by common experience. On
the whole, however, it seems better not to do so but to recognize
frankly that we have, or think we have, the ability to understand mean-
ings and to represent the implications of these meanings by appropri-
ately constructed schemata,

Second, the foregoing explanation may have done something toward
exonerating me from the suspicion that I am tainted with Scientism.
This term has been introduced by Professor von Hayek 6 to denote the
uncritical copying of the methods of mathematical physics in the equally
uncritical belief that these methods are of universal application and the
peerless example for all scientific activity to follow. This history as a
whole will answer the question whether there actually has been such un-
critical copying of methods that have meaning only within the particu-
lar patterns of the sciences that developed them — apart of course from
programmatic utterances that have been numerous enough ever since
the awe-inspiring successes of the physical sciences in the seventeenth
century but mean next to nothing. As regards the question of principle,
there cannot be the slightest doubt that Hayek is right — and so were all
who in the nineteenth century preceded him in uttering protests similar
to his — in holding that the borrowing by economists of any method on
the sole ground that it has been successful somewhere else is inadmissible, -

6 F. A. von Hayek, ‘Scientism and the Study of Society/ Economica, August 1942,
February 1943, and February 1944. This treatise — these articles are nothing less than a
treatise— is strongly recommended both because of the profound scholarship of which
it is the product and because it presents an excellent example of how near to each
other, in discussion of this kind, dwell truth and error.

l: SCOPE AND METHOD

and that the rare and unimportant cases in which this has actually been
done deserve what they get at his hands. Unfortunately this is not the
real question. We have to ask what constitutes ‘borrowing’ before we
can proceed to ask what constitutes illegitimate borrowing. And here we
must beware of an optical illusion similar to the one that makes Marxists
so reluctant to use such terms as price or cost or money or value of the
services of land or even interest when speaking of a future socialist order:
these terms denote concepts of general economic logic and seem to Marx-
ists to be tainted with a capitalist meaning only because they are used
also in capitalist society. Similarly, the concepts and procedures of
‘higher’ mathematics have indeed been first developed in connection
with the physicist’s problems, but this does not mean that there is any-
thing specifically ‘physicalist’ about this particular kind of language . 7
But this also holds for some of the general concepts of physics, such as
equilibrium potential or oscillator, or statics and dynamics, which turn
up of themselves in economic analysis just as do systems of equations:
what we borrow when we use, for example, the concept of an ‘oscillator’
is a word and nothing else. Two circumstances combine, however, to re-
inforce that optical illusion. On the one hand, physicists and mathema-
ticians, when they hit upon those general concepts that occurred to us
only later, not only baptized them but also worked out their logic. So
long as this logic does not introduce anything ‘physicalist’ it would be
waste of effort not to make use of it. On the other hand, students some-
times understand a physical analogy more readily than they do the eco-
nomics of the case to be presented. Hence such analogies are often used
in teaching. It therefore seems as though the things we are accused of
borrowing are merely the reflexes of the fact that all of us, physicists or
economists, have only one type of brain to work with and that this brain
acts in ways that are to some extent similar whatever the task it tackles —
the fact to which the Unity-of-Science movement owes its existence.;
This does not involve any mechanistic, deterministic or other ‘-istic’ er-
rors, or any neglect of the truth that ‘to explain’ means something differ-
ent in the natural and in the social sciences, or finally any denial of the
implications of the historical character of our subject matter.

Third, if economic theory is such a simple and harmless sort of thing
as I have represented it to be, the reader might wonder where the hos-
tility comes from that has followed it ever since it attracted any attention
at all (which was roughly since the time of the physiocrats) to this day. I
shall simply list the main headings for an answer which our story will
amply verify:

(1) At all times, including the present, in judging from the standpoint
of the requirements of each period (not judging the state of the theory

7 Hayek’s teachers, the Austrian utility theorists, by operating the concept of mar-
ginal utility, actually discovered the calculus. It cannot be a crime to formulate their
reasoning correctly.

THE TECHNIQUES OF ECONOMIC ANALYSIS 19

as it was at any time by standards of a later time) the performance of
economic theory has been below reasonable expectation and open to valid
criticism.

(2) Unsatisfactory performance has always been and still is accompa-
nied by unjustified claims, and especially by irresponsible applications
to practical problems that were and are beyond the powers of the con-
temporaneous analytic apparatus.

(3) But while the performance of economic theory was never up to
the mark, that is, never what it might haye been, it was at the same
time beyond the grasp of the majority of interested people who failed
to understand it and resented any attempt at analytic refinement. Let us
distinguish carefully the two different elements that enter into this re-
sentment. On the one hand, there were always many economists who
deplored the loss of all those masses of facts that actually are lost in any
process that involves abstraction. So far as application is concerned, re-
sentment of this type is very frequently quite justified. On the other
hand, however, there are untheoretical minds who are unable to see any
use in anything that does not directly bear upon practical problems. Or,
to put it less inoffensively, who lack the scientific culture which is re-
quired in order to appreciate analytic refinement. It is very important for
the reader to bear in mind this curious combination of justified and un-
justified criticism of economic theory, which will be emphasized all
along in this book. It accounts for the fact that criticism of economic
theory practically always proceeded from both people who were above and
people who were below the level of the economic theory of their time.

(4) The hostility that proceeded from these sources was frequently
strengthened by the hostility to the political alliances which the ma-
jority of theorists persisted in forming. The classical example for this is
the alliance of economic theory with the political liberalism of the nine-
teenth century. As we shall see, this alliance had the effect of turning
for a time the defeat of political liberalism into a defeat of economic
theory. And at that time many people positively hated economic theory
because they thought it was just a device for bolstering up a political
program of which they disapproved. This view came all the easier to
them because economic theorists themselves shared their error and did
all they could to harness their analytic apparatus into the service of their
liberal political creed. In this and many analogous cases, of which mod-
ern economic theory is another deplorable example, economists indulged
their strong propensity to dabble in politics, to peddle political recipes,
to offer themselves as philosophers of economic life, and in doing so
neglected the duty of stating explicitly the value judgments that they
introduced into their reasoning.

(5) Although really implied under one or more of the preceding head-
ings, we may just as well list as a separate one the view that economic
theory consists in framing unfounded, speculative hypotheses in the first
of the two meanings that were distinguished above. Hence, the tendency

I: SCOPE AND METHOP

quite frequent among economists or other social scientists to rule out eco-
nomic theory from the realm of serious science. It is interesting to note
that a propensity 8 of this kind is by no means confined to our field. Isaac
Newton was a theorist if he was anything. Nevertheless, he displayed a
marked hostility toward theory and especially toward framing of causal
hypotheses. What he really meant was not theory or hypothesis of our
second kind but just inadequately substantiated speculation. Perhaps
there was also something else in this hostility, namely the aversion of
the truly scientific mind to the use of the word 'cause’ that carries a
metaphysical flavor. Newton’s example may also be appealed to in order
to illustrate the truth that dislike of the use of metaphysical concepts in
the realm of empirical science does not at all imply any dislike of meta-
physics itself. [J. A. S. intended to have these nine paragraphs of in-
dented material set in small type so that it would be easy for the average
reader to skip them.]

[4. Economic Sociology]

The reader will have observed that our three fundamental fields, economic
history, statistics and statistical method, and economic theory, while essentially
complementing each other, do not do so perfectly. In writing economic his-
tory, there are indeed statements that should not be added at all unless prop-
erly substantiated by pieces of reasoning that belong to economic theory:
such a statement is, for instance, the one that links England’s great economic
development from the 1840’s to the end of the nineteenth century to the
repeal of the Corn Laws and of practically every other kind of protection.
The schemata of economic theory derive the institutional frameworks within
which they are supposed to function from economic history, which alone can
tell us what sort of society it was, or is, to which the theoretical schemata
are to apply. Yet, it is not only economic history that renders this service to
economic theory. It is easy to see that when we introduce the institution of
private property or of free contracting or else a greater or smaller amount of
government regulation, we are introducing social facts that are not simply
economic history but are a sort of generalized or typified or stylized eco-
nomic history. And this applies still more to the general forms of human
behavior which we assume either in general or for certain social situations
but not for others. Every economics textbook that does not confine itself to
teaching technique in the most restricted sense of the word has such an in-

8 There is nothing to wonder at in the fact that on this ground alone the word
economic theory, as used by some fellow economists, in itself implies derogation, To
some extent, however, this attitude is simply a consequence of the fact that our intel-
lectual tastes and aptitudes differ and that we naturally practice in our research ac-
II cording to our preferences. It is merely human nature that we overrate the impor-

I i tance of our own types of research and underrate the importance of the types that ap-

peal to others. Perhaps it is not too much to say that we should never do what we
are doing, both in science and in other pursuits of life, if we did not do this.

THE TECHNIQUES OF ECONOMIC ANALYSIS 2 1

stitutional introduction that belongs to sociology rather than to economic
history as such. Borrowing from German practice, we shall find it useful, there-
fore, to introduce a fourth fundamental field to complement the three others,
although positive work in this field also leads us beyond mere economic anal-
ysis: the field that we shall call Economic Sociology ( Wirtschaftssoziologie ).
To use a felicitous phrase: economic analysis deals with the questions how
people behave at any time and what the economic effects are they produce
by so behaving; economic sociology deals with the question how they came
to behave as they do. 1 If we define human behavior widely enough so that
it includes not only actions and motives and propensities but also the social
institutions that are relevant to economic behavior such as government, prop-
erty inheritance, contract, and so on, that phrase really tells us all we need.
Of course, it should be observed that this distinction is one we make for our
own purposes. It is not implied that this distinction has been made by the
authors themselves whom we are going to encounter. The proof of any pud-
ding is in the eating and hence I refrain from saying anything in its defense
just now.

[ 5 . Political Economy]

The sum total of the historical, statistical, and theoretical techniques that
have been characterized above, together with the results they help to produce,
we call (scientific) economics. This term is of relatively recent growth. A.
Marshall’s great treatise was the first to establish its use, from 1890 on, at
least in England and the United States. 1 In the nineteenth century, the term
commonly in use was Political Economy, though in some countries other terms
competed with it in the first decades of that century. This unimportant matter
will be attended to, as we go along, in the subsequent Parts. But it is just
as well to note two points at once. First, political economy meant different
things to different writers, and in some cases it meant what is now known as
economic theory or 'pure’ economics. A warning must therefore be issued
right now that in order to interpret correctly what any given writer said about
the scope and method of political economy, we must always make sure of the
meaning he attached to this term — some propositions about those, subjects
that have outraged critics become perfectly harmless if this rule be borne in
mind. Second, ever since our science or agglomeration of sciences was bap-
tized political economy by a not very significant writer of the seventeenth cen-
tury whose work owes an undeserved immortality to this fact, there has been
the implicit or explicit suggestion that the exclusive concern of our science
was with the economy of the state — though of course not only of the polis ,
the city-state of Greece — or, what is almost the same thing, with public policies
of an economic nature. This suggestion, which was still more emphasized by
the German term frequently used as a synonym of political economy, Staats-

1 1 believe that this phrase is due to Mr. Gerhard Colm.

1 Later on, a parallel usage was introduced, though less firmly established, in Ger-
many. The word was Social Economics, Sozialokoriomie , and the man who did more
than any other to assure some currency to it was Max Weber.

I: SCOPE AND METHOD

wissenschaft, implied of course an altogether too narrow conception of the
scope of econoniics. Incidentally, it over-emphasized the largely meaningless
distinction between economics and what is now called business economics.
Let us therefore have it understood that we ourselves do not divorce the two
and that all the facts and tools relevant to the analysis of the behavior of
individual firms, past or present, come within our meaning of economics just
as much as do the facts and tools relevant to the analysis of the behavior of
governments, and therefore will have to be added to the contents of any nar-
rower political economies of the past. We have, however, to notice a novel
meaning of the term political economy that has asserted itself of late.

Some contemporaneous economists are of the opinion that modern eco-
nomic theory (in our sense) hangs too much in the air and does not take
sufficient account of the fact that no sensible application to practical questions
or even to the analysis of given situations of an economy can be made of its
results without reference to the historico-political framework within which they
are to hold. This opinion is sometimes extended so as to imply criticism of
any work that concentrates on the improvement of theoretical or statistical
tools of analysis, and then it seems to me to mean nothing except a failure
to realize the inexorable necessity of specialized work. But all the more justi-
fied is this opinion if it be formulated as it has been in the first sentence
of this paragraph. In particular, an economics that includes an adequate anal-
ysis of government action and of the mechanisms and prevailing philosophies
of political life is likely to be much more satisfactory to the beginner than
an array of different sciences which he does not know how to co-ordinate —
whereas, to his delight, he finds precisely what he seeks ready-made in Karl
Marx. An economics of this type is sometimes presented under the title Po-
litical Economy. In partial recognition of the truth that seems to be con-
tained in this program, we have set up our ‘fourth fundamental field,’ Eco-
nomic Sociology.

Political Economy in the sense discussed in the preceding paragraph calls
up still another meaning of the term, the one that occurs in a discussion of
Systems of Political Economy. And this meaning in turn evokes, by associa-
tion, the term Economic Thought. But it will be convenient to deal with
these two concepts in Chapter 4. There we shall also try to clarify the relation
of this History of Economic Analysis to any history of the systems of political
economy and to any history of the thoughts on economic subjects that float
in the public mind.

[6. Applied Fields]

Division of labor, in research as well as in teaching, has produced, in eco-
nomics as elsewhere, an indefinite number of specialties that are usually de-
scribed as ‘applied fields.’ In order to obtain a list of them (which does not
claim to be complete) let us draw inspiration from the courses offered by the
larger institutions of higher learning in the United States that teach economics.

In addition to general survey courses and courses in economic history.

THE TECHNIQUES OF ECONOMIC ANALYSIS 23

statistics, economic theory, and economic sociology , 1 we find, first, offerings
in a group of fields which everyone considers part and parcel of 'general eco-
nomics' and which receive separate treatment only in order to facilitate more
intensive treatment of their subjects. Such are money and banking, business
fluctuations (or cycles), foreign trade (international economic relations), and,
occasionally, location. Second, we find a group of fields, such as accounting,
actuarial science, and insurance, that, historically, have preserved altogether
too much independence from general economics (which is slowly being sur-
rendered in the case of accounting) but are useful or even indispensable for
all or some economists, because they offer both instruments of economic
analysis or opportunities for applying it — witness, for example, the subject of
depreciation. Third, we find a group of standard fields that pivot on the old-
established departments of public economic policy especially: agriculture , 2
labor, transportation and ‘utilities,’ the problems of manufacturing industry
(and of its public control) — for which there is no generally accepted English
name — and public finance (‘fiscal policy’), to which most people will add
(for the present) a number of other fields such as marketing (‘commodity dis-
tribution’) and social security (so far as not covered by insurance). Socialism
and ‘comparative economic systems’ or again ‘population’ may stand for a
fourth group, and the ‘area studies’ that have become so popular of late for
a fifth. Inclusion of other fields or the subdivision of some of those that have
been mentioned could swell impressively the number of passengers in what
we have described as a big bus. But our list as it stands and the reader’s general
knowledge suffice to verify the three statements which it is relevant to our task
to make.

First, there is evidently no permanence or logical order to this jumble of
applied fields. Nor are there definite frontier lines to any of them. They ap-
pear or vanish, they increase or decrease in relative importance, and they
overlap with one another as changing interests and methods dictate. And, as
has been indicated already, this is as it should be. To undertake or to refrain
from undertaking any interesting task out of respect for frontiers or tectonics
would be the height of absurdity.

Second, all those special or applied fields, and not only the three that have

1 Owing to the discredit that, for good reasons and bad, attaches to the word ‘theory’
in many minds, this word is occasionally replaced by the word ‘analysis’ which then
carries a meaning that is more restricted than the one attached to it in this book. The
field of economic sociology does not, so far as I am aware, appear under this title or
separately, but topics belonging in it are treated in courses on history, theory, ‘com-
parative economic systems,’ the more institutionally oriented courses on labor, and in a
number of others.

2 The field of agriculture offers an interesting example of a department of economics
that it is hardly possible to treat without a considerable command of agricultural tech-
nology. In principle, though mostly to a lesser extent, this is true also in other depart-
ments and, so far as this is so, there is no point in drawing any sharp line between, say,
the economics of banking, marketing, or manufacturing industry and the correspond-
ing ‘technologies.’

24 I: SCOPE AND METHOD

been mentioned as constituents of our first group, are mixtures of facts and
techniques that form what we have described as the four fundamental divi-
sions of economic analysis in our sense. The mixtures differ greatly from one
another because there are wide stretches of ground on which there is much
less need or opportunity for elaborate statistical or theoretical tools than there
is in others or even none at all, though the historical element can hardly ever
be entirely neglected with impunity. In addition, the mixtures also differ for
another reason: the specialist workers in the various fields are, individually
and groupwise, very differently grounded in the fundamental fields, and so
mix techniques in a manner that differs considerably from what their chosen
specialties might be thought to require — a fact that we must keep in mind
if we are to understand why economics is what it is. In principle, however,
it is impossible to divorce any of the applied fields from the fundamental ones.

But, third, such divorce is also impossible because the applied fields not
only apply a stock of facts and techniques that lies ready for their use in
general economics but also add to it. These fields may accumulate ‘private’
stocks of facts and methods that are of little or no use outside their boundaries.
Beyond this, however, they have repeatedly developed accumulations of facts
and conceptual schemata that should be recorded as contributions to general
economic analysis, even though the appointed wardens of the latter have some-
times been slow to welcome them. Modern agricultural economics affords some,
examples, the fields of transportation and public finance afford others. It
follows that we cannot confine ourselves to the history of ‘general’ economic
analysis but shall have to keep an eye on developments in applied fields as
best we can.

CHAPTER 3

Interlude II: [Contemporaneous Developments in Other

Sciences]

[1. Economics and Sociology] 25

[2. Logic and Psychology] 27

[3. Economics and Philosophy] 28

From time to time, we shall look up from our work in order to view a piece
of intellectual scenery. Slightly less perfunctorily, we shall, for every one of
our periods, register some contemporaneous developments in other sciences
(in our sense of the term) that were relevant or might, for one reason or an-
other, be expected to have been relevant to the development of our own. What
has to be said now about this aspect of our exposition is so preponderantly
concerned with ‘philosophy’ that I might as well have entitled this chapter:
Economics and Philosophy. The rest will be disposed of in the two paragraphs
that follow.

[1. Economics and Sociology]

After what has been said in the preceding chapter about the paramount
importance for economic analysis of history — and all the sciences and branches
of sciences that this term stands for 1 — and of statistics, it goes without saying
that we must try to keep some contact with them; the reason why this will
be done in a fragmentary manner is not that a more systematic treatment
would not be desirable but that such treatment is impossible within the space
at our disposal and within the limits of my own knowledge — and even if it
were possible, it would drown our own story in an unfathomable ocean.
Similarly, it goes without saying that we cannot afford, subject to the same
restrictions, to neglect the developments of sociology. This term we shall use
in the narrow sense in which it denotes a single though far from homogeneous
science, namely the general analysis of social phenomena such as society,

1 Amplifying what has been said about this point, I want to point out that all the
historical sciences and branches of sciences that specialization (mainly of philological
competence to deal with particular bodies of material) has produced are to some ex-
tent relevant for us even where they do not treat of specifically economic facts. For
instance, the Graeco-Roman civilization is the subject of research by three clearly dis-
tinguishable groups of scholars, namely historians proper, philologists, and jurists. All
three of them deal with many things that do not concern us. But even when they do
so they contribute to the cultural picture of that world which as a whole is not a mat-
ter of indifference to us; and even where they describe military history or the history of
the arts, they use the same techniques that they use in describing- economic or social
events and institutions, so that there is no hard and fast frontier at which our interest
could be definitely said to stop.

I: SCOPE AND METHOD

' 26

group, class, group relations, leadership, and the like. And we shall use the
term in this sense throughout, that is, for developments that antedate by cen-
turies the introduction of the word. In a wider sense it means the whole of
many overlapping and unco-ordinated social sciences — which is the term we
prefer and which includes, among other things, our own economics, juris-
prudence, hierology, ‘political science/ ecology, and descriptive ethics and
aesthetics (in the sense of sociology of moral behavior patterns and of art).
In the footnote below the kinds of relations that may make developments in
these and other fields relevant to a history of economic analysis are illustrated
by the example of jurisprudence. 2

The closeness of some of these relations has been recognized by our setting
up the ‘fundamental field’ of Economic Sociology in which neither economists
nor sociologists can get very far without treading on one another’s toes. But
it does not follow either that the co-operation between the two groups has
actually been particularly close or fertile; or that either of them would have
got along better if there had been more co-operation. As regards the first point
it is the fact that ever since the eighteenth century both groups have grown
steadily apart until by now the modal economist and the modal sociologist
know little and care less about what the other does, each preferring to use,
respectively, a primitive sociology and a primitive economics of his own to
accepting one another’s professional results — a state of things that was and

2 The science or sciences (in our sense) whose subjects consist of statutory or custom-
ary ‘law/ of legal practice, and of legal techniques are relevant to a history of eco-
nomic analysis, first of all, because, to a considerable extent, economists have been
lawyers (or, as we prefer to say, jurists) who brought to bear the habits of the legal
mind upon the analysis of economic phenomena. For instance, the sociological and eco-
nomic systems of the scholastic doctors of the sixteenth century (the literature de jure
et justitia ) cannot be understood if we do not realize that they were primarily treatises
on the political and economic law of the Catholic Church and that their technique
was derived primarily from the old Roman law as adapted to the conditions of the
time. Second, the legal framework of the economic process, and the shaping influence
of either upon the other, are, to say the least, of considerable importance for economic
analysis. Third, the historical roots of the concept of ‘economic law' are in the purely
legistic concept of ‘natural law’ (see below Part 11, ch. 2). Fourth, certain nineteenth-
century economists professed to have derived inspiration for a historical view of the
economic process from a school of jurisprudence that called itself the ‘historical school’
and whose emergence and position must be understood more completely than econo-
mists usually do if the elements of truth and error in that view are to be disentangled.
I take the opportunity to add that the sociological analysis of law as a social phenome-
non is one thing; that the study of the techniques of legal practice — the sort of thing
that is taught in American law schools — is quite another thing; and that historical
jurisprudence is still another thing: so we must distinguish at least three different
‘sciences’ of the law that differ in material, tools, and aims and are cultivated (though
there are overlappings) by different groups of workers, and similarly in the fields of
religion, ethics, and aesthetics. Confusion becomes almost excusable under these cir-
cumstances and great battles about principles and ‘methods’ have been fought on issues
(e.g., in the sciences of art) that clear themselves up automatically as soon as it is
realized that the contestants aim at different targets.

CONTEMPORANEOUS DEVELOPMENTS IN OTHER SCIENCES 27

is not improved by mutual vituperation. As regards the second point it is
by no means certain that closer co-operation, so often clamored for by laymen
who expect great things from 'cross-fertilization' with a certainty untroubled
by professional competence, would have been an unmixed blessing. For it
could certainly not have brought net gains because there would have been
some loss of that efficiency which is the result of strict or even narrow special-
ization. This holds even for the division of economics and of sociology (in the
wider sense) into departments that have developed into what are, to all in-
tents and purposes, semi-independent sciences. This is precisely why we prefer
to speak of social sciences rather than to speak of sociology in the wider sense.
As an eminent economist once observed, cross-fertilization might easily result
in cross-sterilization. This does not affect what has been said about the neces-
sity of following tip, at least in a fragmentary fashion, the developments of
all the 'neighboring fields' in this book. It was only to avoid a possible mis-
understanding that I thought it necessary to write the last sentences.

[2. Logic and Psychology]

For the rest we are particularly interested in logic and psychology. The
former claims our attention because economists have made a not inconsid-
erable contribution to it but especially because of their propensity to dogmatize
and to quarrel about 'method': economists who enjoy this sport are apt to be
influenced by the writings of the logicians of their time which therefore,
though more apparently than really, gain some influence, legitimate or other-
wise, upon our work. As regards psychology, there is the view that came first
to the fore in the eighteenth century, and hence has been sponsored inter-
mittently, that economics like other social sciences deals with human be-
havior. Psychology is really the basis from which any social science must
start and in terms of which all fundamental explanation must run. This
view, which has been defended as strongly as it has been attacked, we
shall denote by the term Psychologism. Actually, however, economists have
never allowed their analysis to be influenced by the professional psychologists
of their times, but have always framed for themselves such assumptions about
psychical processes as they thought it desirable to make. On the one hand,
we shall note this fact occasionally with surprise because there exist problems
in economic analysis that might be attacked with advantage by methods worked
out by psychologists. On the other hand, we must avoid a very natural de-
lusion. If we use an assumption the contents of which seem to belong to a
particular field, this does not necessarily mean that we actually invade that
field. For instance, the so-called law of decreasing returns from land refers to
what might be termed a physical fact. But, as has been pointed out already,
this does not mean that in formulating this assumption we are entering the
field of physics. Similarly, when I state the assumption that as I go on eating
successive pieces of bread my desire for further such pieces decreases, I may
be said to be stating a psychic fact. But, in doing so, I am not borrowing
anything from professional psychology, good or bad; I am simply formulating

20 I: SCOPE AND METHOD

what rightly or wrongly I believe to be a fact of common experience. If we
place ourselves on this standpoint, we shall find that there is much less of
psychology about economic propositions than one might think at first sight.
To speak of psychological laws, such as the Keynesian law of the propensity
to consume, is a flagrant abuse, because this practice suggests justification for
our assumptions, which, in effect, do not exist. Nevertheless, it is necessary
to glance occasionally at the developments in the field of professional psy-
chology, and this necessity arises, though less often, also with respect to a
number of other sciences. For the moment, we confine ourselves to mention-
ing biology as an example. There is, or has been, such a thing as social and
economic Darwinism. If we are to appraise this phenomenon, it is just as
well to make sure of what Charles Darwin actually said and of the methods
and materials that induced him to say it.

[3. Economics and Philosophy]

Now we turn to the subject of the relations between economics and phi-
losophy. Or, to put it more precisely, to the question, how far economic
analysis has experienced influences from philosophy . 1 Owing to the many
meanings that have been assigned to the word philosophy, some care is needed
in order to avoid confusion.

There is first a meaning for which our question is very easy to answer, or
rather, for which no problem exists. The Greek 'philosopher/ who shaded off
into the rhetor and sophist, was simply the man of intellectual pursuits.
Taken in this sense, which was transmitted to the Middle Ages and survived
right into the eighteenth century, philosophy meant the sum total of all sci-
entific knowledge. It was simply the universal science, of which metaphysics
formed a part not less than did physics, and physics not less than mathematics
or any 'philosophy' on the nature of society and of the polis . This usage was
bound to maintain itself so long as the stock, both of analytic tools and facts,
remained small enough for one brain to encompass. More or less, this was the
case until, very roughly, the middle of the eighteenth century, when the time
of the polyhistors was definitely over . 2 As we have seen, St. Thomas Aquinas

1 For reasons that will appear presently, we shall not go into the large literature on
this subject any more than we can help. For the moment, it is Sufficient to mention
the English standard work, James Bonar, Philosophy and Political Economy (1st ed.,
1893; 3rd ed., 1922).

2 Of these polyhistors, or universal scientists, Gottfried Wilhelm Leibniz (1646-1716)
was perhaps the most famous. His thought ranged from pure mathematics to political
economy and back again to physics and to the metaphysical speculation of his monadol-
ogy. His views on economics that have been collected with loving care by W. Roscher
are too insignificant to be mentioned again. But Giambattista Vico (1668-1744) was a
sociologist of outstanding importance, and in advertising for pupils he promised to
teach everything that is knowable ( tutto lo scibile). And never forget: Adam Smith
wrote — and brilliantly — on the development of astronomy. It is true, Of course, that
many or most polyhistors excluded certain specialties from their universal competence.
Thus, most of the great historians were nothing but historians; most of the great physi-

CONTEMPORANEOUS DEVELOPMENTS IN OTHER SCIENCES

2 9

fell in with this use of the word philosophy, except that he excluded the sacred
doctrine which was a science apart. All the others were 'philosophical disci-
plines/ It is interesting to note that St. Thomas made no attempt to assign
to the former any other prerogative but that of super-mundane dignity and
did not give it any authority over the latter.

When we look over those comprehensive systems 3 of science, we cannot
fail to make a discovery of the utmost importance for the problem in hand.
Neither Aristotle nor any of the later polyhistors succeeded in unifying, or
even attempted to unify, the various departments of his teaching and, in par-
ticular, to assert in each of them his views on the 'last causes/ the 'ultimate
meaning’ of things, and the like. The physical theories of Aristotle, for in-
stance, are entirely independent of his views on those ‘fundamentals’ and
could, so far as these are concerned, just as well have been different from
what they were. And this is as true of his political sociology (for example, his
investigations into the constitutions of Greek city-states) as it is of his physics.
Similarly, Leibniz’ views on foreign trade have nothing whatever to do with
his fundamental vision of the physical and the moral world and he could,
so far as these are concerned, just as well have been a free trader. Therefore,
we had better speak of a compound of sciences rather than a universal science.
This compound broke to pieces as the exigencies of the division of labor as-
serted themselves. It was then in the seventeenth and eighteenth centuries that
philosophy was usually divided into natural and moral philosophy, a division
that foreshadowed the German one between Natur - und Ge istesw isse nsc hafien. 4
There is another sense of the word philosophy in which no question arises
of its influencing economics. This is the case if philosophy is conceived of
as a science, like any other, that asks certain questions, uses certain materials,
and produces certain results. Examples of the problems that arise, if we then
define philosophy in this sense, would be: what is meant by matter, force,
truth, sense perception, and so on. This conception of philosophy, which ap-

cians were nothing but physicians. The Greek philosophers kept aloof from the utili-
tarian (‘banausic’) arts.

3 The reader is warned that the term System’ — which in fact carries no more a defi-
nite meaning than did its Greek prototype — is used in this book in a variety of differ-
ent senses which should not be confused, for instance: a set of more or less co-ordi-
nated principles of political action (e.g. liberal system, free-trade system); an organized
body of doctrine (e.g. the scholastic system, Marshall’s system); a set of quantities be-
tween which certain relations are assumed to exist (e.g. system of prices); a set of equa-
tions expressing such relations (e.g. the Walrasian system).

4 For the sake of brevity we neglected a development that culminated around 1900
and produced philosophy in a sense that has some affinity with the sense in which phi-
losophy simply means science in general: namely, the sense that makes philosophy an
attempt to construct a consistent picture of the empirical world from the contribu-
tions made by the individual scientists. This conception will be mentioned in its place,
but all that we need to say about it here is that it does not create any difficulty or
problem concerning the relation between philosophy and economics. A philosophy in
this sense evidently does not undertake to restrict the autonomy of any of the individ-
ual sciences.

3<0 I: SCOPE AND METHOD

peals to many who are not philosophers, makes philosophy completely neutral
as regards any particular proposition in any other science. It comes near to
making philosophy synonymous with epistemology, the general theory of
knowledge.

But a problem, and a very important one, does arise if we define philosophy
to mean all theological and non-theological systems of beliefs (‘speculative
systems’) concerning ultimate truths (realities, causes), ultimate ends (or
values), ultimate norms. Ethics and aesthetics enter into such systems, not
as sciences of certain sets of phenomena (behavior patterns) which they seek
to describe (explain) but as normative codes that carry extra-empirical sanc-
tions. 5 One may well ask whether economics does not also enter in the sense
that a writer’s ‘philosophy’ determines, or is one of the factors which deter-
mine, his economics.

In order to prepare the ground for our answer I shall first mention a few
illustrative cases from the history of other sciences. For any worker whose
philosophy includes Christian belief, research is research into the works of
God. For him, the dignity of his vocation flows from the conviction that his
work is revealing a part, however small, of the Divine order of things. Thus,
Newton expressed Christian beliefs in a purely scientific work. Leibniz went
readily from matters of pure physics and mathematics to matters of theology —
he evidently saw no difference of methodological principle between the two,
and theological aspects suggested themselves to his mind with the utmost
ease. Leonhard Euler (1707-83) argued for his ‘method for finding curves that
enjoy certain extremal properties’ on the ground that the world is the work
of the most perfect Creator and hence must be amenable to description in
terms of maximum and minimum propositions. James P. Joule (1818-89), the
co-discoverer of the fundamental principle of modern thermodynamics, the
principle of the mechanical equivalent of heat, adduced the argument that,
in the absence of the equivalence between heat and motion, something (energy)
could be lost in the physical universe which it would be contrary to the dignity
of God to assume. The last two instances might even be construed as proving
direct influence of Euler’s and Joule’s beliefs upon their analytic work. Never-
theless nobody doubts that there was no influence of this kind, that is, (a)
that the scientific work of the four authors mentioned was not deflected from
its course by their theological convictions; (b) that it is compatible with any

5 This also applies to materialism in its technical philosophical sense, that is, to the
doctrine that has not changed from the days of Leucippus and Democritus to this day
and holds that ‘matter’ is the ultimate reality and exists independently of experience. I
take the opportunity offered by the need for an illustrative example of the text above
to bring home to the reader that the word ‘materialism’ means many things that have
nothing to do with the technical meaning just defined. The ‘idealist’ philosophy that
turns around the proposition (equally devoid of meaning for me personally) that in the
last analysis reality (or the ‘world’) is ‘spirit’ would have served both purposes equally
well : it would have given an example of philosophy in the sense in which it raises a
problem of influence upon economics; and it would have served as another example of
a word of many meanings that are commonly confused, the word Ideal.

CONTEMPORANEOUS DEVELOPMENTS IN OTHER SCIENCES 31

philosophical positions; and (c) that there would be no point in trying to
explain its methods or results by their philosophical positions. They simply
co-ordinated their methods and results with their live Christian belief as they
would co-ordinate with it everything else they did. They put their scientific
work in a theological garb. But, so far as the content of this work is con-
cerned, the garb was removable.

I hold that the garb of philosophy is removable also in the case of eco-
nomics: economic analysis has not been shaped at any time by the philo-
sophical opinions that economists happened to have, though it has frequently
been vitiated by their political attitudes. But this thesis, as it stands, is open
to so many misinterpretations that we must now spell it out carefully. The
best method of doing so is to state explicitly what it does not involve.

First, it does not involve ‘scientism’ (see above ch. 2, sec. 3). That is, I
am not arguing that because the philosophical or theological garb is removable
from propositions belonging to the physical sciences, it must therefore 1 also
be removable from propositions belonging to the social sciences. Our examples
have been presented merely in order to illustrate what I mean by saying that
the theological or philosophical creeds of a scientific worker need not exert
any definite influence upon his analytic work, but not in order to establish
my thesis. So far as those examples go, it is still an open question whether
or not it also applies to the sciences of human action.

Second, my thesis does not imply of course that human action itself and
the psychic processes associated with it — motives or methods of reasoning,
whether political or economic or of any other type — are uninfluenced by, or
uncorrelated with, philosophical or religious or ethical convictions. It so hap-
pens that it is part of my own social psychology to hold that this correlation
is far from perfect — a robber baron may have professed quite sincerely a
creed of meekness and altruism — but this is an entirely different matter. We
are now concerned with the propositions of the sciences of human behavior
about this human behavior and are not questioning that religious or philo-
sophical elements must indeed enter into any explanations 0/ this behavior
whenever they aim at completeness or realism. And this also applies to the
scientific economist’s ‘politics’ and to any advice or recommendation he may
tender with a view to influencing ‘policies.’ All that our thesis involves is that
it does not apply to his tools and ‘theorems.’ 6

Third, my thesis does not involve reliance on general considerations about
the logical autonomy of the economic proposition or theorem from philosophy.
This would be still compatible with the latter’s influences creeping into the
procedures of analytic work in a logically illegitimate manner. It might indeed
be made plausible that such propositions, as that towns frequently developed

6 If the reader finds this a difficult distinction to make, I sympathize with him. It is
in fact this relation between an economist’s political preferences and his analysis and
the relation of the former with his philosophy — particularly evident if we extend ‘phi-
losophy’ to include the sum total of a man's views on what is ‘fair/ ‘just,’ ‘desirable,’
and so on — which do prevent most economists from accepting the argument above,
which is after all only simple common sense if correctly understood.

I: SCOPE AND METHOD

3 2

from meeting places of merchants, do not carry any particular philosophical
connotation; or that such propositions, as that ordinary significance tests are
useless in the case of correlation between time series, are valid alike for the
deist and the atheist; or that propositions, such as that increase in the rate
of remuneration of a factor of production may decrease its supply, are com-
patible with any philosophy and imposed by none. But I am not asking my
readers to put their trust in any arguments of this kind, however convincing
they may seem to some. At the moment I am not making any attempt to
establish my thesis. I am only announcing it and explaining its meaning. The
proof will be supplied in the subsequent Parts, when it will be shown that
even those economists who held very definite philosophical views, such as
Locke, Hume, Quesnay, and above all Marx, were as a matter of fact not
influenced by them when doing their work of analysis.

The reason why so much emphasis has been placed upon the thesis that
philosophy in any technical sense of the term is constitutionally unable to
influence economic analysis and actually has not influenced it, is that the
opposite thesis is one of the most important sources of pseudo-explanations
of the evolution of economic analysis. These pseudo-explanations have a strong
appeal for many historians of economics who are primarily interested in philo-
sophical aspects and therefore attach an undue weight to the references to
such aspects which in fact abound in the literature and are not always easy
to recognize for what they are — frills without importance that nevertheless
obliterate the filiation of scientific ideas.

it f

jfl

CHAPTER 4

The Sociology of Economics

i. Is the History of Economics a History of Ideologies? 34

[(a) Special Nature of *. Economic Laws’] 34

[(b) The Marxian Exposition of Ideological Bias] 35

[(c) How Does a History of Economic Analysis Differ from a History of

Systems of Political Economy ; from a History of Economic Thought ?] 38
[(d) The Scientific Process: Vision and Rules of Procedure ] 41

[The Chapter is unfinished. There is no treatment of the last two sections outlined
at the beginning of the chapter, namely:

2. The Motive Forces of Scientific Endeavor and the Mechanisms of Scien-
tific Development

3. The Personnel of Science in General and of Economics in Particular]

We have already referred to a department of science that we called the Sci-
ence of Sciences (W issenschaftslehre). This science, starting from logic and to
some extent also from epistemology, treats of the general rules of procedure in
use in the other individual sciences. But there is another science about science
which is called the Sociology of Science (Wissenssoziologie ) 1 and treats of
science as a social phenomenon. That is, it analyzes the social factors and
processes that produce the specifically scientific type of activity, condition its
rate of development, determine its direction toward certain subjects rather than
other equally possible ones, foster some methods of procedure in preference to
others, set up the social mechanisms that account for success or failure of lines
of research or individual performances, raise or depress the status and influence
of scientists (in our sense) and their work, and so on. Our emphasis upon the
fact that the workers in the fields of tooled knowledge are apt to form distinct
vocational groups qualifies particularly well for conveying to the reader the
reasons why, and the extent to which, science constitutes a proper subject of
sociological research. Our interest in this subject is of course confined, primarily
at least, to the topics that may usefully figure in an introduction to a history of
economic analysis. Of these the problem of ideology is by far the most impor-
tant and will be dealt with first (1); under a second heading we shall consider
the motive forces of scientific endeavor and the mechanisms of scientific de-
velopment (2); and finally we shall discuss some topics concerning the personnel
of science in general and economics in particular (3).

1 [J. A. S. left space for this note but did not write it. In Capitalism , Socialism and
Democracy (New York, 1950), p. 11, he explains the term Sociology of Knowledge as
follows: The German word is W issenssoziologie, and the best names to mention are
those of Max Scheler and Karl Mannheim. The latter’s article on the subject in the
German Dictionary of Sociology ( Handworterbuch der Soziologie) can serve as an intro-
duction/]

i: SCOPE AND METHOD

i. Is the History of Economics a History of Ideologies?

[(a) Special Nature of ‘Economic Laws.’] The historical or ‘evolutionary’
nature of the economic process unquestionably limits the scope of general con-
cepts and of general relations between them (‘economic laws’) that economists
may be able to formulate. There is indeed no sense in denying, a priori, as has
been done sometimes, that any such concepts or relations can be formulated
at all. In particular it is not necessary that the concepts we use in the study of
social groups should be familiar to the members of these groups themselves:
the fact, if it be a fact, that the concept of income was not familiar to the
people of the Middle Ages before the fourteenth century is no reason for not
using it in an analysis of their economy . 1 But it is true that ‘economic laws’
are much less stable than are the ‘laws’ of any physical science, that they work
out differently in different institutional conditions, and that neglect of this fact
has been responsible for many an aberration. It is also true that whenever we
attempt to interpret human attitudes, especially attitudes of people far re-
moved from us in time or culture, we risk misunderstanding them not only if
we crudely substitute our own attitudes for theirs, but also if we do our best
to penetrate into the working of their minds. All this is made much worse than
it would be otherwise by the fact that the analyzing observer himself is the
product of a given social environment — and of his particular location in this
environment — that conditions him to see certain things rather than others, and
to see them in a certain light. And even this is not all: environmental factors
may even endow the observer with a subconscious craving to see things in a
certain light. This brings us up to the problem of ideological bias in economic
analysis.

Modem psychology and psychotherapy have made us familiar with a habit of
our minds that we call rationalization . 2 This habit consists in comforting our-

1 Let me make this quite clear. Sociologists like Max Weber who stand for the inter-
pretative method of social states or changes — that is, who believe that it is our main
or sole business to try to understand what things meant to the people concerned —
may easily drift into the position that the use of any concepts not familiar to the people
under study involves the error of assuming that their minds functioned just like ours.
Now this error may be involved but it need not be: using a concept that carries mean-
ing for us but not to the people that we observe is one thing; postulating that the
concept carried meaning also for the latter is another thing. We need not go to primi-
tive tribes in order to illustrate this: if, in terms of concepts of our own, we formulate
the conditions for maximizing profits, we need not assume that the businessman himself
uses these concepts; our ‘theory’ is perfectly meaningful even if we know that he
does not.

2 ‘Rationalization’ in the sense I am about to explain must be carefully distinguished
from other meanings of the same word, and especially these two: (i) We sometimes
speak of rationalization when we mean action that aims at improving something, e.g.
an industrial concern, to make it conform to standards of which consulting specialists
approve. (2) In research work we sometimes speak of rationalization when we mean the

THE SOCIOLOGY OF ECONOMICS

selves and impressing others by drawing a picture of ourselves, our motives, our
friends, our enemies, our vocation, our church, our country, which may have
more to do with what we like them to be than with what they are. The com-
petitor who is more successful than we are ourselves is likely to owe his success
to tricks that we despise. As likely as not, the leader of a party not our own
is a charlatan. The beloved girl is an angel exempt from human frailties. The
enemy country is the home of monsters, our own the home of wholly admirable
heroes. And so on. The importance of this habit for the health and happiness
of the normal mind is obvious 3 and so is the importance of a correct diagnosis
of its verbal manifestations.

[(b) The Marxian Exposition of Ideological Bids.] Half a century before the
full importance of this phenomenon was professionally recognized and put to
use, Marx and Engels discovered it and used their discovery in their criticisms
of the ‘bourgeois’ economics of their time. Marx realized that men’s ideas or
systems of ideas are not, as historiography is still prone to assume uncritically,
the prime movers of the historical process, but form a ‘superstructure’ on more
fundamental factors, as will be explained at the proper place in our narrative.
Marx realized further that the ideas or systems of ideas that prevail at any
given time in any given social group are, so far as they contain propositions
about facts and inferences from facts, likely to be vitiated for exactly the
same reasons that also vitiate a man’s theories about his own individual be-
havior. That is to say, people’s ideas are likely to glorify the interests and ac-
tions of the classes that are in a position to assert themselves and therefore
are likely to draw or to imply pictures of them that may be seriously at variance
with the truth. Thus, the medieval knights fancied themselves as protectors
of the weak and defenders of the Christian faith, whereas their actual be-
havior and, still more, other factors that had produced and kept in existence
the social structure of their world are bound to look very different to an
observer of a different time and class. Such systems of ideas Marx called
ideologies. 4 And his contention was that a large part of the economics of his
time was. nothing but the ideology of the industrial and commercial bour-
geoisie. The value of this great contribution to our insight into the processes

attempt to link a set of empirical findings to some theoretical principle that is to explain
them. Thus, we say that we rationalize observed business behavior by the principle of
profit maximization. These meanings have nothing to do with the one under discussion.

3 This seems to me the essential point about rationalizations: they supply a sort of
self-defense for our psychic organisms and make many a life bearable that would not
be so without them. Let me add, however, that there is also another side to them that
accounts for their role in psychoanalytic practice.

4 The term is of French origin and at first meant simply the analysis of ideas, espe-
cially with reference to Condillac’s theory. Occasionally it seems to have been used in
much the same sense as the term Moral Philosophy, i.e.. as roughly equivalent to social
science. In this sense it was used by Destutt de Tracy. Napoleon I also used it but in
a different sense that carried a derogatory connotation: he described as ideologues those
opponents of his government, such as Lafayette, whom he considered unrealistic
dreamers.

I: SCOPE AND METHOD

3 6

of history and into the meaning of social science is impaired but not destroyed
by three blemishes, which it is as well to notice at once.

First, while Marx was so much alive to the ideological character of systems
of ideas with which he was not in sympathy, he was completely blind to the
ideological elements present in his own. But the principle of interpretation in-
volved in his concept of ideology is perfectly general. Obviously we cannot say:
everywhere else is ideology ; 5 we alone stand on the rock of absolute truth.
Laborist ideologies are neither better nor worse than are any others.

Second, the Marxist analysis of ideological systems of thought reduces them
to emulsions of class interests which are in turn defined in exclusively economic
terms. According to Marx the ideologies of capitalist society are, to put it
crudely, glorifications of the interests of what he styled the capitalist class,
whose interests are made to turn on the hunt for pecuniary profits. Ideologies
that do not glorify the behavior of capitalist man in business but something
else, for instance the national character and behavior, must hence always be
reducible, however indirectly, to those economic interests of the dominant
class. This however is not implied in the principle of ideological interpretation
but constitutes an additional and much more doubtful theory. The principle
itself implies only two things: that ideologies are superstructures erected on,
'and produced by, the realities of the objective social structure below them;
and that they tend to reflect these realities in a characteristically biased
manner. Whether or not these realities can be completely described in purely
economic terms is another question. Without entering upon it here, we merely
record the fact that we are going to attach a much wider meaning to the con-
cept of Ideological Influence. Social location undoubtedly is a powerful factor
in shaping our minds. But this does not amount to saying that our minds are
exclusively shaped by the economic elements in our class position or that,
even so far as this is the case, they are exclusively shaped by a well-defined
class or group interest . 6

Third, Marx and especially the majority of his followers assumed too readily
that statements which display ideological influence are ipso facto condemned
thereby. But it cannot be emphasized too strongly that, like individual ration-
alizations, ideologies are not lies. It must be added that statements of fact
that enter into them are not necessarily erroneous. The temptation is great
to avail oneself of the opportunity to dispose at one stroke of a whole body of
propositions one does not like, by the simple device of calling it an ideology.
This device is no doubt very effective, as effective as are attacks upon an op-
ponent’s personal motives. But logically it is inadmissible. As pointed out al-
ready, explanation, however correct, of the reasons why a man says what he
says tells us nothing about whether it is true or false. Similarly statements
that proceed from an ideological background are open to suspicion, but they
may still be perfectly valid. Both Galileo and his opponents may have been
swayed by ideologies. That does not prevent us from saying that he was

5 [J. A. S. put a pencil note ‘delusion?’ beside this reference to ideology and the one
in the next to the last sentence in the paragraph above.]

6 [This problem is touched upon at intervals throughout the History.]

THE SOCIOLOGY OF ECONOMICS

'right/ But what logical warrant have we for saying so? Is there any means of
locating, recognizing, and possibly eliminating the ideologically vitiated ele-
ments in economic analysis? And does enough remain when we have done so?

It will be understood that our answers, though illustrated by examples, will
for the moment be provisional and that the validity or otherwise of the prin-
ciples I am about to formulate can be judged only by their applications in this
book as a whole. But before we embark upon this task we must clarify a pre-
liminary matter.

Unfortunately we have to bar a fire escape by which some of the strongest
exponents of the doctrine that economics, and in principle all science, is viti-
ated by ideological delusions have tried to escape from the apparently inevi-
table conclusion concerning the possibility 'of scientific truth/ Professor K.
Mannheim taught that, though ideological delusion is the common fate of man-
kind, there are nevertheless 'detached intelligences/ floating freely in space,
who enjoy the privilege of being exempt from this fate. Slightly more realisti-
cally, everyone is a victim of ideological delusion except the modern radical
intellectual who stands indeed upon the rock of truth, the unbiased judge
of all things human. Now, if anything can be called obvious in this field, it is
the fact that this intellectual is just a bundle of prejudices that are in most
cases held with all the force of sincere conviction. But this apart, we cannot
follow Mannheim down his fire escape because we have fully accepted the
doctrine of the ubiquity of ideological bias and therefore cannot see anything
else in the belief of some groups in their freedom from it but a particularly
vicious part of their own system of delusions . 7 Now we turn to our task.

First, ideological bias, as defined above by our amended version of the
Marxist definition, is obviously not the only danger that threatens economic
analysis. In particular there are two otl&rs that should be mentioned specifi-
cally because they are easily confused with ideological bias. One is possible
tampering with facts or with rules of procedure by Special Pleaders. All we
have to say about this has been said already: here I only wish to warn the
reader that special pleading is not the same thing as ideologically vitiated
analyzing. Another danger proceeds from the inveterate habit of economists
to pass value judgments upon the processes they observe. An economist’s
value judgments often reveal his ideology but they are not his ideology: it is
possible to pass value judgments upon irreproachably established facts and the
relations between them, and it is possible to refrain from passing any value
judgments upon facts that are seen in an ideologically deflected light. We are
not going to discuss the problem of value judgments here. It will be more

7 Some groups, like bureaucracies, are more given to this ideology, which among
other things involves the clearly ideological denial of any group interest of their own
or at least of its influence on the policies that they originate or assist in shaping. This
may be used as a first example of the influence of ideologies upon analysis. For this
ideology of bureaucracies is an important factor in the unscientific habit of economists
of using a clearly ideological theory of the state that raises the latter into a superhuman
agency for the public good and neglects all the facts about the realities of public ad-
ministration that modern political science provides.

30 I: SCOPE AND METHOD

convenient to do so on other occasions, especially when I shall have to report
upon a full-dress debate on the subject in Part iv. Chapter 4- 8

[(c) How Does a History of Economic Analysis Differ from a History of
Systems of Political Economy; from a History of Economic Thought ?] The
distinction above between ideologically biased statements and value judg-
ments should not, however, be interpreted as a denial of their affinity. This
affinity is even the main reason why I think it important to distinguish this
history of economics — economic analysis — from either a history of Systems of
Political Economy or a history of Economic Thought. By a system of political
economy I mean an exposition of a comprehensive set of economic policies that
its author advocates on the strength of certain unifying (normative) principles
such as the principles of economic liberalism, of socialism, and so on. Such
systems do come within our range so far as they contain genuinely analytic
work. For instance, A. Smith’s Wealth of Nations was, in fact as in intention,
a system of political economy in the sense just defined and as such it does not
interest us. All the more does it interest us by virtue of the fact that A. Smith’s
political principles and recipes — his guarded advocacy of free trade and the rest
— are but the cloak of a great analytic achievement. In other words, we are not
so much interested in what he argued for as we are in how he argued and what
tools of analysis he used in doing so. His political principles and recipes them-
selves (including ideology — revealing value judgments) were no doubt what
mattered most to himself and to his readers and, furthermore, what accounts
primarily for the success of his work with the public and, in this sense, for its
proud position in the history of human thought. But I am prepared to sur-
render them all as mere formulations of the ideology of his epoch and country,
without validity for any other.

The same applies to what we del?ne as Economic Thought, that is, the
sum total of all the opinions and desires concerning economic subjects, espe-
cially concerning public policy bearing upon these subjects that, at any given
time and place, float in the public mind. Now the public mind is never an un-
differentiated or homogeneous something but is the result of the division of
the corresponding community into groups and classes of various natures. In
other words, the public mind reflects more or less treacherously, and at some
times more treacherously than at others, the class structure of the correspond-
ing society and the group minds or attitudes that form in it. Since these group
minds have different opportunities of asserting themselves and especially of
leaving their marks upon the literature which comes under the observation
of later generations, questions of interpretation arise that are always difficult
and sometimes impossible to solve. The public mind of a time and place is
in particular not only differentiated sectionally, but also according to the posi-
tion and intelligence of the individuals that form the same horizontal or
vertical section. It is one thing with politicians, another with the shopkeepers,
farmers, and laborers that are ‘represented’ by these politicians. And it may be

8 [Unfortunately, there is only an unfinished version of this chapter, written in 1943.
It was one of the sections that J. A. S. had taken out to rewrite and amplify.]

THE SOCIOLOGY OF ECONOMICS

formulated into systems of political economy by writers who belong, or who
attach themselves, to particular sections. On the other hand, it may border on,
or overlap with, analytic work as it has often done in treatises written by
members of the commercial or industrial bourgeoisie. So far as it does do the
latter, it will of course be our task to pick out as best we can such analytic
performances from the common run of verbalizations of the humors of the
times that are unconnected with any effort to improve our conceptual appa-
ratus, and hence without interest for us. However difficult it may be to carry
out this program in any particular case, the distinction between different masses
of thought which we are trying to draw is quite clear on principle.

It would, I suppose, be possible to write alongside a history of economic
analysis another history of the popular views on economic subjects. By the
same token it is possible to write a history of economic thought that traces
out the historical change of attitudes, mentioning, analytic performances in
passing. Such a history would indeed display the close association that exists
within the attitudes of the public mind in the sense defined, with fhe kind of
problems that at any given time interest analysts and form the general attitude
or spirit in which they approach their problems. Our own plan is exactly the
opposite one. We shall, of course, never neglect the general environment of
economic thought in which, at various times, analysts did their work. But
these environments and their historical changes are never our main object of
interest. They come in as favorable or inhibiting influences upon analytic
work, which shall remain the hero throughout our play. In trying to disentangle
analytic work from its popular background, even though this background in-
cessantly asserts its influence, we shall make a discovery which it is just as well
to notice at once.

The development of analytic work, however much disturbed it may have
been by the interests and attitudes of the market place, displays a character-
istic property which is completely absent from the historical development of
economic thought in our sense and also from the historical succession of sys-
tems of political economy. This property may best be illustrated by an ex-
ample: from the earliest times until today, analytic economists have been
interested, more or less, in the analysis of the phenomenon that we call com-
petitive price. When the modern student meets the phenomenon on an ad-
vanced level of his study, for instance in the books of Hicks or Samuelson, he
is introduced to a number of concepts and problems that may seem to him
difficult at first, and would certainly have been completely un-understandable
to so relatively recent an author as John Stuart Mill. But the. student will also
discover before long that a new apparatus poses and solves problems for which
the older authors could hardly have found answers even if they had been
aware of them. This defines in a common-sense and at any rate a perfectly
unambiguous manner, in what sense there has been ‘scientific progress’ be-
tween Mill and Samuelson. It is the same sense in which we may say that
there has been technological progress in the extraction of teeth between the
times of John Stuart Mill and our own.

Now our ability to speak of progress in these cases is obviously due to the

40 i: SCOPE AND METHOD

fact that there is a widely accepted standard, confined, of course, to a group
of professionals, that enables us to array different theories of competitive price
in a series, each member of which can be unambiguously labeled superior to
the preceding one. We further observe that this array is associated with the
lapse of time, in the sense that the later theory of competitive price almost
always holds higher rank in the array of analytic perfection: whenever this is
not the case, it is possible to assign this fact to extra-analytic and, in this
sense, disturbing influences. But while it is thus possible to speak of analytic
progress and impossible to deny the facts that this word is to denote, there is
nothing corresponding to this in the field of economic thought or even in any
historical array of systems of political economy. For instance, there would be
no sense in speaking of a superiority of Charlemagne’s ideas on economic
policy as revealed by his legislative and administrative actions over the eco-
nomic ideas of, say, King, Hammurabi; or of the general principles of policy
revealed by the proclamations of the Stuart kings over those of Charlemagne;
or of the declarations of policy that sometimes preface acts of Congress over
those Stuart proclamations. We may of course sympathize with some of the
interests favored in any of those cases rather than with the interests favored
in others, and in this sense array such documents also in a scale of preference.
But a place of any body of economic thought in any such array would differ
according to the judge’s value judgments, and for the rest we shall be left
with our emotional or aesthetic preference for the various schemata of life
that find expression in those documents. We should be very much in the same
position if we were asked whether Gauguin or Titian was the greater painter.
That is, the only sensible answer to such a question is that there is no meaning
to it. And the same thing applies of course to all systems of political economy
if we exclude from them technical excellences or deficiencies. We may, indeed,
prefer the world of modern dictatorial socialism to the world of Adam Smith,
or vice versa, but any such preference comes within the same category of sub-
jective evaluation as does, to plagiarize Sombart, a man’s preference for
blondes over brunettes. In other words, there is no objective meaning to the
term progress in matters of economic or any other policy because there is no
valid standard for interpersonal comparisons. It should be superfluous to add
that this argument seems to clarify satisfactorily the differences between his-
torians of economics on this point. Some of them think of technical analysis
and an increasing command of facts; these are quite right in speaking of scien-
tific progress in our field. Others are speaking of the changing humors, them-
selves the product of changing social conditions, that produce changing opin-
ions about policies and desirabilities; these are quite right in denying that
there is such a thing as progress in our field. Either group may err only in
overlooking that there is an aspect of man’s thought on economic subjects
other than the one they are considering exclusively. Only those err without
qualification who either see in the development of economic analysis nothing
but a reflex of the changing humors of the public mind, or else indulge in the
enviable but childish belief that political attitudes are a function of nothing
except progressive insights.

THE SOCIOLOGY OF ECONOMICS

4 1

[(d) The Scientific Process: Vision and Rules of Procedure .] We are now
ready to take the second step in our inquiry into the dangers of ideological bias,
namely, to ask the question how far it threatens the validity of results in that
narrower field that we have described as Economic Analysis. Some readers
may think even that there is no second step to take: since we have already
surrendered, as ideologically conditioned, all the systems of political economy,
and since, in addition, we have recognized as ideologies the less completely
systematized sets of opinions on economic subjects that, at any time and
place, ‘float in the public mind/ we seem in fact to have admitted all there is
to admit. And those readers in particular whose primary interest is in the
history of the ideas that shape or, at all events, are closely associated with
policies or with people’s ideas about what is to be considered as fair or desir-
able in the management of economic affairs and whose interest in the develop-
ment of technical economic analysis is secondary only are quite likely to grant —
perhaps with a shrug of the shoulders — that our box of tools may well be as far
removed from the influence of ideologies as are the techniques of any other
science. Unfortunately we cannot take this for granted. Let us therefore analyze
the scientific process itself in order to see where ideological elements may enter
it and what are our means of recognizing and perhaps eliminating them.

In practice we all start our own research from the work of our predecessors,
that is, we hardly ever start from scratch. But suppose we did start from
scratch, what are the steps we should have to take? Obviously/ in order to be
able to posit to ourselves any problems at all, we should first have to visualize
a distinct set of coherent phenomena as a worth-while object of our analytic
efforts. In other words, analytic effort is of necessity preceded by a preanalytic
cognitive act that supplies the raw material for the analytic effort. In this
book, this preanalytic cognitive act will be called Vision. It is interesting to
note that vision of this kind not only must precede historically the emergence
of analytic effort in any field but also may re-enter the history of every estab-
lished science each time somebody teaches us to see things in a light of which
the source is not to be found in the facts, methods, and results of the pre-
existing state of the science.

Let us illustrate this at once by an outstanding example from our own field
and time. Critics and admirers of the scientific performance of the late Lord
Keynes will agree to the statement that his General Theory of Employment ,
Interest, and Money (1936) was the outstanding success of the 1930’s and
that it dominated analytic work for a decade after its publication, to say the
least. The General Theory presented an analytic apparatus which the author
summed up in Chapter 18. If we follow his exposition step by step (see espe-
cially pp. 249-54) we observe that this apparatus had been designed in order
to give convenient expression to certain facts of ‘the world in which we live’ —
although, as Keynes himself emphasized, these facts are attributed to his
fundamental schedules (propensity to consume, attitude to liquidity, and
marginal efficiency of capital) as special characteristics and not as ‘logically
necessary’ properties. This analytic pattern will be discussed in the proper

4 2 I: SCOPE AND METHOD

place, 9 where it will also be shown that the special characteristics in question
are the characteristics of England’s aging capitalism as seen from the stand-
point of an English intellectual. There can be no question of their having
been established by antecedent factual research. They are ‘plausibly ascribed
to our [the English] world, on our general knowledge of contemporary human
nature' (p. 250). This is not the place to discuss the merits or demerits of this
conception. All that matters here and now is that it is a conception or vision
in our sense, and that it antedated all the analytic efforts that Keynes and
others bestowed upon it. The process stands out in this case with such unsur-
passable clearness because we can read a formulation of the vision, as yet
analytically unarmed, in a few brilliant pages of Keynes’s The Economic Con-
sequences of the Peace (1919). So far as this line of endeavor of a man of many
interests was concerned, the whole period between 1919 and 1936 was then
spent in attempts, first unsuccessful, then increasingly successful, at imple-
menting the particular vision of the economic process of our time that was
fixed in Keynes’s mind by 1919 at latest. Other examples, from our field as
well as from others, could be adduced in order to illustrate this ‘way of our
mind.' But it would hardly be possible to find a more telling one.

Analytic effort starts when we have conceived our vision of the set of phe-
nomena that caught our interest, no matter whether this set lies in virgin soil
or in land that had been cultivated before. The first task is to verbalize the
vision or to conceptualize it in such a way that its elements take their places,
with names attached to them that facilitate recognition and manipulation, in a
more or less orderly schema or picture. But in doing so we almost automatically
perform two other tasks. On the one hand, we assemble further facts in addi-
tion to those perceived already, and learn to distrust others that figured in the
original vision; on the other hand, the very work of constructing the schema or
picture will add further relations and concepts to, and in general also eliminate
others from, the original stock. Factual work and ‘theoretical’ work, in an end-
less relation of give and take, naturally testing one another and setting new
tasks for each other, will eventually produce scientific models, the provisional
joint products of their interaction with the surviving elements of the original
vision, to which increasingly more rigorous standards of consistency and ade-
quacy will be applied. This is indeed a primitive but not, I think, misleading
statement of the process by which we grind out what we call scientific proposi-
tions. Now it should be perfectly clear that there is a wide gate for ideology
to enter into this process. In fact, it enters on the very ground floor, into the
preanalytic cognitive act of which we have been speaking. Analytic work begins
with material provided by our vision of things, and this vision is ideological
almost by definition. It embodies the picture of things as we see them, and
wherever there is any possible motive for wishing to see them in a given rather
than another light, the way in which we see things can hardly be distinguished
from the way in which we wish to see them. The more honest and naive our

9 See Part v, ch. 5. [This appraisal of Keynes’s General Theory was apparently the
last thing written for the History of Economic Analysis.]

THE SOCIOLOGY OF ECONOMICS

vision is, the more dangerous is it to the eventual emergence of anything for
which general validity can he claimed. The inference for the social sciences is
obvious, and it is not even true that he who hates a social system will form
an objectively more correct vision of it than he who loves it. For love distorts
indeed, but hate distorts still more. Our only comfort is in the fact that there
is a large number of phenomena that fail to affect our emotions one way or the
other, and that therefore look to one man very much as they do to another. But
we also observe that the rules of procedure that we apply in our analytic work
are almost as much exempt from ideological influence as vision is subject to
it. Passionate allegiance and passionate hatred may indeed tamper with these
rules. In themselves these rules, many of which, moreover, are imposed upon
us by the scientific practice in fields that are little or not at all affected by
ideology, are pretty effective in showing up misuse. And, what is equally im-
portant, they tend to crush out ideologically conditioned error from the visions
from which we start. It is their particular virtue, and they do so automatically
and irrespective of the desires of the research worker. The new facts he
is bound to accumulate impose themselves upon his schema. The new con-
cepts and relations, which somebody else will formulate if he does not, must
verify his ideologies or else destroy them. And if this process is allowed to
work itself out completely, it will indeed not protect us from the emergence
of new ideologies, but it will clear in the end the existing ones from error. It
is true that in economics, and still more in other social sciences, this sphere
of the strictly provable is limited in that there are always fringe ends of things
that are matters of personal experience and impression from which it is prac-
tically impossible to drive ideology, or for that matter conscious dishonesty , 10
completely. The comfort we may take from our argument is therefore never
complete. But it does cover most of the ground in the sense of narrowing the
sphere of ideologically vitiated propositions considerably, that is, of narrowing
it down and of making it always possible to locate the spots in which it may
be active.

[J. A. S. did not complete his introductory part and stopped at this point. The fol-
lowing three paragraphs were found untyped among the notes and manuscript of this
Part.]

While it is hoped that the foregoing treatment of the ideology problem will help
the reader understand the situation within which we have to work, and put him on
his guard without imbuing him with a sterile pessimism concerning the 'objective valid-
ity’ of our methods and results, it must be admitted that our answer to the problem,

10 The role of what above is meant by conscious dishonesty is greatly enhanced by
the fact that many things that do amount to tampering with the effects of logic do not
in our field necessarily present themselves as dishonesty to the man who practices such
tampering. He may be so fundamentally convinced of the truths of what he is standing
for that he would rather die than give new weight to contradicting facts or pieces of
analysis. The first thing a man will do for his ideals is lie. Now we do not interpret
this element in the case as we do when speaking of ideological bias, but of course it
reinforces the baleful influence of the latter. 1

I: SCOPE AND METHOD

consisting as it does of a set of rules by which to locate, diagnose, and eliminate ideo-
logical delusion, cannot be made as simple and definite as can the usual glib assertion
that the history of scientific economics is or is not a history of ideologies. We have had
to make large concessions to the former view, concessions that challenge the scientific
character of all those comprehensive philosophies of economic life — such as the Politi-
cal Economy of Liberalism — which are, to many of us, the most interesting and most
glamorous of the creations of economic thought. Worse than this, we have had to
recognize, on the one hand, that although there exists a mechanism that tends to crush
out ideologies automatically, this may be a time-consuming process that meets with
many resistances and, on the other hand, that we are never safe from the current in-
trusion of new ideologies to take the place of the vanishing older ones. Under these
circumstances, examples that may do something toward teaching the use of our rules
may usefully complement the discussion above. We shall arrange our example in four
groups.

First, when we look at the contents of our box of theoretical or statistical tools, we
discover many items that are, and are known to be, ideologically neutral. For instance,
we find a concept that is called the marginal rate of substitution, which has, since
about 1900, been increasingly used in the theory of value instead of the older concept,
marginal utility. Those who accepted the former in preference to the latter, have done
so for purely technical reasons that are completely irrelevant to any ideology of eco-
nomic life, and, as a matter of fact, nobody has ever asserted the contrary. Similarly,
the question whether or not the ordinary significance tests are applicable to the case
of correlation between time series is a .very important one for economic analysis. But
it would be waste of time to investigate the arguments that have been used in establish-
ing the negative answer for ideological bias, because it is clear from the outset that
they are impervious to it by nature. The results that we produce by means of reasoning
that makes use of such stainless-steel concepts or theories may still be ideologically viti-
ated. But we can at least be sure that the ideological bias, if there be any, must be
sought for among the other elements of our reasoning.

Second, there are tools or theories that, though they can be shown to be actually
neutral, yet acquire a putative ideological importance because people erroneously be-
lieve that they are relevant to their ideologies. We have just noticed the unchallenged
fact that the transition from the marginal utility theory of value to a theory of value
based upon the concept of marginal rate of substitution was ideologically neutral in the
sense that either can be shown to be equally compatible with any ideology whatsoever.
But this was not so with the preceding phase of the development of the theory of
value. Among the opponents of the marginal utility theory of value were the Marxist
sponsors of a labor theory of value who believed — as did many marginal utility theorists
also — that the choice between labor and marginal utility "explanations’ of economic
value depends upon our vision of the economic process and is ideologically relevant.
Specifically, the Marxist notion that value is congealed labor was the first link in what
Marxists considered to be a proof that the source of all incomes except wages is exploi-
tation. However, as will be shown in Part in, the ideology . . .

[J. A. S. had nearly finished Section 1 of Chapter 4 (Is the History of Economics a
History of Ideologies?). For a further discussion of some of these problems, the reader
is referred to the presidential address (by J. A. S.) before the American Economic Asso-
ciation, "Science and Ideology,’ American Economic Review, March 1949.

Chapter 4 was apparently to have been the last chapter of the introductory Part.
There were to have been two more sections (2. The Motive Forces of Scientific En-
deavor and the Mechanisms of Scientific Development, and 3. The Personnel of Science

-J

THE SOCIOLOGY OF ECONOMICS

in General and of Economics in Particular). These subjects are discussed at intervals
throughout the History (see Index under these headings) and in connection with the
author’s concept of 'schools.’ About the Ricardians, for example, he said: 'Moreover,
the group was a genuine school in our sense: there was one master, one doctrine, per-
sonal coherence; there was a core; there were zones of influence; there were fringe ends.'

A few preliminary paragraphs (probably dictated), which deal to some extent with
the personnel of science, were found among the author’s notes and are printed below.]

The reader will have no difficulty in perceiving the relation which exists between
the definition of a science as a technique that develops in a social group professionally
devoted to its cultivation and the ideological aspects of the methods and results that
emerge from the ‘scientific’ activities of such a group. Evidently there must be a certain
amount of cohesion between its members, at least when the group has attained a suffi-
ciently definite existence, a corporative spirit that produces explicit or subconscious rules
according to which the members recognize each other and admit certain individuals
and exclude others. In noticing a few of the phenomena to which these facts give rise
we shall complete the little that can be said here on the subject of the sociology of
science.

If it be possible at all to imagine an individual who no matter for what reason em-
barks for himself and by himself upon the investigation of any of those sets of phe-
nomena that have ever become the objects of scientific efforts, it should also be . pos-
sible to realize a very simple yet very fundamental truth. Our individual must first rec-
ognize the phenomena on which he is going to work and he must recognize them as
being somehow connected with one another and distinct from others. This recognition
is a cognitive act. But it forms no part of the analytic work. On the contrary, it sup-
plies the object or material on which analysis works and is therefore a prerequisite of
it. The analytic work itself then consists of two different though inseparable activities.
The one consists in conceptualizing the contents of the vision. By this we mean the
fixing of its elements into precise concepts that receive labels or names in order to
retain their identity, and in establishing relations (theorems or propositions) between
them. The other consists in hunting for further empirical data (facts) with which we
enrich and check the ones originally perceived. It stands to reason that these two
activities are not independent of one another but that there must be an incessant
give and take between them. Attempts at conceptualization invite the hunt for further
facts and the new facts discovered must themselves be inserted and conceptualized. In
an endless sequence both activities improve, deepen; and correct the original vision and
also each other’s results. We do try at any given stage of our scientific endeavors to
construct schemata Or systems or models by which to describe as best we can the set
of phenomena we are interested in, which are then developed ‘deductively’ or ‘in-
ductively.’ But they are provisional by nature and are always relative to the stock of
facts we command. This is indeed a very imperfect description of scientific procedure
but it brings out a fact that will be emphasized again and again in these pages: there
is not and there cannot be any fundamental opposition between ‘theory’ and ‘fact
finding,’ let alone between deduction and induction. It will be one of our tasks to show
why the appearance of such opposition has emerged nevertheless.

In practice, of course, no scientific worker ever goes through all the stages of the
work beginning with an independent vision of his own. Intuitive perception of novel
aspects is indeed never absent so long as a science is really alive. But vision of the kind
that produces novel methods or propositions or else leads to the discovery of novel
facts — which then enter the science in the form of new hypotheses or restrictions —
only adds to and perhaps partly displaces existing scientific structures, the bulk of which

I: SCOPE AND METHOD

is handed from generation to generation as a matter of course. And practically always
it isn't society as whole or even a random collection of members that hands on the
stock of scientific knowledge but a more or less definite group of professionals who
teach the rising generations not only their methods and results but also their opinions
about the direction and the means of further advance. In a majority of cases compe-
tence in doing scientific work cannot be acquired, or can be acquired only by individ-
uals of quite exceptional originality and force, from any source other than the teach-
ing of recognized professionals. Let us briefly glance at some of the consequences of
this fact.

First of all, it should be observed that this social mechanism is tremendously labor-
saving. By means of it any beginner who follows the advice received and who does the
work assigned to him acquires knowledge of facts, grasp of problems, mastery of meth-
ods with an economy of energy that should set the bulk of his force free for explora-
tion of lands that lie beyond the boundary line at which the competence of the teacher
ends. There should be no reasonable doubt about it, therefore, that primarily the social
mechanism glanced at is not only favorable to the development of conceptual apparatus
and to the accumulation of factual knowledge but even that it supplies the most potent
motive power of what is usually referred to as scientific progress. Obviously, however,
there is also another side to the medal. Teaching in any established science stereotypes
the mind of the tyro and may stunt such originality as he may have. This has another
and less obvious consequence. Owing to the resistance that an existing scientific struc-
ture offers, major changes in outlook and methods, at first retarded, then come about by
way of revolution rather than of transformation and elements of the old structure that
might be permanently valuable or at least have not yet had time to yield their full
harvest of result are likely to be lost in the process. There is thus plenty of justifica-
tion, just as there is for the resentments of the revolutionary, for the propensity of a
certain type of mind to emphasize continuity and to defend old insights against new
ones. Many examples of this will be noticed in this book.

Second, the fact that existing structures once established tend to persist accounts in
the field of scientific endeavor as it does in others for a phenomenon that is not easy
to explain, the phenomenon of 'generations.' Consider a population with constant age
distribution in which moreover the number of people that enter scientific vocations are
equal to the number of people who retire. A given profession, say the profession of
scientific economists, would then also display a constant age distribution. It is no doubt
possible to construct sub-groups whose outlooks and methods may be expected to de-
velop and there is no problem whatever in the antagonism of -these age groups that
we might observe. But this is not the problem of scientific generations for we also
observe that at any given time a majority of the people in all the age groups display
certain similarities of attitude so that, for example, it is possible to speak of a genera-
tion of 1880-1900 and to contrast it with the generation of 1920-1940 although younger
and older men presumably differed in the first period as much as they did in the sec-
ond. There would be no point in this if change in methods and results proceeded at
an even rate. In the case of economists one might be tempted to explain this phenom-
enon by the change in social and economic conditions and by the consequent change
in the practical problems that attracted attention in the two periods. But we find the
same phenomenon in sciences that work on invariant environments. It is precisely this
which gives us the clue to the nature of the problem and at the same time to its solu-
tion. Problems and methods not only change because environments change. They also
change in consequence of the [fact that the] analytic work that is embodied in a given
structure of a science has a way of resisting change.

THE SOCIOLOGY OF ECONOMICS

Third, the professionals that devote themselves to scientific work in a particular field
and even all the professionals who devote themselves to scientific work in any field
tend to become a sociological group. This means that they have other things in com-
mon besides the interest in scientific work or in a particular science per se. In most
cases they teach the science which they are trying to bring up and to make their living
by teaching. Naturally, this will tend to evolve a social and economic type. The group
accepts or refuses to accept co-workers also for reasons other than their professional
competence or incompetence. In economics this grouping took long to mature but
when it did mature it acquired much greater importance than it did in physics. We
shall see how in most countries writers on economic topics hail from all the sectors
of society. There were indeed factors that made for grouping at an early time, the
most important instance being the Catholic scholastic doctors, but all the rest con-
sisted of types that came from anywhere in the scales of social rank or of income
brackets. In England, this was so even in the first half of the nineteenth century.
In such cases we must use the word profession with a proviso. In England there
was at the time indeed a profession of economists in the sense that there were
writers on economic topics who mutually recognized their professional competence. But
later on the association of scientific work with teaching produced an economic profes-
sion in a fuller sense of the word and this economic profession developed attitudes to
social and political questions that were similar also for reasons other than similar scien-
tific views. This similarity of conditions of life and of social location produced similar
philosophies of life and similar value judgments about social phenomena. It would be
unnecessary to dwell on the consequences of this were it not for the fact that it was
closely associated with the phenomenon of scientific schools. Since this concept will
inevitably play a considerable role in our story we had better stay for a moment in order
to investigate its meaning.

Part II

FROM THE BEGINNINGS
TO THE FIRST CLASSICAL SITUATION
(To About 1790)

CHAPTER 1

Graeco-Roman Economics

i. Plan of the Part
[2. From the Beginnings to Plato]

[3. Aristotle’s Analytic Performance]

[4. On the Origin of the State, Private Property, and Slavery]
[5. Aristotle’s 'Pure’ Economics]

(a) Value

(b) Money

[6. Greek Philosophy]

[7. The Contribution of the Romans]

[(a) Absence of Analytic V/ork]

[(b) Importance of Roman Law]

[(c) Writings on Agriculture]

[8. Early Christian Thought]

60
60
62

66
67
67

1. Plan of the Part

It has been explained in Part 1 that no science, in the sense there defined, is
ever founded or created by a single individual or group. Nor is it in general
possible to assign any precise date to its 'birth.' The slow process by which
economics, as we now call it, rose into recognized existence ran its course be-
tween the middle of the seventeenth and the end of the eighteenth centuries.
However, a concept that has been introduced in Part 1 may help us to be
somewhat more precise, at least so far as the exigencies of exposition are con-
cerned: the concept of Classical Situations . 1 Such a classical situation emerged

1 [J. A. S. did not complete the sections of Part 1 in which he would have discussed
his concept of Classical Situations (and the difficulties inherent in periodizing) with
special reference to his reasons for arranging the subject matter of the history of eco-
nomic analysis in the three main divisions covered by Parts 11, in, and iv. The reader
will, however, find references to these problems at intervals throughout this book, es-
pecially in Part 111, ch. 1 and again in Part iv, ch. 1.

As J. A. S. points out, the term classic in this book has three meanings which
should be distinguished from one another. Formerly it referred to the economic litera-
ture of the period from Adam Smith to J. S. Mill. 'It retained this label until, at a
time when the word “classic” had lost its eulogistic connotation and was beginning
to stand for “obsolete,” Lord Keynes used the word in order to denote the teaching
of A. Marshall and his immediate followers (or simply, pre- Keynesian economics).'
J. A. S. himself uses the term Classical Situation to describe the achievement of sub-
stantial agreement after a long period of struggle and controversy — the consolidation
of the fresh and original work which went before. When he wishes to use the term
classic in the first sense (Adam Smith to J. S. Mill), he puts it in quotes 'to prevent
confusion’ (Part 111, ch. 1, sec. 1).]

52 II: BEGINNINGS TO ABOUT 1790

in the second half of the eighteenth century and no such classical situation
had ever emerged before. Availing ourselves of this, we might be tempted to
start somewhere between 1750 and 1800, perhaps with the peak success of
that epoch, A. Smith’s 'Wealth of Nations (1776). But every classical situa-
tion summarizes or consolidates the work — the really original work — that leads
up to it, and cannot be understood by itself. Therefore, we shall try to cover
in this Part, as best we can, the whole span of more than 2000 years that
extends from 'beginnings’ to about twenty years after the publication of the
Wealth of Nations. This task is much facilitated by the further fact that, so far
as the purposes of this history are concerned, many centuries within that span
are blanks.

The classical situation of the second half of the eighteenth century was tire
result of a merger of two types of work that are sufficiently distinct to justify
separate consideration . 2 There was the stock of factual knowledge and the con-
ceptual apparatus that had slowly grown, during the centuries, in the studies
of philosophers. And, semi-independent of this, there was a stock of facts and
concepts that had been accumulated by men of practical aEairs in the course
of their discussions of current political issues. These two sources of nascent
economics cannot be separated strictly. On the one hand, there were numerous
intermediate cases that cannot be classified without cutting many a Gordian
knot. On the other hand, right into the time of the physiocrats, the scholar’s
technique was so very simple that most of it was within the reach of ordinary
common sense and easily rivaled by unlearned practitioners, whose writings,
therefore, cannot be dismissed as irrelevant to our purpose: on the contrary,
they frequently rose to what we call in this book the scientific level. Broadly,
however, our distinction is valid all the same.

Let us recall our distinction between Economic Thought — the opinions on
economic matters that prevail at any given time in any given society and be-
long to the province of economic history rather than to the province of the
history of economics — and Economic Analysis — which is the result of scientific
endeavor in our sense. The history of economic thought starts from the records
of the national theocracies of antiquity whose economies presented phenomena
that were not entirely dissimilar to our own, and problems which they managed
in a spirit that was, in fundamentals, not so very dissimilar either. But the his-
tory of economic analysis begins only with the Greeks.

Ancient Egypt had a kind of planned economy that turned upon her irriga-
tion system. The Assyrian and Babylonian theocracies had huge military and
bureaucratic establishments and elaborate legal systems — of which the code of
Hammurabi (about 2000 b.c.) is the earliest legislative monument; they pur-
sued an activist foreign policy; also they developed monetary institutions to a
high degree of perfection, and knew credit and banking. The sacred books of

2 Like periodization, the setting up of such types is an expository device. Though
certainly based upon provable facts, neither must be taken too seriously or else what
is intended to be a help for the reader turns into a source of misconceptions. Periods
and types are useful only so long as this is remembered.

GRAECO-ROMAN ECONOMICS

Israel, especially the legislative portions of them, reveal perfect grasp of the
practical economic problems of the Hebrew state. But there is no trace of
analytic effort. More than anywhere else we might expect to find such traces
in ancient China, the home of the oldest literary culture of which we know.
We find in fact a highly developed public administration that dealt currently
with agrarian, commercial, and financial problems. These problems are fre-
quently touched upon, mainly from an ethical standpoint, in the remains of
Chinese classical literature, for instance in the teaching of Kung Fu Tse (551-
478 b.c.), who was himself at two stages of his life a practical administrator
and reformer, and of Meng Tzu (Mencius, 372-288 b.c., works trans. by L. A.
Lyall, 1932), from whose works it is possible to compile a comprehensive sys-
tem of economic policy. Moreover, there were methods of monetary manage-
ment and of exchange control that seem to presuppose a certain amount of
analysis. The phenomena incident to the recurrent inflations were no doubt ob-
served and discussed by men much superior to us in cultural refinement. But
no piece of reasoning on strictly economic topics has come down to us that
can be called 'scientific' within our meaning of the term. 3

The obvious inference is of course highly uncertain. There may have been
analytic work, the records of which failed to survive. But there is reason to
suppose that there was not much of it. We have seen before that common-
sense knowledge, relative to scientific knowledge, goes much farther in the eco-
nomic field than it does in almost any other. It is perfectly understandable,
therefore, that economic questions, however important, took much longer in
eliciting specifically scientific curiosity than did natural phenomena. Nature
harbors secrets into which it is exciting to probe; economic life is the sum
total of the most common and most drab experiences. Social problems interest
the scholarly mind primarily from a philosophical and political standpoint;
scientifically they do not at first appear very interesting or even to be 'problems'
at all.

[2. From the Beginnings to Plato]

So far as we can tell, rudimentary economic analysis is a minor element —
a very minor one — in the inheritance that has been left to us by our cultural
ancestors, the ancient Greeks, Like their mathematics and geometry, their
astronomy, mechanics, optics, their economics is the fountainhead of practically
all further work. Unlike their performance in these fields, however, their eco-
nomics failed to attain independent status or even a distinctive label: their
Oeconomicus (obco?, house, and vo(i.og law or rule) meant only the practical
wisdom of household management; the Aristotelian Chrematistics (jcer^a,
possession or wealth), which comes nearest to being such a label, refers mainly
to the pecuniary aspects of business activity. They merged their pieces of eco-
nomic reasoning with their general philosophy of state and society and rarely

3 See, however, E. D. Thomas, Chinese Political Thought (1927); S. Y. Ly, Les
grands courants de la pensee economique chinoise dans Vantiquite . . . (1936); and
Huan Chang Chen, The Economic Principles of Confucius and His School (1911).

54 II: BEGINNINGS TO ABOUT 1790

dealt with an economic topic for its own sake. This accounts, perhaps, for the
fact that their achievement in this field was so modest, especially if compared
with their resplendent achievements in others. Classic scholars ,as well as
economists who rate it more highly think of that general philosophy and not
of technical economics. Also they are prone to fall into the error of hailing as
a discovery everything that suggests later developments, and of forgetting that,
in economics as elsewhere, most statements of fundamental facts acquire im-
portance only by the superstructures they are made to bear and are common-
place in the absence of such superstructures. Such as they were, the scientific
splinters of Greek economic thought 1 that are accessible to us may be gleaned
from the works of Plato (427-347 b.c.) and Aristotle (384-322 b.c.).

Greek thought, even where most abstract, always revolved around the con-
crete problems of human life. These problems of life in turn always centered
in the idea of the Hellenic city-state, the polis, which was to the Greek the
only possible form of civilized existence. Thus, by virtue of a unique synthesis
of elements that with us dwell in different worlds, the Greek philosopher was
essentially a political philosopher: it was from the polis that he looked into the
universe, and it was the universe — of thought as well as of all other human
concerns — that he found reflected in the polis. The Sophists seem to have been
the first to analyze this universe very much as we do now: they are, in fact,
the forefathers of our own methods of thought, our logical positivism included.

But Plato’s aim was not analysis at all but extra-empirical visions of an ideal

1 We are not concerned with economic conditions and with public opinion about
them. But the reader can with little trouble get an instructive glimpse of both from
G. M. Calhoun, The Business Life of Ancient Athens (1926). This book may also
bring home to him, among other things, the curious affinity that exists between our
own reactions to business practice and those of the ancient Greeks. The works of
Greek poets and historians are relevant only from this standpoint and need not be
considered here though some of the latter, especially Thucydides and Polybius, are |

of absorbing interest to any student of society. Nor is it necessary to discuss Xenophon, 1

whose Oeconomicus is precisely the sort of treatise on household management that |

went under similar titles until the sixteenth century, and whose Poroi , a treatise on M

Attic public finance, is of course very interesting for the economic historian (as is ;i

also the pseudo-Xenophontic treatise on the Athenian commonwealth, the survivor ||

of what may have been a large literature written mainly by opponents of the radical 3

regimes in post-Periclean Athens). Among ‘philosophers,’ Plato and Aristotle are of §1

such commanding importance that reference may be confined to them, in a sketch fj

like this. The huge literature about them naturally pays but little — and sometimes
dilettantic — attention to the topics that matter to us. The purposes of the general |

reader will be served adequately by the perusal of M. L. W. Laistner, Greek Eco- ||

nomics (1923), which also contains translations of portions of representative works. jf

See also Auguste Souchon, Les Theories economiques dans la Grece antique (1898). S

It seems, , however, impossible not to mention such classics as Fustel de Coulanges’ |

La Cite antique (12th ed. of the English trans. by W. Small, 1921); T. Gomperz’

Griechische Denker (trans. by Magnus and Berry, 1901-12), and U. von Wilamowitz- .7

Moellendorp’s Stoat und Gesellschaft der Griechen und der Romer (2nd ed., 1923) —
masterly pictures of the cultural backgrounds from which sprang, among so many
more important things, also the beginnings of economic analysis.

GRAECO-ROMAN ECONOMICS

polis or, if we prefer, the artistic creation of one. The picture he painted of the
Perfect State in his Politeia ( The Republic 2 ) is no more analysis than a paint-
er's rendering of a Venus is scientific anatomy. It goes without saying that on
this plane the contrast between what is and what ought to be loses its meaning.
The artistic quality of the Politeia and of the whole literature — mostly lost —
of which the Politeia seems to have been the peak achievement is well brought
out by the German term for it, Staatsromane (literally: state novels). In default
of a satisfactory English synonym we must use the word Utopia. The reader
presumably knows that more or less under the influence of the Platonic ex-
ample, this type of literature again found favor in the Renaissance and then
continued to be produced, sporadically, to the end of the nineteenth century . 3

But analysis comes in after all. There is a relation between the painter's
Venus and the facts described by scientific anatomy. Just as Plato's idea of
'horseness' obviously has something to do with the properties of observable
horses, so his idea of the Perfect State is correlated with the material furnished
by the observation of actual states. And there is no reason whatever to deny
the analytic or scientific character — remember: we do not attach any compli-
mentary meaning to either of these words — of such observations of facts or re-
lations between facts as are enshrined, explicitly or by implication, in Plato's
construction. Reasoning of an analytic nature is still more prominent in a
later work, the Nomoi (Laws). But nowhere is it pursued as an end in itself.
Consequently it does not go very far.

Plato’s Perfect State was a City-State conceived for a small and, so far as
possible, constant number of citizens. As stationary as its population was to
be its wealth. All economic and non-economic activity was strictly regulated —
warriors, farmers, artisans, and so on being organized in permanent castes,
men and women being treated exactly alike. Government was entrusted to one
of these castes, the caste of guardians or rulers who were to live together with-
out individual property or family ties. The changes introduced in the Nomoi
are considerable — chiefly they are compromises with reality — but they do not
touch the fundamental principles involved. This is all we need for our pur-
pose. Though Plato’s influence is obvious in many communist schemes of
later ages, there is little point in labeling him a communist or socialist or
a forerunner of later communists or socialists. Creations of such force and
splendor defy classification and must be understood in their uniqueness, if at
all. The same objection precludes attempts to claim him as a fascist. But if
we do insist on forcing him into a strait jacket of our own making, the fascist
strait jacket seems to fit somewhat better than the communist one: Plato’s
‘constitution’ does not exclude private property except on the highest level of

2 The standard English translation by B. Jowett includes introductory essays on
Plato’s life, writings, and philosophy, and an analysis of the work.

3 The best interpretation of Greek Staatsromane that I know of — and one that is
itself a work of art — is Edgar Salin’s Platon und die griechische XJtopie (1921). This
literature naturally reflects the social movements of its time, a subject into which it
is impossible to enter here. See Robert von Pdhlmann’s Geschichte der sozialen Frage
und des Sozialismus in der antiken Welt (1912).

56 II : BEGINNINGS TO ABOUT 1790

the purest ideal; at the same time it enforces a strict regulation of individual
life, including limitation of individual wealth and severe restrictions upon free-
dom of speech; it is essentially ‘corporative’; and it recognizes the necessity
of a classe dirigente — features that go far toward defining fascism.

The analytic background, such as it is, comes into view as soon as we ask
the question: why this rigid stationarity? It is difficult not to answer (however
pedestrian such an answer may sound to the true Platonist) that Plato made
his ideal stationary because he disliked the chaotic changes of his time. His
attitude to contemporaneous events was certainly negative. He hated the
Sicilian tyrannos (though we must not translate this word by tyrant). He
almost certainly despised the Athenian democracy. Yet he realized that tyranny
grew out of democracy and was, in any case, the practical alternative to it.
Democracy, in turn, he interpreted as the inevitable reaction to oligarchy, and
this again he traced to inequality of wealth, the consequence, as he thought,
of commercial enterprise ( Politeia vm). Change, economic change, was at the
bottom of the development from oligarchy to democracy, from democracy to
tyranny (of a popular leader), that was so little to his taste. Whatever we
may think of Platonic stationarity as the remedy, is there not a piece of —
almost Marxian — economico-sociological analysis behind that diagnosis?

We need not stay to consider the numerous economic topics that Plato
touched upon incidentally. It will suffice to mention two examples. His caste
system rests upon the perception of the necessity of some Division of Labor
( Politeia n, 370). He elaborates on this eternal commonplace of economics
with unusual care. If there is anything interesting in this, it is that he (and
following him, Aristotle) puts the emphasis not upon the increase of efficiency
that results from division of labor per se but upon the increase of efficiency
that results from allowing everyone to specialize in what he is by nature best
fitted for; this recognition of innate differences in abilities is worth mentioning
because it was so completely lost later on. Again, Plato remarks in passing
that money is a ‘symbol' devised for the purpose of facilitating exchange
( Politeia 11, 371; Jowett translated ounPokov by ‘money-token’). Now such an
occasional saying means very little and does not justify the attribution to
Plato of any definite view on the nature of money. But it must be observed
that his canons of monetary policy — his hostility to the use of gold and silver,
for instance, or his idea of a domestic currency that would be useless abroad —
actually do agree with the logical consequences of a theory according to which
the value of money is on principle independent of the stuff it is made of.
In view of this fact it seems to me that we are within our rights if we claim
Plato as the first known sponsor of one of the two fundamental theories of
money, just as Aristotle may be claimed as the first known sponsor of the
other (sec. 5b below). It is highly unlikely, of course, that these theories
originated with them, but it is certain that they taught them and that they
attached exactly the same meaning to them as did the authors who again
took them up from the late Middle Ages on. We may assume this with con-
fidence because those authors display both Platonic and Aristotelian influences
clearly enough. In fact, filiation can be strictly proved.

GRAECO-ROMAN ECONOMICS

The dialogue Eryxias, which was not written by Plato but has been trans-
mitted to us among his writings and contains nothing that clashes with any
of his known opinions, is mentioned here because it is the only extant piece
of work that is wholly devoted to an economic subject and indeed treats it
for its own sake. Otherwise, the contents of the dialogue — substantially an
inquiry into the nature of wealth, which is related to wants and carefully
distinguished from money — do not present any great interest.

[3. Aristotle’s Analytic Performance]

Aristotle’s performance is quite different. It is not only that in his works
Platonic glamour is conspicuous by its absence, and that instead we find (if
such a thing may be said without offense of so great a figure) decorous,
pedestrian, slightly mediocre, and more than slightly pompous common
sense. Nor is it only that Aristotle much more than Plato — in any case, much
more frankly than Plato — co-ordinated and discussed pre-existing opinions that
prevailed in what must have been a copious literature. The essential difference
is that an analytic intention, which may be said (in a sense) to have been
absent from Plato's mind, was the prime mover of Aristotle’s. This is clear
from the logical structure of his arguments. It becomes still clearer when we
observe his method of work: for instance, his political concepts and doctrines
were drawn from an extensive collection he laboriously made of constitutions
of Greek states. Of course, he also looked for the Best State , 1 which was to
realize the Good Life, the Summum Bonum, and Justice. He also overflowed
with value judgments for which he claimed absolute validity (as do we). He
also gave normative form to his results (as do we). And finally he also went
hortatory on Virtue and Vice (as we do not ). 2 But, however important all this
may have been to him and, for more than 2000 years, to all his readers, it
does not concern us at all; as I have said already and shall use every oppor-
tunity to repeat again and again, all this affects the goals and motives of
analysis but it does not affect its nature . 3

1 It is interesting to note that he, too, philosophized primarily about the Greek
city-state which, in spite of the exploits of his illustrious tutee, was and remained for
him the only form of life worthy of serious attention. That Alexander’s stupendous
experiment in political construction completely failed to stir his imagination and to
set his mind working on the vast vistas opened up by that experiment is highly char-
acteristic of the man.

2 He therefore refused assent to the pleasure-and-pain doctrines about behavior that
were gaining ground in the Greece of his day. But though he did not give a utilitarian
definition of happiness, he placed the concept of happiness in the center of his social
philosophy. Whoever does this has taken the decisive step and has committed the
original sin: whether he then emphasizes virtue and vice or pleasure and pain is sec-
ondary — the way is smooth from the one to the other.

8 If any doubt were possible concerning Aristotle's analytic intention, it would be
removed by his programmatic statement: ‘As in other departments of science, so in
politics, the [given] compound [of phenomena] should always be resolved into the
simple elements or least parts of the whole’ (Politics 1, 1). To be sure, the term ‘re-

58 II : BEGINNINGS TO ABOUT 1790

But only a small part of his analytic performance is concerned with eco-
nomic problems. His main work as well as his main interest, so far as social
phenomena are concerned, was in the field we have decided to call economic
sociology or rather it was in the field of political sociology to which he sub-
ordinated both economic sociology and technical economics. It is as a treatise
or textbook on state and society that his Politics must be appraised. And his
Nicomachean Ethics — a comprehensive treatise on human behavior presented
from the normative angle — also deals so preponderantly with political man,
with man in the city-state, that it should be considered as a companion volume
to the Politics , making up together with the latter the first known systematic
presentation of a unitary Social Science. The reader presumably knows that up
to, say, the times of Hobbes, all that went under the name of political science
and political philosophy fed upon the Aristotelian stock. For our purpose, it
must suffice to note: (1) that not only was Aristotle, like a good analyst, very
careful about his concepts but that he also co-ordinated his concepts into a
conceptual apparatus, that is, into a system of tools of analysis that were re-
lated to one another and were meant to be used together, a priceless boon
to later ages; (2) that, as is indeed implied in his ‘inductive’ approach alluded
to above, he investigated processes of change as well as states; (3) that he
tried to distinguish between features of social organisms or of behavior that
exist by virtue of universal or inherent necessity (qpvosl) and others that are
instituted by legislative decision or custom ( vo^co ); (4) that he discussed social
institutions in terms of purposes and of the advantages and disadvantages
they seemed to him to present, and that he himself thus gave in, and led
followers to give in, to a particular form of the rationalist error, namely, the
teleological error. 4 Deferring consideration of his concept of Natural Law, we
confine ourselves to three characteristic samples of his analysis.

solving’ is but a literal equivalent to ‘analyzing’ and actually identifies only a par-
ticular type of the activity we mean to indicate by analysis. It is, however, the spirit
of the passage that counts and not its particular wording. The passage as a whole
clearly expresses the fact that Aristotle consciously applied an analytic method.

4 Teleology, or the attempt to explain institutions and forms of behavior causally
by the social need or purpose they are supposed to serve, is obviously not always
erroneous: many things in society can be, of course, not only understood in terms
of their purpose but also causally explained by it. In all sciences that deal with pur-
posive human actions, teleology must always play some role. But it must be handled
with care; and there is the ever-present danger of making improper use of it. Mostly,
this improper use consists in exaggerating the extent to which men act, and shape the
institutions under which they live, according to clearly perceived ends that they con-
sciously wish to realize in the most rational way. This is why the teleological error
may be called a particular instance of the wider category of rationalist errors. It is
interesting to note, however, that Aristotle was quite free from the teleological error
in matters outside of his social science. In Physicae auscultationes (n, 8) he recognized,
for instance, that our teeth are adapted to chewing food, not because they were made
for this purpose but, as he thought, because individuals who are by accident endowed
with serviceable teeth have a better chance of surviving than those who have not.
What a curious piece of Darwinism!

GRAECO-ROMAN ECONOMICS

[4. On the Origin of the State, Private Property, and Slavery]

Contrary to a widespread impression, Aristotle did not accept Plato's idea
that the state developed from the patriarchal family or gens. Neither did he
fully accept the idea of a Social Contract which seems to have been current
among Sophists, but it always hovered around his path. Occasionally, he even
talked about an original covenant so that the idea came easily to any disciple
of his. This is interesting for two reasons. First, in the seventeenth and eight-
eenth centuries the social contract became the centerpiece of a line of thought
whose exponents would have greatly resented being called Aristotelians. Second,
Aristotle's handling of this subject is characteristic of his general attitude to-
* ward ideas of the Sophists. Much in Aristotle is strongly suggestive of Sophist
influences. Yet he consistently argued against them, or rather against the
views that we know to have been held by them. Perhaps it is not difficult
to explain such an attitude; it is by no means rare. In any case, however, we
must not allow it to obliterate the fact that he absorbed some of their thought
and that it was mainly through his works that some Sophist influences reached
the Middle Ages.

In the second Book of the Politics , Aristotle discussed private property,
communism, and the family, mainly by way of criticizing Plato, Phaleas, and
Hippodamus. His criticism of Plato — the only one of the three whose text
we can compare with the criticism — is strikingly unfair and, moreover, mis-
conceives completely the nature and meaning of Plato's creation. But the argu-
ments he adduced for private property and the family and against communism
were all the more successful — they read almost exactly like the arguments of
middle-class liberals of the nineteenth century.

Aristotle lived in a society and breathed the air of a civilization to which
slavery was essential. However, he also lived in a time when this essential
institution was under fire from social critics. In other words, slavery had be-
come a problem. This problem Aristotle attempted to solve by positing a
principle that was to serve both as an explanation and as a justification. It
stated what he thought was an indubitable fact, the ‘natural’ inequality of
men: by virtue of inborn quality, some men are predestined for subjection,
others for rule. He saw the difficulty of identifying this proposition with the
•quite different one that the former class of men actually furnishes the slaves
of real life, and that the latter class of men actually furnishes the masters of
real life. But he eliminated this difficulty by admitting ‘unnatural’ and ‘unjust’
cases of slavery such as would arise from indiscriminate enslavement of (Hel-
lenic) prisoners of war. Most of us will see in this theory a peerless example
of ideological bias coupled with apologetic intention (as we know, the two
do not necessarily coincide). All the more important is it to make quite clear
precisely what it is that justifies this impression. Our dislike of the proposition
that slavery is due to a congenital inferiority — of some sort — in the enslaved
would certainly not justify it. Nor is it sufficient that Aristotle's theory involves
several non sequiturs. This would establish faultiness of analysis but not

60 II : BEGINNINGS TO ABOUT 1790

ideological bias. At the same time, if the mistakes committed in an argument
all point in the same direction and if this direction agrees with what we may
conceive the analyst’s ideology to be, we are probably within our rights in
suspecting ideological bias. Even so, it is not the suspicion of bias but the
proof of the mistakes that should motivate rejection.

[5. Aristotle’s ‘Pure’ Economics]

Keeping these principles of interpretation in mind, we now turn to Aris-
totle’s embryonic ‘pure’ economics, the elements of which are to be found
mainly in Politics, i, 8-11, and in Ethics, v, 5. Nothing would be easier than
to show that he was primarily concerned with the ‘natural’ and the ‘just’ as «
seen from the standpoint of his ideal of the good and virtuous life, and that
the economic facts and relations between economic facts which he considered
and evaluated appear in the light of the ideological preconceptions to be ex-
pected in a man who lived in, and wrote for, a cultivated leisure class, which
held work and business pursuits in contempt and, of course, loved the farmer
who fed it and hated the money lender who exploited it. These things are
just as interesting but not more so than are the corresponding though different
value judgments and ideologies of the modern intellectual. The points that
really matter for us are these. Aristotle based his economic analysis squarely
upon wants and their satisfactions. Starting from the economy of self-sufficient
households, he then introduced division of labor, barter, and, as a means, of
overcoming the difficulties of direct barter, money — the error of confusing
wealth with money duly coming in for stricture. There is no theory of ‘dis-
tribution.’ This — presumably the extract from a large literature that has been
lost — constitutes the Greek bequest, so far as economic theory is concerned.
We shall follow its fortunes right to A. Smith’s Wealth of Nations, the first
five chapters of which are but developments of the same line of reasoning.
Let us therefore look at the bequest more closely.

(a) Value. Aristotle not only distinguished value in use and value in ex-
change as clearly as did any later writer but he also perceived that the latter
phenomenon derives somehow from the former. But in itself this is not only
common sense but also commonplace, and further than this he did not ad-
vance. His failure to do so was made good by the later scholastics, who are
entitled to the credit for having developed the theory of price which he him-
self cannot be said to have had. It has been held that this was due to his
preoccupation with the ethical problem of justice in pricing — ‘commutative’
justice — which diverted his interest from the analytic problem of actual pricing.
Nothing could be farther from the truth. Preoccupation with the ethics of
pricing, as the example of the later scholastics suffices to show, is precisely one
of the strongest motives a man can possibly have for analyzing actual market
mechanisms. Several passages show, as a matter of fact, that Aristotle tried to
do so and failed. 1 He considered, however, the case of Monopoly (Politics,

1 The most characteristic of these passages occurs in Ethics, v (1133), which I
interpret like this: ‘As the farmer’s labor compares with the shoemaker’s labor, so

GRAECO-ROMAN ECONOMICS

i, ii and Ethics, v, 5), which he defined as it has been defined ever since,
namely, as the position in a market of a Single Seller ((aovos, alone or standing
alone; jwotaiv, to sell). 2 He condemned it as ‘unjust/

These facts seem to yield the solution of a problem that has exercised some
historians of the theory of value. Aristotle no doubt sought for a canon of
justice in pricing, and he found it in the ‘equivalence’ of what a man gives
and receives. Since both parties to an act of barter or sale must necessarily
gain by it in the sense that they must prefer their economic situations after
the act to the economic situations in which they found themselves before the
act — or else they would not have any motive to perform it — there can he no
equivalence between the ‘subjective’ or utility values of the goods exchanged
or between the good and the money paid or received for it. And since Aristotle
did not offer any theory of exchange value or price, those historians concluded
that he must have had in mind some mysterious Objective or Absolute Value
of things that is intrinsically inherent in them and independent of circum-
stances or human valuations or actions — a metaphysical entity most welcome
to people with philosophical propensities and most distasteful to people of
a more ‘positive’ type of mind. But surely this does not follow. Failure to
explain exchange value is not failure to recognize it as a fact. And it is much
more reasonable to assume that Aristotle simply thought of the exchange
values of the market, as expressed in terms of money, rather than of some
mysterious value substance measured by those exchange values. But does not
this imply that he accepted the actual commodity prices as the standard of
his commutative justice and thereby lost the means of pronouncing upon their
justice or injustice? Not at all. We have seen that he condemned monopoly
prices. It is not farfetched to equate, for Aristotle’s purpose, monopoly prices
with prices that some individual or group of individuals have set to their own
advantage. Prices that are given to the individual and with which he cannot
tamper, that is to say, the competitive prices that emerge in free market under
normal conditions, do not come within the ban. And there is nothing strange
in the conjecture that Aristotle may have taken normal competitive prices as
standards of commutative justice or, more precisely, that he was prepared to
accept as ‘just’ any transaction between individuals that was carried out at
such prices — which is in fact what the scholastic doctors were to do explicitly.
If this interpretation be correct, his concept of the just value of a commodity
is indeed ‘objective,’ but only in the sense that no individual can alter it by
his own action. Moreover, his just values were social values — expressive, as
he almost certainly thought, of the community’s evaluation of every com-
modity 3 — but only in the sense that they were the super-individual result of

the product of the farmer compares with the product of the shoemaker.’ At least,
I cannot get any other sense out of this passage. If I am right, then Aristotle was
groping for some labor-cost theory of price which he was unable to state explicitly.

2 Joan Robinson added the corresponding concept, Monopsony, the position in the
market of a Single Buyer (drjxoveiv, to buy).

3 This idea kept on turning up throughout the ages. We also find it in J. B. Clark
(see below, Part iv). But though it seems to have had a strong appeal for some minds,

02 II; BEGINNINGS TO ABOUT 1790

the actions of a mass of reasonable men. In any case, they are nothing more
metaphysical or absolute than quantities of commodities multiplied by their
normal competitive prices. The reader will have no difficulty in perceiving
that, if values are defined in this way, the Aristotelian requirement of com-
mutative justice acquires a sound and perfectly simple meaning. It will be
fulfilled by their equality in every act of exchange or sale: if A barters shoes
for B’s loaves of bread, Aristotelian justice requires that the shoes equal the
loaves when both are multiplied by their normal competitive prices; if A sells
the shoes to B for money, the same rule will determine the amount of money
he ought to get. Since, under the conditions envisaged, A would actually get
this amount, we have before us an instructive instance of the relation which,
with Aristotle himself and a host of followers, subsists between the logical and
the normal ideal and between the ‘natural’ and the ‘just.’

We have expended such care on this argument because it disposes once for
all of metaphysical speculations about objective or absolute value wheresoever
and whensoever they might occur. Dismissing for good what we have seen to
be a spurious problem, we shall henceforth understand by objective value of
a commodity the magnitude defined and nothing else. Similarly, we shall not
bother about any possible metaphysical meaning of the concept of Intrinsic
Value since it is always possible (and in most cases very easy) to attach to it
an entirely unmetaphysical one — as, for instance, in the most important case,
where an author speaks of the intrinsic value of a coin.

(b) Money. The theory of money that Aristotle sponsored in conscious op-
position, so it seems to me, to the alternative one sponsored by Plato was this:
the very existence of any non-communist society involves the exchange of
goods and services; this exchange, at first, ‘naturally’ takes the form of barter;
but the people who want what other people have may not have what the latter
want; therefore it will often be necessary to accept in exchange what one
does not want in order to get what one does want by means of a further act
of barter (indirect exchange); obvious convenience will then induce people to
choose, tacitly or through legislative action, one commodity — Aristotle did nof
consider the possibility that people might choose more than one— -as a Medium
of Exchange. Aristotle briefly mentioned the fact that some commodities —
such as the metals — are better fitted for this role than others, thus foreshadow-
ing some of the tritest passages in nineteenth-century textbooks about homo-
geneity, divisibility, portability, relative stability of value , 4 and so on. Moreover,
the requirements of his rule of equivalence in exchange naturally led him to
observe that the Medium of Exchange will also be used as a Measure of Value.
And finally he recognized, implicitly at least, its use as a Store of Value. Three
of the four functions of money traditionally listed in those nineteenth-century

there is very little to it: there is no realistic sense in which it can be averred that any
non-socialist society as such evaluates commodities, though it is true of course that
social influences shape the subjective valuations of individuals that govern their be-
havior and thus produce prices and ‘objective values.’

4 He recognized, however, that the value of gold and silver was not immutable.

GRAECO-ROMAN ECONOMICS 63

textbooks — the fourth is to serve as the Standard of Deferred Payments — can
therefore be traced to Aristotle.

Essentially, this theory embodies two propositions. The first is that, what-
ever other purposes money may come to serve, its fundamental function, which
defines it and accounts for its existence, is to serve as a medium of exchange.
Therefore, this theory belongs to what Professor von Mises has described as
‘catallactic’ theories of money (%aTa^^dxxeiv, to exchange). The second proposi-
tion is that in order to serve as a medium of exchange in the markets of
commodities, money itself must be one of these commodities. That is to say,
it must be a thing that is useful and has exchange value independently of its
monetary function — this is all that intrinsic value means in this connection —
a value that can be compared with other values. Thus the money commodity
goes by weight and quality as do other commodities; for convenience people
may decide to put a stamp on it (xaQooc-nriQ) in order to save the trouble of
having to weigh it every time, but this stamp only declares and guarantees
the quantity and quality of the commodity contained in a coin and is not the
cause of its value. This proposition, which, of course, is not either identical
with the first or implied by it, will identify what we shall henceforth call
Metallism or the Metallist Theory of Money in contrast to the Cartal Theory
of which Plato’s is an example. 5

Whatever may be its shortcomings, this theory, though never unchallenged,
prevailed substantially to the end of the nineteenth century and even beyond.
It is the basis of the bulk of all analytic work in the field of money. Therefore,
we have every motive to make sure of our interpretation of Aristotle, whose
personal influence in this matter is recognizable at least as late as A. Smith.
No passage in the Politics will bear any other interpretation unless we attribute
to Aristotle certain views that he mentioned but clearly attributed to others.
But: in the Ethics, playing upon the Greek word for current coin (vopwruo-),
he did state that money exists not by 'nature’ but by convention or legislation
(v6|u,(p), which seems to point in another direction. The fact, however, that he
added, by way of explaining his meaning, that money might be changed or
demonetized by the community suggests that he meant no more than that
convention or legislation decides the material to be used for coining money
and on the particular form to be given to the coins. 6

Attention should finally be called to an interesting point of method. Aris-
totle’s theory of money is a theory in the ordinary sense of this term, that is to
say, an attempt to explain what money is and what money does. But, he pre-
sented it in a genetic form, as was his habit in dealing with any social institu-
tion: he lets money develop in what purports to be a historical sequence that

5 See ch. 6 of this Part.

6 We cannot enter, as we should, into a discussion of other passages. It must suffice
to say that, at worst, they weigh hut lightly as against the clear implications of Aris-
totle’s emphasis on the necessity that money should consist of a material that is a
commodity in its own right. Either the phrase that money is vnaXkay\ia trig zgeiag
y.axd airvdrptTvv ( Ethics , v, 5, 11) means that money is a means of exchange [used]
according to convention or else I do not understand it.

64 II: BEGINNINGS TO ABOUT 1790

starts from a condition or 'stage' in which there was no money. Of course, we
need not see more in this than an expository device. In fact, the reader should
remember this possible interpretation, which will redeem from sheer absurdity
many an argument that presents itself in the garb of purely imaginary 'history,'
as do, for instance, those theories of the state that use the idea of an original
social contract. Even A. Smith’s ‘early and rude state of society’ may benefit
from an interpretation that refuses to take it seriously. But the case of money
is different because the Aristotelian theory of the logical origin of money may
pass muster — at a push — as a verifiable theory of its historical origin. Such
instances as the Semite shekel or the tea-money of Mongolian nomads suffice
to show this. It is in such cases that our point of method arises. Is it valid
procedure to trace as far back as we can the history of an institution in order
to discover its essential or its simplest meanings? Clearly not. Primitive forms
of existence are as a rule not more simple but more complex than later ones:
the chieftain who is judge, priest, administrator, warrior all in one is evidently
a more complex phenomenon than are any of his specialized successors of later
times; the medieval manor is conceptually a more complex phenomenon than
is the U.S. Steel Corporation. Logical and historical origins must, therefore,
be kept distinct. But this distinction presents itself only in advanced stages
of analysis. The unsophisticated analyst invariably confuses them . 7 This con-
fusion is undoubtedly implied in Aristotle’s theories of money and also of
other social institutions. He bequeathed it to the whole line of thinkers that
descends from him, the English utilitarians included. And it survived, in spots,
until today.

(c) Interest. The rest of Aristotle’s ‘pure’ economics, considered from our
standpoint , is hardly worth mentioning. Many, if not most, of the things that
were to become problems for the economist of later times he took for granted
in the spirit of prescientific common sense; and he passed his value judgments
upon a reality large stretches of which he failed to explore at all. The chiefly
agrarian income of the gentleman of his time evidently presented no problem
to him; the free laborer was an anomaly in his slave economy and was disposed
of perfunctorily; the artisan, except so far as the just price of his product was
concerned, fared little better; the trader (and shipowner), the shopkeeper, the
money lender were mainly considered with a view to the ethical and political
appraisal of their activities and their gains , 8 neither of which seemed to call

7 It should be observed, however, that identification of historical and logical evolu-
tion does not necessarily involve confusion. But if it does not involve confusion then
it requires either proof of coincidence in every particular case or acceptance of an
evolutionary or ‘emanatistic’ logic, such as Hegel’s.

8 Observe: I am not arguing against Aristotle’s ideal of life or against any particular
value judgments of his. Still less am I arguing for glorification of economic activity.
On the contrary, I applaud the philosopher for having refused to identify rational
behavior with the hunt for wealth. All I want to establish is that Aristotle, who in
political matters was so alive to the necessity of analyzing and fact-finding as a pre-
liminary to judging, never seems to have bothered about this preliminary in 'purely'
economic matters except in the matters touching value, price, and money. For instance,

GRAECO-ROMAN ECONOMICS

6 5

for explanatory analysis. There is nothing surprising or blameworthy in this.
It is by slow degrees that the physical and social facts of the empirical uni-
verse enter the range of the analytic searchlight. In the beginnings of scien-
tific analysis, the mass of the phenomena is left undisturbed in the compound
of common-sense knowledge, and only chips of this mass arouse scientific
curiosity and thereupon become ‘problems/

For Aristotle, interest w'as no such chip. He accepted the empirical fact of
interest on money loans and saw no problem in it. He did not even classify
loans according to the various purposes they are capable of serving and does
not seem to have noticed that a loan that financed consumption is something
very different from a loan that financed maritime trade ( foenus nauticum).
He condemned interest — which he equated to ‘usury’ in all cases — on the
ground that there was no justification for money, a mere medium of exchange,
to increase in going from hand to hand (which of course it does not do). But
he never asked the question why interest was being paid all the same. 9 This
question was first asked by the scholastic doctors. It is to them that the credit
belongs of having been the first both to collect facts about interest and to
develop the outlines of a theory of it. Aristotle himself had no theory of in-
terest. In particular, he should not be hailed as the forerunner of the monetary
interest theories of today. For though he linked up interest with money, this
was not due to analytic effort but to the absence of it: analysis that eventually
leads back to a preanalytic view, that earlier analysis seemed to have disproved,
imparts a different meaning to it.

[6. Greek Philosophy]

So far as economics in the technical sense is concerned, we do not lose
anything by leaving Greek thought at this point. Unfortunately, we lose a lot
in another respect. There is hardly an idea in the realm of philosophy that
does not descend from Greek sources, and many of these ideas, while not
directly relevant to economic analysis itself, are all the more relevant to the
general attitude and spirit of the analyst, though, as I have been careful to
point out, such background influences should not be overemphasized. The
various post-Aristotelian schools in particular, such as the Skeptics, Stoics,
Epicureans, and then the Neo-Platonists, all not only influenced the Roman
eclectics such as Cicero and Seneca but also helped to shape directly medieval
as well as more modern thought. It goes without saying, for instance, that the
Stoic idea of a rational universe 1 governed by immutable laws reflects an atti-

the fundamental difference he finds between the trader’s and the producer’s gains is
essentially preanalytic. This fact has nothing to do with the other fact that he dis-
approved of the former and approved of the latter.

9 In order to make this point quite clear, let us compare Aristotle’s attitude toward
interest with that of Karl Marx, who condemned the phenomenon at least as strongly
as did Aristotle. But the analytic problem of interest was all the more important to him.

1 On the meaning to be assigned in this connection to the term rational, see below,
ch. 2, sec. 5c.

66 II : BEGINNINGS TO ABOUT I79O

tude of mind that is not without significance for us. We must be content,
however, to cast a glance at the message of Epicurus (about 341-270 b.c.). 2

Epicurean philosophy might serve as a standard example for the truth that
what a set of ideas comes to mean in the course of time is but distantly re-
lated to what the originators meant to convey. Epicurus lived in the Hellenistic
period that witnessed the rapid decay of the polis. Active life, to the Greek,
had meant active participation in the administration and politics of the city-
states. For a man of culture such a life was then no longer possible. And
Epicurus', like many other people’s, answer to the resulting ethical problem —
the problem of what might be called spiritual unemployability of the refined
mind — was to leave the world alone and to try to achieve detached serenity
(araeaSjia) by understanding resignation. The causes that produced this par-
ticular attitude — there is no good equivalent for the German Lebensstimmung
— were historically unique and so is really that attitude itself — or has been
until today. But three elements of Epicurus’ system of thought kept on turning
up in the later Middle Ages, in the Renaissance, and also later on. The first
of these elements is his atomistic materialism that tallies with, and perhaps
influenced, later mechanistic philosophies of the universe. The second is this:
Epicurus’ attitude to the social environment may indeed be described as a
highly sublimated egocentric hedonism or eudaemonism; and though his hedon-
ism and eudaemonism was something very different from the hedonism and
eudaemonism of later ages and in particular defined pleasure and pain quite
differently, there is still a connecting line that leads from Epicurus to Helvetius
and Bentham. Bentham’s boisterous and vulgar utilitarianism would no doubt
have shocked the old sage. But, much as we may dislike associating them, we
must call both of them hedonists in a wider sense. The third element is the
social contract, of which Epicurus, though not the originator, was an important
exponent. But the idea was handed to the philosophers of natural law, who
adopted it in the seventeenth and eighteenth centuries, by their scholastic
predecessors, and this fact does not point to Epicurus.

[7. The Contribution of the Romans]

Let us now consider the still smaller contribution of the Romans. The doc-
trine that practical need — and not, as I hold, the lure of intellectual adventure
— is the prime mover of scientific endeavor can be put to the test in the case
of ancient Rome. Even in the earliest time when Rome was substantially a
community of peasants, there were economic problems of first-rate importance
that produced violent class struggles. By the time of the first Punic War im-
portant commercial interests had developed. Toward the end of the Republic,
trade, money and finance, colonial administration, the plight of Italian agri-
culture, the food supply of the capital, the growth of latifundia, slave labor,
and so on all presented problems that, in an artificial political setup created

2 See C. Bailey, Epicurus, the Extant Remains (1926); W. Wallace, Epicureanism
(1880).

GRAECO-ROMAN ECONOMICS

by military conquest and by all the consequences of incessant warfare, might
have fully employed a legion of economists. At the height of cultural achieve-
ment, at the epoch of Hadrian and Antoninus Pius, when many of those diffi-
culties were temporarily in abeyance and peace and prosperity reigned for a
time in the vast realm, its able rulers and the galaxy of brilliant generals and
administrators around them could have made use of a brain trust. Yet there
was nothing of the kind — nothing beyond the occasional utterance of groans
about the empire’s unfavorable balance of trade or about latifundia perdidere
Italiam . 1

[(a) Absence of Analytic Work.] But this is not difficult to understand. In
the social structure of Rome, purely intellectual interests had no natural home.
Though its complexity increased as time went on, we may, for our purpose,
put the case in a nutshell by saying that there were the peasants, the urban
plebs (including traders and artisans), and the slaves. And above them all,
there was a 'society’ that no doubt had its business stratum (more or less repre-
sented by the order of the equites) but consisted mainly of an aristocracy that,
unlike the Athenian aristocracy in the times after Pericles, never retired into
opposition to lead a life of refined leisure, but threw itself wholeheartedly into
public affairs both civil and military. The res publica was the center of its ex-
istence and all its activity. With widening horizons and increasing refinement,
it cultivated an interest in Greek philosophy and art and developed a (largely
derivative) literature of its own. These things were touched upon lightly, how-
ever, and were definitely considered as pastimes, essentially nugatory in them-
selves. There was little steam left for serious work in any scientific field, as
Cicero’s (106-43 B - c -) representative writings are sufficient to show. 2 And this
deficiency was not, and could not be, made up. by encouraging foreigners and
freedmen who were directed primarily toward utilitarian tasks.

Of course, a society of this structure was bound to be passionately interested
in history, mainly its own history. This was in fact one of the two. main outlets
for such scientific curiosity as the Roman mind harbored. But this curiosity
was characteristically confined to political and military history. Sociological
and economic backgrounds were hastily sketched — such sketches occur even
in Caesar — social upheavals were reported with the utmost economy of general
considerations. The one great exception is Tacitus’ (c. 55-120) Germania.

[(b) Importance of Roman Law.] The only other outlet was the law. In
order to understand the nature of the Roman achievement in this field and

1 This phrase — that the large landed estates were the cause of the decline of Italy —
was the elder Pliny’s (23-79). The very fact that he saw nothing but the obvious,
and in particular that he failed to see that the latifundia were as much the conse-
quence as they were the cause of that decline, in itself shows what sort of economics
was deemed adequate by a very able and highly civilized Roman (though it was not
worse than is our own popular economics).

2 De re publica is the one to come nearest to our field. Yet there is in it very little
that could interest the economist, apart of course from what it tells us, directly and
indirectly, about the economic conditions of that epoch. That applies still more to
the Letters to Atticus.

68 II : BEGINNINGS TO ABOUT 1790

the reason why, unlike other legal systems, the Roman law plays a role in
the history of economic analysis, we must recall a few facts about it. The
reader is familiar, perhaps, with the English division of legal material into
common law and equity. A somewhat analogous division existed in ancient
Rome. There was the old and formalistic civil law ( jus civile , jus quiritium ),
which, however, unlike the .English common law, applied only to the affairs
of the citizens ( quirites ) who until a.d. 212 formed but a part of the free
population of the empire. This civil law 3 was developed by 'interpretation’
through the agency of a college of priests ( pontifices ) and also through the
agency o.f an officer of state in charge of judicial administration ( praetor ur-
banus). This additional legal material bears some similarity to the English
law of equity. But the bulk of what, to some extent, may be likened to English
equity grew from another root, namely, from the relations, commercial and
other, between non-citizens ( peregrini ) or between citizens and non-citizens.
The body of legal rules that applied to these was called jus gentium. Note
that this term, as used in Roman times, has nothing to do with the meaning
it began to acquire from the seventeenth century on, namely, the meaning
of Law of Nations ( droit des gens, Volkerrecht). Since this body of law was
formulated, and largely created, by another officer of state, who was in charge
of a separate department of public administration ( praetor peregrinus), it was
also, together with the legal rules formulated or created by the praetor urbanus,
referred to as 'officers’ law’ ( jus honorarium ) : every praetor codified and promul-
gated it for his year of office in his edictum. Of course, there was also a steady
stream of special enactments of various types. Comprehensive codification or
even compilation was not attempted before the fourth century, though those
praetorian edicta were fused, and stereotyped in an enactment, in the reign
of Hadrian. We have, however, a second-century textbook, the Institutiones,
by a jurist whose given name ( praenomen ) was Gaius.

Anglo-American jurisprudence, that is to say, the sum total of the techniques
of legal reasoning and of the general principles to be applied to individual
cases, is largely the work of the superior courts, whose, decisions together with
the motivating arguments, as everyone knows, have an authority that ap-
proaches that of an enactment. In Rome, the same practical needs produced
a similar achievement but in a different way. English and American judges
of the highest ranks are professional lawyers and, in principle at least, very
eminent lawyers — leaders of the legal profession of great personal authority.
The Roman judges were laymen — like our jurors — who had to be told what
the law was. And the practicing lawyers were also laymen except for a group
of professional pleaders ( causidici ) who had not much standing. This deficiency
was made up in a way for which there is no analogy. Men of position and
leisure became interested in legal questions almost as a hobby (unless they

3 The reader should not confuse Civil Law in this sense with Civil Law in the
sense used by modern Anglo-American lawyers: in their parlance it simply means the
whole of the Roman law preserved in the Corpus juris civilis (see next footnote), as
developed by medieval and modern practice.

GRAECO-ROMAN ECONOMICS

taught; the first to lecture on jurisprudence was, so far as we know, M. Antistius
Labeo; the first to establish a school, Masurius Sabinus, c. a.d. 30). And they
were interested not so much in the individual cases as such as in the logical
principles relevant for their solution. They did not plead or do any other
kind of legal work except one: they gave opinions on points of law whenever
consulted by parties or attorneys or judges. So great was their authority that
it may well be compared to that of English judges. It was first officially recog-
nized by Augustus, who granted to the more eminent of these ‘jurists’ a special
privilege of giving such opinions, the jus respondendi. These opinions were
little monographs which together with more comprehensive works (such as
the commentaries ad edictum ) piled up to an extensive literature of which the
remains, most of them preserved in the extracts made for Justinian’s Corpus
(528-3 3)/ have been the object of admiration ever since.

The reason we have for referring to this literature is its genuinely scientific
character. Those jurists analyzed facts and produced principles that were not
only normative but also, by implication at least, explanatory. They created a
juristic logic that proved to be applicable to a wide variety of social patterns —
indeed to any social pattern that recognizes private property and ‘capitalist’
commerce. So far as their facts were economic, their analysis was economic
analysis. Unfortunately the scope of this analysis was strictly limited by the
practical purposes they had in view, which is why their generalizations yielded
legal principles but not also economic ones. Mainly, we owe to them definitions
— for example, of price, money, of purchase and sale, of the various kinds of
loans ( mutuum and commodatum), of the two types of deposits (regular e and
irregular e), and so on — which provided starting points for later analysis. But
they did not go beyond these starting points. Any theorems — for example,
about the behavior of prices or about the economic importance of the ‘ir-
regular’ deposit that creates no obligation to return the individual things de-
posited but only the obligation to return ‘as much of the same kind’ ( tantun -

4 A word on that compilation may be welcome to some readers. In a.d. 528, the
emperor Justinian appointed a committee of jurists, presided over by his minister of
finance ( quaestor sacri palatii), Tribonianus, in order to trim into a manageable shape
the exuberant foliage of both enactments and legal literature. Apart from subsequent
imperial statutes ( Novellae ), that were added to it, the Corpus juris civilis, as the
compilation was called, contains first, the Institutiones, a textbook for beginners based
upon that of Gams; second, the Digestae or Pandectae, which consist of a mass of
extracts or quotations from the works of those consulting jurists; third, the Codex,
which reproduced all the imperial statutes that were still in force. We are interested
only in the Digestae. Unfortunately, Justinian ordered the destruction of everything
that was not included in them. But the committee had at least the sense to refrain
from mutilating the fragments included. Thus, the Digestae, though invested with
the force of law, do not contain pulverized gems — pulverized into paragraphs of a
code of law — but the gems themselves, a unique method of codification. Let us bow
to the greatest of the authors included: Julius Paulus, Celsus, Papinianus, Ulpianus,
Modestinus, Africanus, and Salvius Julianus — the order expressing a personal scale of
preference that I cannot expect everybody to share.

yo II : BEGINNINGS TO ABOUT I79O

dem in genere) — would have been irrelevant digressions. It is therefore not
quite correct to speak of an economic theory of the Corpus juris 5 — not, in any
case, of an articulate one — though it may be said with truth that the Roman
jurists, by clarifying concepts, did preliminary work . 6

The importance of this work — and also of the training in clear thinking
that everybody undergoes who studies the literature — is greatly enhanced by
the curious fact that the law of the Corpus juris was again taught from the
twelfth century on and that subsequently it recovered its authority with the
courts of most European countries (‘reception’ of the Roman law). Now, to
the end of the eighteenth century, most of the writers on economic questions
were, if not businessmen, either clergymen or lawyers by profession: the
scholarly training of these two types of economists was largely provided by the
Roman and the canon law and so there was a natural avenue by which the
concepts, the spirit, and even, perhaps, some mannerisms of the Roman jurists
entered the field of economic analysis. Among these concepts was the funda-
mental one of Natural Law. Once more, however, we defer its consideration,
as we did when we met it in Aristotle: it will be more convenient to give
later on a connected account of its development.

[(c) Writings on Agriculture.] We now turn for a moment to a minor
matter, the Roman writings on agriculture ( De re rustica ). This branch of eco-
nomic literature that seems to have been cultivated rather extensively by the
Romans is more interesting for the economic historian than it is for us. It
dealt with the practical principles of farm or rather estate management but
rarely touched upon questions that come within our province. For instance,
the elder Cato’s advice that the landowner should sell aging slaves before they
become useless and that he should show himself as hard a taskmaster as pos-
sible when inspecting his estate is no doubt very revealing in many respects
but it does not involve any economic analysis. Some of those writers, of whom

5 See, however, Paul Oertmann, Die Volkswirtschaftslehre des Corpus juris emits
(1891), which, though obsolete in parts, is still the standard work on the subject.

6 One point may, however, be worth mentioning. Julius Paulus (1, Dig., xvm, 1)
explained the nature of money much as had Aristotle (from the inconvenience of
direct barter). The passage is quite straightforward and calls for no comment until
he adds that the stamped material of which the money is made ( materia forma
publica percussa), usum dominiumque (this may be safely translated by purchasing
power) non tom ex substantia praebet quam ex quantitate. This passage has puzzled
many a commentator and was the subject of a controversy in the eighteenth century.
It seems, in fact, to renounce the metallist theory clearly indicated in the preceding
sentence. But I do not think that such an ‘aside’ should be taken very seriously. In
addition, there is the word quantitas, which has induced some writers to credit Paulus
with a quantity theory of money. But there is no indication in the passage of an
inverse relation between the quantity of money and its purchasing power. Moreover,
the word quantitas is much more likely to mean ‘nominal value' than quantity. This
was its meaning in the literature on money in the Middle Ages and in the sixteenth
century. All that Paulus probably meant was that people, in handling money in every-
day transactions, usually take a coin at its nominal value without any conscious
thought of the commodity value of its materials.

GRAECO-ROMAN ECONOMICS 71

only Varro and Columella need, be mentioned, occasionally made some re-
marks that suggest later developments, such as that the most profitable use
of a piece of land depends, among other things, upon its distance from the
center of consumption. But it is as true in these cases as it is in others that
the mere statement of facts that are known to iis from common experience is
of no scientific importance, unless they become the starting point of an analysis
that distills from them more interesting results. 7

[8. Early Christian Thought]

We do not leave the Graeco-Roman world when we now turn for a moment
to the Christian thought of the first six centuries. After what has been said
about the nature of our aims, it is obvious that there would be no point in
looking for 'economics’ in the sacred writings themselves. The opinions on eco-
nomic subjects that we might find — such as that believers should sell what
they have and give it to the poor, or that they should lend without expecting
anything (possibly not even repayment) from it — are ideal imperatives that
form part of a general scheme of life and express this general scheme and
nothing else, least of all scientific propositions.

But neither is there anything for us to garner in the works of those great
men who during these centuries laid the foundation of the Christian tradition.
And this does call for a word of explanation. For we might expect that, so
far as Christianity aimed at social reform, the movement should have mo-
tivated analysis in the way in which, for example, the socialist movement did
in our own time. Yet there is nothing of the kind either in Clement of Alex-
andria (about 150-215) or in Tertullian (155-222) or in Cyprian (200-258) to
mention a few of those who did concern themselves with the moral aspects
of the economic phenomena around them. They preached against wanton
luxury and irresponsible wealth, they enjoined charity and restraint in the use
of worldly goods, but they did not analyze at all. Moreover, it would be quite
absurd to suspect mercantilist theories behind Tertullian’s advice to content
oneself with the simple products of domestic agriculture and industry instead
of craving for imported luxuries, or a theory of value behind his observation
that abundance and rarity have something to do with price. The same is true
of the Christian teachers of the subsequent period. They lacked nothing in
refinement and did develop techniques of reasoning — that partly hailed from
Greek philosophy and from the Roman law — for the subjects that seemed to
them worth while. Yet neither Lactantius (260-340) nor AmbrosiuS (340-97)
— who might have elaborated a little on his statement that the rich consider
as their rightful property the common goods of which they have possessed

7 M. Terentius Varro (116-27 b.c.) was a man of some eminence who, in his long
life, turned out an almost incredible quantity of literature on all sorts of subjects.
Among his extant remains are Rerum rusticarum libri tres in which the remark above
occurs. Much less interesting is De re rustica by L. Junius Moderatus Columella (1st
century a.d.), which deals mainly with the cultivation of vegetables, trees, flowers,
and so on, and with the rearing of animals.

72 II: BEGINNINGS TO ABOUT I79O

themselves - — nor Chrysostomus (347-407) nor St. Augustine (354-430), the ac-
complished author of the Civitas Dei and of the Co nfessiones — whose very
obiter dicta reveal analytic habits of mind — ever went into economic problems
though they did go into the political problems of the Christian state.

The explanation seems to be this. Whatever our sociological diagnosis of
the mundane aspects of early Christianity may be, it is clear that the Christian
Church did not aim at social reform in any sense other than that of moral re-
form of individual behavior. At no time, even before its victory, which may be
roughly dated from Constantine’s Edict of Milan (313), did the Church at-
tempt a frontal attack on the existing social system or on any of its more
important institutions. It never promised economic paradise or, for that
matter, any paradise this side of the grave. The How and Why of economic
mechanisms were then of no interest either to its leaders or to its writers.

CHAPTER 2

The Scholastic Doctors and the Philosophers
of Natural Law

1. The Great Gap 73

2. Feudalism and Scholasticism 74

3. Scholasticism and Capitalism 78

4. Scholastic Sociology and Economics 82

[(a) From the Ninth Century to the End of the Twelfth ] 83

[(b) The Thirteenth Century] 87

[(c) From the Fourteenth Century to the Seventeenth] 94

5. The Concept of Natural Law 107

(a) The Ethico-Legal Concept 108

(b) The Analytic Concept ' 110

6. The Philosophers of Natural Law: Natural-Law Analysis in the Sev-
enteenth Century 115

(a) The Protestant or Laical Scholastics 116

(b) Mathematics and Physics 118

(d) Contribution to Economics 122

7. The Philosophers of Natural Law: Natural-Law Analysis in the

Eighteenth Century and After 122

[(a) The Science of Human Nature: Psychologism] 123

[(b) Analytic Aesthetics and Ethics] 126

[(c) Self-Interest, the Common Good, and Utilitarianism] 130

[(d) Historical Sociology] 134

[(e) The Encyclopedistes] 137

[(f) The Semi-Socialist Writers] 139

[(g) Moral Philosophy] 141

1. The Great Gap

The Eastern Empire survived the Western for another thousand years, kept
going by the most interesting and most successful bureaucracy the world has
ever seen. Many of the men who shaped policies in the offices of the Byzantine
emperors were of the intellectual cream of their times. They dealt with a host
of legal, monetary, commercial, agrarian, and fiscal problems. We cannot help
feeling that they must have philosophized about them. If they did, however,
the results have been lost. No piece of reasoning that would have to be men-
tioned here has been preserved.

In the Germanic states of the West, similar problems arose even before the
time of Charlemagne, and we know fairly well from literary sources as well as
from documents how they dealt with them. But Charlemagne's vast empire
presented problems of internal administration and international economic rela-

74 n : beginnings to about 1790

tions that had been unknown to any Germanic ruler before him. Practical
wisdom, however, not inferior to that of any other age, is all that his measures
reflect. The historians and philosophers who adorned his court touched upon
economic questions incidentally, if at all . 1 So far as our subject is concerned
we may safely leap over 500 years to the epoch of St Thomas Aquinas (1225-
74), whose Summa Theologica 2 is in the history of thought what the south-
western spire of the Cathedral of Chartres is in the history of architecture.

2. Feudalism and Scholasticism

St. Thomas’ life extended over the crest of feudal civilization. This term
suggests the idea of a particular type of warrior society, namely, of a society
dominated by a warrior stratum that was organized, on the principle of vassal-
age, in a hierarchy of fief-endowed lords and knights. From the standpoint of
this hierarchy of warriors, the old distinction between men of free status and
men of unfree status had lost much of its original significance. What mattered
was not whether a man was free or not, but whether he was a knight or not.
Even the Emperor of the Holy Roman Empire of German Nationality — to
use the official phrase — who was in theory recognized as the feudal overlord
of all Christianity, primarily was, and felt himself to be, a knight; and even the
unfree man was a knight as soon as he had got hold of a horse and arms and
had learned how to use them — which was at first a very simple matter, though
in St. Thomas’ age it had become a highly skilled occupation. This warrior
class enjoyed unrivaled power and prestige, and hence impressed the stamp
of its own cultural pattern upon the civilization of feudal times.

The economic base of this social pyramid consisted of the dependent peas-
ants and manorial craftsmen on whose work tire warriors lived. We thus seem
to behold what at first sight looks like a structural unit in the sense that the
phrase Social Pyramid is indeed meant to convey. But this picture is quite un-
realistic. Societies, with the possible exception of primitive tribes and full-
fledged socialism, are never structural units, and half the problems they present
arise from the fact that they are not. The society of feudal times cannot be
described in terms of knights and peasants any more than the society of capital-
ist times can be described in terms of capitalists and proletarians. Roman
industry, commerce, and finance had not been destroyed everywhere. Even

1 The reader will find an instructive description of the intellectual situation of these

times in M. L. W. Laistner, Thought and Letters in Western Europe, a.d. 500 to 900
(1931). V

2 New edition: S. Thomae Aquinatis, Doctoris Angelici, Summa Theologica, diligenter
emendata de Rubeis, Billuart et Aliorum (Taurini, 1932). The work, though unfinished,
has acquired unrivaled authority in the course of the centuries. But it contains much
that was revolutionary in St. Thomas’ day, and shortly after his death a number of
propositions were declared heretical, though only locally. The canonization of the au-
thor in 1323 marks the turning of the tide. It was not, howevei, until the sixteenth
century that Catholic thought definitely rallied round his teaching. Pope Leo xm’s
encyclical Aeterni Patris (1879) made it the official teaching of the Church.

SCHOLASTIC DOCTORS AND NATURAL LAW PHILOSOPHERS 75

where they had been destroyed or where they had never existed, they — and
consequently classes of bourgeois character — had developed or developed again
before St. Thomas' day. In many places these classes had outgrown the frame-
work of the feudal organization and, helped by the fact that a well-fortified
town was normally impregnable to the knights’ arts of warfare, they had suc-
cessfully challenged the rule of the feudal lords — the most conspicuous instance
being the victorious resistance of the towns of Lombardy. As a historical reality,
therefore, feudalism means the symbiosis of two essentially different and largely,
though not wholly, antagonistic social systems.

But there was another factor of nonfeudal origin and character that the
warrior class failed to absorb or to conquer, for us the most important of all,
the Roman Catholic Church. We cannot enter into a discussion of the ex-
tremely intricate relations of the medieval Church with the feudal powers.
The one essential point to grasp is that the Church was not simply an organ
of feudal society but an organism distinct from feudal society that always
remained a power in its own right. However closely allied with, or dependent
upon, feudal kings and lords it may at times have been, however near it may
have come to defeat and to being harnessed into the service of the warrior
class, it never resigned its own authority and never became the instrument of
that or any other class. Since the Church was always able not only to assert
itself but also to wage successful war upon the feudal powers, this fact should
be too obvious to require explicit statement, were it not that historiography,
inspired by a popular version of Marxian sociology, may easily create the im-
pression — to put it in the crudest possible way — that medieval thought was
merely the ideology of a landholding warrior class, verbalized by its chaplains.
This impression would be wrong not only from the standpoint of those who
refuse to accept the Marxian sociology of ideas, but also from the standpoint
of Marx himself, even if we chose to interpret the Catholic system of thought
as an ideology, it would still remain the ideology of the clergy and never
merge with that of the warrior class. It is important to keep this in mind
because of the practically complete monopoly of learning that the Catholic
Church enjoyed until the Renaissance. This monopoly was due primarily to
the spiritual authority of the Church. But it was greatly reinforced by the con-
ditions of those ages in which there was neither room nor security for profes-
sional scholars except within a convent. In consequence, almost all ‘intel-
lectuals’ of those times were either monks or friars. Let us briefly consider some
implications of this.

All those monks and friars spoke the same unclassical Latin; they heard the
same Mass wherever they went; they were formed by an education that was
the same in all countries; they professed the same system of fundamental be-
liefs; and they all acknowledged the supreme authority of the Pope, which was
essentially international: their country was Christendom, their state was the
Church. But this is not all. Their internationalizing influence was strengthened
by the fact that feudal society itself was international. Not only the Pope’s
but also the Emperor’s authority was international in principle and, to some
varying degree, in fact. The old Roman Empire and that of Charlemagne were

y6 II : BEGINNINGS TO ABOUT 179O

no mere reminiscences- People were familiar with the idea of a temporal as
well as of a spiritual superstate. National divisions did not mean to them what
they came to mean during the sixteenth century; nothing in the whole range
of Dante’s political ideas is so striking as is the complete absence of the na-
tionalist angle. The result was the emergence of an essentially international
civilization and an international republic of scholars that was no phrase but a
living reality. St. Thomas was an Italian and John Duns Scotus was a Scots-
man, but both taught in Paris and Cologne without encountering any of the
difficulties that they would have encountered in the age of airplanes.

In fact as well as in principle, practically everybody who wished to do so
was allowed to enter a monastic order and also to join the ranks of the secular
clergy. But advancement within the Church was open to everybody in prin-
ciple only, since the claims of members of warrior-class families in fact ab-
sorbed the greater part of bishoprics and abbotcies. But the man without con-
nection was never entirely excluded from the higher dignities, not even from
the highest; and, what is much more important for us, he was not debarred
from becoming an idea-shaping and policy-shaping 'key man.’ The regular clergy
(the monks) and the friars supplied, as it were, the general staff of the Church.
And in the monasteries men of all classes met on equal terms. Naturally, the
intellectual atmosphere was often charged with social and political radicalism,
though this was, of course, much more the case at some times than at others
and much more with the friars than with the regular monks. In the literature
that we are going to survey we get this radicalism in a highly rarefied form
but we do get it.

But how can a radical — hence also critical — attitude of mind be imputed
to a social group whose members were bound to obey the dictates of a supreme
and absolute authority? This apparent paradox is easily resolved. The lives
and the faith of the monks and friars were indeed subject to authority that
was, in theory at least, absolute and spoke immutable truth. But beyond the
sphere of discipline and fundamental religious belief — beyond the matters
that were de fide — that authority did not undertake to direct their thought,
nor did it prescribe results . 1 In particular, it had not, in general, any motive
for doing so in the department of political and economic thought, that is to
say, for compelling the clerical intellectuals to expound and defend or to
represent as immutable any given temporal order of things. The Church was
judge of all things human; conflict with temporal authority was an ever-present
possibility and very often the actual fact; the monastic orders were important
instruments of Papal authority: these were no reasons for preventing them
from looking upon temporal institutions as historically mutable works of man.
I am far from wishing to belittle the importance of Christian ideals and pre-
cepts per se. But we need not invoke them in order to realize that monastic sub-
ordination to authority in matters of faith and discipline was compatible with
extensive freedom of opinion in all other matters. We must go even further.
Not only, did the monks’ sociological location — outside, as it were, of the class

1 Facts that apparently contradict this statement will be discussed later on.

SCHOLASTIC DOCTORS AND NATURAL LAW PHILOSOPHERS

structure — make for an attitude of detached criticism of many things; there
also was a power behind them that was in a position to protect that freedom.
So far as treatment of political and economic problems is concerned, the
clerical intellectual of that age was not more but less exposed to interference
from political authority and from ‘pressure groups’ than was the laical intel-
lectual of later ages.

The indictment that unquestioning acceptance of ecclesiastic authority in-
validated the reasoning of those monastic scholars from a scientific standpoint
is thus seen to be without foundation. We have, however, still to consider a
particular form of it. The analytic nature of their reasoning has often been de-
nied on the ground that their arguments can have been only arguments from
authority: subject to the authority of the Pope as they were, they had no other
method left of establishing or refuting a proposition than to adduce for or
against it literary authorities recognized by that supreme authority. But this is
not so. The point can be cleared up by a reference to St. Thomas. He taught
indeed that authority was of decisive importance in matters involving Revela-
tion — namely, the authority of those to whom the revelations had been made
— but he also taught that in everything else (and this includes, of course, the
whole field of economics) any argument from authority was ‘extremely weak .’ 2

With the monopoly of learning went the monopoly of ‘higher’ teaching. In
the schools that were founded from the seventh century on, by temporal and
spiritual lords, it was clerics who taught the tatters of Graeco-Roman science
as well as theology and philosophical doctrines of their own — great teachers
like Abelard attracted students and caused, occasionally, a lot of trouble for
the controlling authorities. In some cases from these schools, in others inde-
pendently, the self-governing ‘universities’ developed in the twelfth and thir-
teenth centuries — incorporated associations 3 of either teachers, as in Paris, or
students, as in Bologna, who before long grouped themselves into theological,
philosophical, legal, and medical ‘faculties.’ At first, princes and bishops had
no more to do with them than what was implied in the granting of corporative
privileges and in religious supervision. Accordingly, the universities enjoyed a
large measure of freedom and independence; they gave more scope to the
individual teacher than do the mechanized universities of today; they were a
meeting ground of all classes of society; and they were essentially international.
But from the fourteenth century on, government foundations became increas-
ingly frequent. Governments also acquired control of previously independent
institutions. Eventually, this changed everything. Government influence not

2 ‘Nam licet locus ab auctoritate quae fundatur super ratio ne humana, sit infirmissi-
mus . . . ,’ Summa i, quaest. i, art. 8, ad secundum. Of course, the scholastics all
quoted copiously, but so do we. They deferred to authority — where they agreed with
it — more than we do because they emphasized co-operative rather than individual opin-
ion and attached great importance to continuity of doctrine. But this is all.

3 Universitas originally meant nothing but corporation. Many people enrolled merely
for the sake of the legal privileges that membership in such a self-governing corporation
entailed. The meaning of universitas litter arum, which we attach to the term Univer-
sity, is of later origin.

7 8 ri: beginnings to about 1790

only made for the assertion of purely utilitarian aims but also for restriction
of freedom, particularly, of course, in matters of political doctrine. But, pre-
cisely because of the power that stood behind the clerical teachers, the uni-
versities held their own fairly well until the religious split in the sixteenth
century.

The opportunities offered by the universities naturally reinforced the old
tendency of scholars to become teachers. And since the public was then as
prone as it is now to overemphasize the teaching at the expense of the produc-
tion of what is being taught, medieval men of science were and are usually
referred to as Schoolmen or Scholastics (doctor es scholastici). In order to dis-
abuse himself of prevailing preconceptions, the reader had better see in these
scholastic doctors simply college or university professors. St. Thomas, then, was
a professor. His Summa Theologica was, as he informs us in the preface, con-
ceived as a textbook for beginners (incipientes ) .

3. Scholasticism and Capitalism

The processes that eventually shattered the social world of St. Thomas
Aquinas are usually summed up in the phrase Rise of Capitalism. Though
infinitely complex, they yet admit of a description in terms of a few broad
generalizations that are not too hopelessly wrong. Also, though there was of
course no break anywhere, it is possible to date developments at least by cen-
turies. Capitalist enterprise had not been absent before, but from the thir-
teenth century on it slowly began to attack the framework of feudal institu-
tions that had for ages fettered but also sheltered the farmer and the artisan,
and to evolve the contours of the economic pattern that still is, or until quite
recently was, our own. By the end of the fifteenth century most of the phe-
nomena that we are in the habit of associating with that vague word Capitalism,
had put in their appearance, including big business, stock and commodity
speculation, and 'high finance , 7 to all of which people reacted much as we do
ourselves . 1 Even then these phenomena were not all of them new. Truly un-
precedented was only their absolute and relative importance.

The growth of capitalist enterprise, however, created not only new economic
patterns and problems but also a new attitude toward all problems. The rise
of the commercial, financial, and industrial bourgeoisie of course altered the
structure of European society and in consequence its spirit or, if you prefer,
its civilization. The most obvious point about this is that the bourgeoisie ac-
quired power to assert its interests. Here was a class that saw business facts in a

1 Owing to the importance of the financial complement of capitalist production and
trade, the development of the law and the practice of negotiable paper and of ‘created’
deposits afford perhaps the best indication we can have for dating the rise of capital-
ism. Around the Mediterranean both emerged in the course of the fourteenth century,
though negotiability was not fully established before the sixteenth. See A. P. Usher,
The Early History of Deposit Banking in Mediterranean Europe (1943), and R. de
Roover, ‘Money, Banking, and Credit in Medieval Bruges,’ Journal of Economic His-
tory, Supplement, December 1942.

SCHOLASTIC DOCTORS AND NATURAL LAW PHILOSOPHERS 79

different light and from a different angle; a class, in short, that was in business,
and therefore could never look at its problems with the aloofness of the school-
man. But this point is second in importance to another. As we have seen in the
first part of this book, it is more essential to realize that quite irrespective of
the assertion of his interests, the businessman, as his weight in the social struc-
ture increased, imparted to society an increasing dose of his mind, just as the
knight had done before him. The particular mental habits generated by the
work in the business office, the schema of values that emanates from it, and
the attitude to public and private life that is characteristic of it, slowly spread
in all‘ classes and over all fields of human thought and action. Results burst
forth in the epoch of cultural transformation that has been so curiously mis-
named Renaissance . 2

One of the most important of these results was the emergence of the laical
intellectual , 3 and hence of laical science. We may distinguish developments of
three different kinds. First, there always had been laical physicians and lawyers;
but in the Renaissance they began to crowd out the clerical element. Second,
starting from their professional needs and problems, laical artists and craftsmen
— there was really no sociological distinction between them — began to de-
velop a fund of tooled knowledge (for example, in anatomy, perspective,
mechanics) that was an important source of modern science but grew up out-
side of scholastic university science: such a figure as Leonardo da Vinci will
illustrate this point; and the figure of Galileo will illustrate another point,
namely, how this kind of development produced the laical physicist. It had
its analogue in economics; the businessman and civil servant, also starting like
the artist-craftsman from his practical needs and problems, began to develop
a fund of economic knowledge which will be surveyed in the next chapter.
Third, there were the Humanists. Professionally, these were classical scholars.
Their scientific work consisted in the critical editing, translation, and interpre-
tation of the Greek and Latin texts that became; available in the fifteenth and

2 The 'revival’ of the interest in the thought and art of ancient Greece and Rome
was so powerful a factor in the intellectual life of those times only because ancient
forms provided convenient vessels for new needs and meanings. The real cultural
achievement of that period did not consist in reconditioning old heirlooms.

3 The word 'laical’ has been chosen after some hesitation. ‘Secular’ would not do be-
cause it derives another connotation from the distinction: secular clergy — regular clergy.
‘Laymen’s science’ conflicts with our use of the term layman (a man not trained in
scientific method). ‘Laicist’ conveys the idea of an antagonism to the Church (cf., for
instance, the phrases ‘laicist state’ or iaicism’). So ‘laical’ will have to serve in order
to denote people or any activity (scientific or propagandist) of people who are not in
holy orders. The noun shall be ‘laics.’ There is a more serious difficulty, however. On
the one hand, the educational system of the Catholic Church proved so strong that
many laical intellectuals continued to be shaped by it. Many of them retained habits
of mind that did not differ essentially from those of the intellectuals in holy orders. On
the other hand, an increasing number of the latter renounced allegiance to the scholas-
tic system of thought as completely as any laic could have done: Erasmus of Rotterdam
(1467-1536) affords an early instance. Our distinction though based upon a real differ-
ence is therefore not an easy one to handle. It is not simply a question of the cloth.

II : BEGINNINGS TO ABOUT 1790

sixteenth centuries. But they loved to believe that a command of Greek and
Latin would make a man competent in everything; and this together with their
social location — also outside of the scholastic universities — turned these critics
of texts into critics of men, manners, beliefs, and institutions, as well as into
all-round litterateurs. They did not, however, contribute to technical eco-
nomics. For us they are important only so far as they influenced the general
intellectual atmosphere of their age.

The Catholic Church had little reason to object to the laical physician or
lawyer as such and actually did not object to them; it was the most liberal
patron of the artist-craftsman, whose art in fact remained primarily religious
for a long time to come; it employed humanists in the Papal chancery and
elsewhere, and the Renaissance Popes and Cardinals, some of whom were dis-
tinguished humanists themselves, invariably encouraged humanistic studies.
The conflict that arose nevertheless is therefore a problem- And diagnosis of
its nature is not facilitated by painting the picture all in black and white.
There is little if anything to the saga of a new light that had flashed upon the
world and was bitterly fought by the powers of darkness, or of a new spirit
of free inquiry that the henchmen of hidebound authoritarianism vainly tried
to smother. Nor is our understanding of the conflict helped by mixing it up
with the related but quite different phenomenon of the Reformation — the intel-
lectual revolution and the religious revolution reinforced each other but their
sources are not the same; they do not stand to each other in any simple rela-
tion of cause and effect.

There was no such thing as a New Spirit of Capitalism in the sense that
people would have had to acquire a new way of thinking in order to be able
to transform a feudal economic world into a' wholly different capitalist one. So
soon as we realize that pure Feudalism and pure Capitalism are equally un-
realistic creations of our own mind, the problem of what it was that turned the
one into the other vanishes completely. 4 The society of the feudal ages con-

4 This problem is a typical instance of what may be termed Spurious Problems, that
is to say, of those problems that the analyst himself creates by his own method of pro-
cedure. For purposes of abbreviated description, we construct abstract pictures of social
‘systems’ that we endow with a number of well-defined characteristics in order to con-
trast them sharply. This method of (logically) Ideal Types (discussed below) has, of
course, its uses, though it inevitably involves distortion of the facts. But if, forgetting
the methodological nature of these constructions, we put the ‘ideal’ Feudal Man face
to face with the ‘ideal’ Capitalist Man, transition from the one to the other will pre-
sent a problem that has, however, no counterpart in the sphere of historical fact. Un-
fortunately, Max Weber lent the weight of his great authority to a way of thinking
that has no other basis than a misuse of the method of Ideal Types. Accordingly, he
set out to find an explanation for a process which sufficient attention to historical de-
tail renders self-explanatory. He found it in the New Spirit — i.e. a different attitude to
life and its values — engendered by the Reformation ( The Protestant Ethic and the
Spirit of Capitalism, trans. by Talcott Parsons, 1930; see also, R. H. Tawney, Religion
and the Rise of Capitalism, 1926, and, contra, H. M. Robertson, Aspects of the Rise
of Economic Individualism; a Criticism of Max Weber and His School, 1933). The

SCHOLASTIC DOCTORS AND NATURAL LAW PHILOSOPHERS 8l

tained all the germs of the society of the capitalist age. These germs developed
by slow degrees, each step teaching its lesson and producing another increment
of capitalist methods and of capitalist 'spirit.’ Similarly, there was no such
thing as a New Spirit of Free Inquiry whose emergence would call for explana-
tion. The scholastic science of the Middle Ages contained all the germs of the
laical science of the Renaissance. And these germs developed slowly but stead-
ily within the system of scholastic thought so that the laics of the sixteenth
and seventeenth centuries continued rather than destroyed scholastic work.
This applies even where it is most persistently denied. Even in the thirteenth
century Albertus Magnus observed, Roger Bacon experimented and invented —
he also insisted upon the need for more powerful mathematical methods —
while Jordanus the Nemore theorized in an entirely 'modern' spirit. 5 Even
the heliocentric system of astronomy was not simply a bomb thrown at the
scholastic fortress from outside. It originated in the fortress. Nicolaus Cusanus
(1401-64) was a cardinal. And Copernicus himself was a canon (though he
did not actually takfe orders), a doctor of canon law, lived all his life in church
circles, arid Clement VII approved of his work and wished to see it published. 6

historical objections to this construction are too obvious to detain us. Much more im-
portant is it to see the fundamental methodological error involved.

5 See, e.g., Pierre Duhem’s Les Sources des theories physiques (1905) and Les Origines
de la statique (1905-6); also Etudes sur Leonard da Vinci (1906-13).

6 The subsequent struggle about the Copernican system of astronomy should be
briefly noticed, both in order to display the element of truth in the traditional saga
and in order to reduce it to its true dimensions. Nicolas Copernicus (1473-1543) com-
pleted his manuscript in or about 1530. For decades his idea spread quietly without let
or hindrance. It met indeed with opposition and even ridicule from professors who
continued to hold on to the Ptolemaic system, but this is only what we should expect
in the case of a new departure of such importance. It was this ridicule and not the
Inquisition that Galileo feared when, toward the end of the sixteenth century, he be-
came a convinced adherent of Copernicus’ theory. The execution (1600) by the Inqui-
sition of another adherent of it, Giordano Bruno, is no proof to the contrary because
he also held purely theological views of a heretical nature and, moreover, frankly ex-
pressed contempt for the Christian faith. But when Galileo finally decided to come
out in support of it (1613 and 1632), the theory was indeed declared heretical by a
group of theological advisers of the Inquisition — not, however, by Cardinal Bellarmine
— and he was forbidden to hold or teach it; when he failed to keep his promise to
submit, he was forced to abjure it and was imprisoned for a fortnight. The point is
not only that in this case a purely physical theory was considered theologically ob-
noxious and that its scientific sponsor was made to suffer for it but also that such an
occurrence was an ever-present possibility in an age that interpreted scripture more or
less literally. This is the element of truth in the saga. But it is clear that the case was
quite exceptional; for the hulk of scientific work, that possibility hardly existed at all.
Moreover, Galileo’s case was complicated by his impulsiveness and his unfortunate talent
for personally antagonizing people who were in a position to make their resentment
felt. The case of Copernicus himself, and indeed the whole history of the fortunes
of his theory up to 1613, suggest that more tactful handling of the matter might have
avoided prosecution.

02 II : beginnings to about 1790

Nor is this at all surprising because, as we have seen, the authority of the
Church was not the absolute bar to free research that it has been made out
to be. The prevalent impression to the contrary is due to the fact that until
recently the world has been content to accept the testimony of the enemies of
the Church, which was inspired by unreasoning hatred and unduly dramatized
individual events. During the last twenty years or so a more impartial opinion
has been gaining ground. This is fortunate for us because it makes it much
easier to appreciate scholastic scientific performance in our field.

If, then, we remove a coating of partisan colors, the true picture of the con-
flict appears without further difficulty. It was primarily political in nature. The
laical intellectuals, Catholics no less than Protestants, were often opposed to
the Church as a political power, and political opposition against a church
very easily turns into heresy. It was this spirit of political opposition and the
incidental danger of heresy that the Church sensed — sometimes wrongly, more
often rightly — in the works of the laical intellectuals and which made it react
even to writings that had nothing to do with either church government or re-
ligion and would have passed unnoticed had they been published by a cleric
of whose political and religious allegiance the Church was sure. There was,
however, another point of limited but, for us, considerable importance. It
would seem that the scientific profession does not always absorb novelties with
alacrity. Moreover, professors are men who are constitutionally unable to con-
ceive that the other fellow might be right. This holds for all times and places.
In Galileo’s day, however, the universities were in the hands of monastic
orders, except in the countries that had become or were becoming Protestant.
These orders welcomed novices and readily opened the scientific career to them.
But they did not welcome the scientific work of people who did not want to
join them: hence a conflict of interest between two groups of intellectuals
that stood in each other’s way. And professional resentment against a scien-
tific opponent, of which all ages afford amusing examples, sometimes acquired
a connotation that was not amusing under circumstances in which the uni-
versities, though they had not always the ear of the Pope, always had the ear
of the Inquisition. But this does not mean that those professors themselves
did nothing but rehearse Aristotelian texts.

4. Scholastic Sociology and Economics 1

St. Thomas divided the field of tooled knowledge into the sciences that
work by the light of human reason only ( philosophicae disciplinae ), including
Natural Theology ( ilia theologia quae pars philosophiae ponitur ), and Super-
natural Theology ( sacra doctrina ). The latter was also a science but a science

1 During the last half-century, research in medieval economic conditions and processes
has grown to proportions' that are unmanageable for anyone but the specialist. This
literature contains frequent references to economic thought or even analysis, which are,
however, made in a spirit and from a standpoint that render them almost useless for
our purpose. By far the most serviceable work of this kind that I know, outdated but
excellent in its way, is W. J. Ashley’s Introduction to English Economic History and

SCHOLASTIC DOCTORS AND NATURAL LAW PHILOSOPHERS 83

sui generis by virtue of the fact that, unlike all other sciences, it makes use not
only of human reason but also of revelation. ( Summa i, quaest. i.) 2 In this
schema which seems to have been generally accepted, sociology and economics
had no separate compartments of their own. At first, they formed parts of
moral theology or ethics, which was itself a part of both supernatural and
natural theology. Later on, especially in the sixteenth century, sociological and
economic topics were treated within the system of scholastic jurisprudence.
Individual questions, mainly about money and interest, were occasionally dealt
with separately. So were political questions. But economics as a whole never
was. For our purpose, it will be convenient to distinguish three periods in the
historical evolution of scholastic thought, according to the degree to which
economic problems received attention.

[(a) From the Ninth Century to the End of the Twelfth.] The earliest of
our periods extends from the ninth century, in the course of which scholastic
thought first gathered momentum, to the end of the twelfth. Apart from purely
theological questions, it was mainly problems of the theory or philosophy of
knowledge which attracted the thinkers of those times. So far as I am able to

Theory (1888 and 1893; especially Book 1, ch. 3, and Book n, ch. 6). The standard
work on scholastic economic doctrine , though marred by serious defects, is still W.
Endemann’s Studien in der romanisch-kanonistischen Wirtschafts- und Rechtslehre
(1874 and 1883). Still older and still useful is G. A. L. Cibrario, DelVeconomia po-
litica del Medioevo (1839). V. Brants' L’tlconomie politique au Moyen-Age. Esquisse
des theories economiques professees par les ecrivains des XIII® et XTV e siecles (1895)
and H. Pirenne's Economic and Social History of Medieval Europe (English trans.
1936), taken together, complement Ashley’s history for the Continent. J. W. Thomp-
son’s Economic and Social History of the Middle, Ages (300-1300) and (1300-1530)
[1928 and 1931] does the same. Also see: G. A. T. O’Brien, An Essay on Mediaeval
Economic Teaching (1920); E. Schreiber, Die volkswirtschaftlichen Anschauungen der
Scholastik . . . (1913); M. Beer, Early British Economics from the Xlllth to the
Middle of the XVIIIth Century (1938); H. Gamier, LTdee du juste prix (1900); and
B. Jarrett, Social Theories of the Middle Ages (1926); some other works will be men-
tioned later. For 'background’ see especially M. de Wulf, Histone de la philosophie
medievale (English trans. by Messenger, 1925-6) and, since the scholastic renaissance
in our own day is a phenomenon nobody can afford to neglect, also his Introduction &
la philosophie neo-scolastique (1904; English trans. by Coffey, 1907). I make no claims
for this selection, except that it will suffice to start off further study.

2 There are two points about this that deserve to be noticed. First, Aristotle defined
each science by its subject. But St. Thomas realized that different sciences often deal
with the same things (de eisdem rebus) and that it is not the subject but the cognitive
process ( ratio cognoscibilis ) which identifies a science. Second, St. Thomas did not, of
course, deny that Supernatural Theology also used logical procedure (1, quaest. 1, art.
8). The real difference is in the source of the starting points (principia) which, like
other sciences, it takes for granted. These are derived from revelation in the case of
Supernatural Theology but in all other sciences, with the possible exception of the
purely formal ones, they are derived either from other sciences or else from direct ob-
servation of facts. The latter proposition St. Thomas did not state explicitly. But it is
clearly implied. If he had stated it explicitly, much misunderstanding of scholastic
thought might have been avoided.

84 II : BEGINNINGS TO ABOUT 179O

make out, no piece of reasoning that could be claimed for the province of eco-
nomic analysis occurs in any of the works of such leaders as, to mention a few,
Erigena, Abelard, St. Anselm, or John of Salisbury. Our program, therefore,
debars us from considering their performance, though this will fatally limit
our conception of the general stream of scholastic thought. But two things must
be mentioned nevertheless. We shall call them (i) the Platonic streak and (u)
the individualist streak.

1. In the slow and laborious task of intellectual reconstruction that
had to be undertaken after centuries during which Europe had been
ravaged by barbarian hordes, the remains of ancient learning naturally
acquired paramount importance. Most of these remains were, however,
not available before the twelfth century and much of the rest was be-
yond the scholars of the time or was available only in bad translations.
Within the little stock, Platonic and Neo-Platonic influences predomi-
nated both directly and, through the mediation of St. Augustine’s phi-
losophy, indirectly. But Platonic influence will inevitably bring to the
fore the problem of Platonic ideas, the problem of the nature of general
concepts (universalia). Accordingly, the first and most famous of all
scholastic discussions in pure philosophy was about this problem; and
until the end of the fifteenth century it kept on flaring up again and
again. We shall not wonder at this or accept it as proof positive of the
sterility of scholastic thought. For it should be clear that this problem
represents but a particular form of positing the general problem of pure
philosophy. To say that the scholastics never ceased to discuss it there-
fore means no more than that, while interested in a great many other
things, they never ceased to be interested • in pure philosophy. On the
whole, it may be averred that the 'realistic' view — the view according to
which only ideas or concepts, as such, have real existence, and which is
therefore the exact opposite of what we should call a realistic view —
prevailed more or less until the fourteenth century when the battle
turned in favor of the opposite, the 'nominalist,' view. 3 But Abelard's
(1079-1142) compromise seems to have enjoyed a great, though varying,
amount of popularity throughout: the ideas or universals exist inde-
pendently of any individuals corresponding to them in the mind of God
(universalia are ante res, in this sense); but they are embodied in indi-
vidual things (universalia are therefore also in rebus); and the human

3 It is important to keep in mind that, in scholastic times, schools of thought tended
to be identified, and even to identify themselves, with individual monastic orders. The
Franciscan order was, for example, a stronghold of nominalist philosophy. This phe-
nomenon is readily understandable, and I do not think I need explain it. But there
is need for emphasizing its importance, for it also shows in other matters: the reason
why the late scholastics were so severe on the economics of Duns Scotus — a fact that
is not easy to motivate — may perhaps be sought in the antagonism of orders, just as
in later ages it is sometimes necessary to invoke the explanatory virtue of antagonisms
between national groups of economists — a not unimportant piece of the sociology of
science.

SCHOLASTIC DOCTORS AND NATURAL LAW PHILOSOPHERS 85

mind gets a glimpse of them only by observation and abstraction (in
which sense they are post res).

This controversy was purely epistemological in nature and has no bear-
ing whatever upon the practice of economic or any other analysis. But it
had to be mentioned because, in our own time, the Realism and Nomi-
nalism of the scholastic doctors have been linked with two other con-
cepts, Universalism and Individualism, which are held by some writers
to be relevant to analytic practice. These writers went so far as to repre-
sent Universalism and Individualism as two fundamentally different
views of social processes, the conflict between which runs through the
whole history of sociological and economic analysis and is indeed the
essential fact behind all the other clashes of opinion that occurred
throughout the ages . 4 Whatever argument it may be possible to adduce
for this doctrine from the standpoint of economic thought or, conceiv-
ably, also from the standpoint of a philosophical interpretation of analytic
procedures, there is nothing in it that concerns these analytic procedures
themselves: the rest of the book will establish this point. Just how we are
interested merely in showing that Universalism and Individualism have
nothing to do with scholastic Realism and Nominalism. Universalism
as opposed to Individualism means that 'social collectives,’ such as so-
ciety, nation, church, and the like, are conceptually prior to their indi-
vidual members; that the former are the really relevant entities with
which the social sciences have to deal; that the latter are but the products
of the former; hence that analysis must work from the collectives and
not from individual behavior. If, then, we choose to call these collectives
sociological universal, then the doctrine in question may indeed be said
to oppose universals to individuals. But scholastic Realism opposed uni-
versals to individuals in quite a different' sense. If I were to adopt scho-
lastic Realism, then my idea of, say, society would claim logical pre-
cedence over any individual empirical society that I observe but not over
individual men; the idea of these men would be another universal in the
scholastic sense, claiming logical precedence over the empirical indi-

4 The doctrine of Universalism is usually associated with O. Spann, who is in fact
responsible for its success in Germany (for his and his group’s publications, see Encyclo-
paedia of the Social Sciences, ‘Economics, Romantic and Universalist Economics’). But
it is really due to K. Pribram (e.g. Die Entstehung der individualistischen Sozialphiloso-
phie, 1912), who also linked Universalism with scholastic Realism, and Individualism
with scholastic Nominalism. I do not hold that the categories Universalist-Individualist
are useless for purposes other than ours. Important aspects of economic thought, par-
ticularly in its ethico-religious aspects, can perhaps be described by means of them.
And the term Universalist is better than the term Socialist, which has acquired a more
restricted meaning. Objection is raised only to the improper extension of the field of
application of these concepts, which is precisely due to failure to distinguish between
economic thought and economic analysis. It is this failure to recognize the epistemolog-
ical barrier between these two which is to be blamed for the talk about universalist
methods and even a universal science that can only produce confusion.

II: BEGINNINGS TO ABOUT I79O

viduals. Manifestly, this would imply nothing about either the relation
between the two scholastic universals or the relation between any em-
pirical society (a universal in the sense of universalist doctrine) and the
empirical individuals comprising it. In particular, I could in this case still
be as strong an individualist, politically or in any other sense, as I please.*
The opposite opinion is thus seen to rest on nothing but an error induced
by the double meaning attached to 'universal* and 'individual.’ 5

ii. In surveying the history of civilizations, we sometimes speak of ob-
jective and subjective cases. By an objective civilization we mean the civ-
ilization of a society in which every individual stands in his appointed
niche and is subject, without reference to his tastes, to superindividual
rules; a society that recognizes as universally binding a given ethical and
religious code; a society in which art is standardized and all creative activ-
ity both expresses and serves superindividual ideals. By a subjective civili-
zation we mean a civilization that displays the opposite characteristics; in
which society serves the individual and not the other way round; in short,
a society that turns upon, and implements, subjective tastes and allows
everyone to build his own system of cultural values. We need not enter
into the general question of the analytic standing of such schemes. But
we are concerned with the sweeping assertion so often met with that, in
the sense explained, medieval civilization was objective and modern
civilization is (or until recently was) Subjective or individualist, because
this touches, or may be supposed to touch, upon the 'spirit’ in which
people conducted or conduct their economic analysis. There cannot be
any doubt that some of the characteristics fit — religious life in the age of
'One God, One Church,’ as compared to religious life in the age of
hundreds of denominations, is the standard example. But neither can
there be any doubt that as a whole those abstract pictures are ludicrously
inadequate. Is it possible to imagine a fiercer individualist than a knight?
Did not the whole trouble that medieval civilization experienced with
military and political management (and which largely accounts for its
failures) arise precisely from this fact? And is the member of a modern
labor union or the mechanized farmer of today really so much more of an
individualist than was the medieval member of a craft guild or the
medieval peasant? Therefore, the reader should not be shocked to learn
that the individualist Streak in medieval thought also was much stronger
than is commonly supposed. This is true, both in the sense that opinion
was much more differentiated individually and in the sense that the indi-
vidual phenomenon and (in speculations about society) the individual man
were much more carefully attended to than we are apt to think. Scholastic
sociology and economics, in particular, are strictly individualist, if we
understand this to mean that the doctors, so far as they aimed at descrip-
tion and explanation of economic facts, started invariably from the indi-

5 By the same token, we must not label Abelard as individualist on the ground that
he seems to have coined the phrase: nihil est praeter individuum.

SCHOLASTIC DOCTORS AND NATURAL LAW PHILOSOPHERS

vidual's tastes and behavior. That they applied superindividual canons of
justice to these facts is not relevant to the logical nature of their analysis;
but even these canons were derived from a moral schema in which the
individual was an end in himself and the central idea of which was the
salvation of individual souls.

[(b) The Thirteenth Century .] Our second period, speaking roughly, covers
the thirteenth century. There is justification for calling it the classic period of
scholasticism so far as theology and philosophy are concerned. Theological
and philosophical thought was indeed not only revolutionized but also con-
solidated into a new system that was all that the term Classic implies. Chiefly,
this revolution was the work of Grosseteste, Alexander of Hales, St. Bonaven-
tura, and Duns Scotus (Franciscan school) on the one hand, and of Albertus
Magnus and his disciple, St. Thomas (Dominican school), on the other. The
consolidation, that is, the creation of the classic system, was the towering
achievement of St. Thomas alone. But in other respects, there was only
revolution and no consolidation. That century, indeed, gave birth to scholastic
science as distinguished from theology and philosophy; it produced work that
initiated and laid the foundations for further work, but it did not establish
anything beyond starting points. This holds for the social as well as for the
physical sciences. It should be particularly noticed that, as the example of
Grosseteste shows, interest in mathematical and physical research was wide-
spread even among men who did no such research themselves. Roger Bacon
was a peak, but not a solitary peak; and plenty of men, without and within the
Franciscan order, stood ready to go on in his line of advance. The reason why
this does not stand out as it should is that the scholastic physicists and mathe-
maticians of the subsequent four centuries tended to become specialists in
their particular- fields and their scholastic background is easily lost from sight.
For instance, we look upon Francesco Cavalieri (1598-1647) simply as a great
mathematician. It does not occur to us to associate the origins of the integral
calculus with scholasticism in general or with the Jesuit order in particular,
though as a matter of fact Cavalieri was the product of both. 6

In itself, that theologico-philosophical revolution is no concern of ours. But
one aspect of it is of considerable importance for the history of sociological
and economic analysis, namely, the resurrection of Aristotelian thought. Dur-
ing the twelfth century more complete knowledge of Aristotle's writings
filtered slowly into the intellectual world of western Christianity, partly through
Semite mediation, Arab and Jewish. 7 To the scholastic doctors this meant two

6 Roger Bacon (i2X4?-92), the doctor mirabilis of scholastic tradition, affords an-
other case that illustrates the nature and the causes of the troubles that were experi-
enced by some eminent physicists. He was still more aggressive than was Galileo 400
years later. In all ages people react unfavorably to being called fools. In rough ages
they react roughly.

7 Avicenna (Ibn Sina, 980-1037), the Arab physician-philosopher, and Averroes (Ibn
Rushd, 1126-98), the lawyer-philosopher of Cordoba, and Moses Maimonides (1135-
1204) the Hebrew theologian-philosopher (especially his Guide of the Perplexed, Eng-

88 II : BEGINNINGS TO ABOUT 179O

things. First, Arab mediation meant Arab interpretation, which was unaccept-
able to them in some matters of epistemology as well as of theology. Second,
access to Aristotle’s thought immensely facilitated the gigantic task before
them not only in metaphysics, where they had to break new paths, but also in
the physical and social sciences, where they had to start from little or nothing.

The reader will observe that I do not assign to the recovery of Aris-
totle’s writings the role of chief cause of thirteenth-century developments.
Such developments are never induced solely by an influence from out-
side. Aristotle came in, as a powerful ally, to help and to provide imple-
ments. But perception of the task and the will to rush forward were, of
course, there independently of him. An analogy will clear up this point.
We have had occasion to refer to the partial adoption or 'reception’ of the
Corpus juris civilis in the later Middle Ages and the Renaissance. This
phenomenon cannot be causally explained by a lucky discovery of a few
old volumes coupled with the naive belief of uncritical minds that these
volumes contained legal material that was still in force. The economic
process was evolving patterns of life that called for legal forms, especially
for a system of contracts, of the type that the Roman jurists had worked
out. There can be no doubt but that the lawyers of the Middle Ages
would have eventually worked out similar forms for themselves. The
Roman law came in usefully, not because it brought something that was
foreign to the spirit and needs of the age — so far as it did this, its recep-
tion was in fact an unmitigated nuisance — but precisely because it pre-
sented, ready made, what without it would have had to be produced
laboriously. Similarly, the ‘reception’ of Aristotle’s teaching was prin-
cipally a most important time- and labousaving device, particularly in
those fields that were as yet waste lands. It is in this light — and not in
the light of the theory that there was passive acceptance of a lucky dis-
covery — that we must see the relation between Aristotelism and scho-
lasticism.

But so soon as the scholastic doctors realized that in Aristotle’s writ-
ings they had all, or nearly all, they could hope for at the moment and
that with the help of his doctrines they might accomplish what it would
have cost them a century’s work to do by themselves, they naturally
made the most of this opportunity. Aristotle became for them the phi-
losopher, the universal teacher, and most of their work took the form
of expounding him to students and to the public at large, and of com-
menting upon him. Moreover, his writings served admirably for didactic
purposes since they were in fact summarizing and systematizing text-
books. In consequence, it was in the role of expounders of, and com-
mentators on, Aristotelian doctrine that Grosseteste, Albertus Magnus,

lish trans. by Friedlander, 1881-5) should be mentioned in this connection. The prob-
lem of reconciling Aristotle’s teaching with Hebrew theology presented itself to Mai-
monides in much the same manner as the analogous problem presented itself to the
Christian doctors.

SCHOLASTIC DOCTORS AND NATURAL LAW PHILOSOPHERS 89

and the other leaders mentioned above appeared to the public of their
own and of later times. St. Thomas himself became, for many people,
simply the man who had succeeded in harnessing Aristotle for the service
of the Church. This misconception of the revolution of the thirteenth
century and, in particular, of St. Thomas’ performance was not corrected
but, on the contrary, was fostered by the scientific practice of the next
300 years. For Aristotle’s work continued to provide the systematic frame
for the growing scientific material and to supply the need for nicely pedes-
trian texts; everything, therefore, continued to be cast in the Aristotelian
mold — nothing so completely as scholastic economics, which also illus-
trates the way in which, by this convenient practice, the scholastic doc-
tors were likely to lose the credit for their original contributions.

This explains not only the otherwise quite incomprehensible success of
Aristotelian teaching through these 300 years but also the penalty the ancient
/Sage was eventually to pay for this success. We may just as well complete the
story which is so full of interest to the student of the tortuous ways of the
human mind. We have seen that there was nothing in the scholastic system
to bar new developments within it or even developments away from the
ground taken by its classic works. Descartes’ philosophy may exemplify such
a development. 8 He displayed no hostility to the old scholastic philosophy
and, among other things, accepted St. Anselm’s proof of the existence of
God — rejected by St. Thomas — as the basis of his own theory of the cogito.
There is plenty of room for doubt as to how much this amounts to. But it
certainly suffices for speaking of peaceful evolution from scholastic back-
grounds. We have also seen, however, that scholasticism became a bugbear,
as the influence of laical intellectuals asserted itself. And wherever hostility
to scholasticism asserted itself, hostility to Aristotle asserted itself also: be-
cause Aristotelism was the vessel of scholastic thought, hostility to Aristotelism
became the vessel of hostility to the doctors. There were even anti-scholastic
and anti-Aristotelian scholastics of whom Gassendi is the outstanding ex-
ample. 9 His mathematical and physical work, entirely neutral in itself, ac-
quired a critical connotation by the way in which he advocated the cause of
experimental — 'empiricist’ or 'inductive' — methods rather than by this ad-
vocacy as such. In philosophy he replaced the Aristotelian basis (substantially)
by one essentially Epicurean. However, it was of course among the laical ene-
mies of the Catholic doctors that it became the fashion to represent Aristotle

8 Rene Descartes (1596-1650). For the purpose in hand, only his Essais philoso-
phiques (1637) is relevant. He was the mediator between medieval and modem philoso-
phy, and was the product of Jesuit education.

9 Pierre Gassendi (1592-1655) was a philosopher, mathematician, and physicist, a
professor in holy orders whom, on his actual work, nobody would think of excluding
from the scholastic circle. But he went out of his way to distance himself from it. Of
his works those most important for us are: Exercitationes paradoxicae adversus A ris-
toteleos (1624); Syntagma philosophiae Epicuri , 1649 (works ed. by Montmort, 1658);
see also G. S. Brett, The Philosophy of Gassendi (1908).

QO II : BEGINNINGS TO ABOUT I79O

as the incarnation of old dust and of futility. Paracelsus had Aristotelian boohs
solemnly burned before starting his medical lectures; Galileo, in the famous
dialogue on the heliocentric system that gave so much offense, made a comic
figure of the inept Aristotelian objector; Francis Bacon, in espousing the cause
of ‘inductive' science, contrasted it with both scholastic and Aristotelian spec-
ulation. All this was unfair to the scholastic doctors. But it was still more
unfair to the old sage. For if there is any general message at all that speaks
to us from his pages, it is surely the message of empirical research . 10 So true
is it that, in science as elsewhere, we fight for and against not men and things
as they are, but for and against the caricatures we make of them . 11 However,
let us return to the classic period, the thirteenth century, in order to search
for elements of sociological and economic analysis.

We find small beginnings only — little of sociology, still less of economics.
In part this was doubtless due to lack of interest. St. Thomas, in particular,
was indeed interested in political sociology but all the economic questions
put together mattered less to him than did the smallest point of theological
or philosophical doctrine, and it is only where economic phenomena raise
questions of moral theology that he touches upon them at all. Even where
he does we do not feel, as we do elsewhere, that his powerful intellect is all
there, passionately resolved to penetrate into the core of things but rather
that he is writing in obedience to the requirements of systematic complete-
ness. More or less, this applies to all his contemporaries. In consequence,
Aristotle’s teaching sufficed for them and they hardly ever went beyond it.
There was indeed a difference in moral tone and cultural vision and also a
shift of emphasis that is accounted for by the different social patterns they
beheld. But neither is so important as we might have expected. Since these
things are of no great moment in a history of economic analysis, it will suffice
to note that the scholastic doctors looked upon physical labor as a discipline
favorable to Christian virtue and as a means of keeping men from sinning,

10 Theophrastus Bombastus von Hohenheim, who called himself Paracelsus ( 1 490?-
1541), was a physician and chemist of eminence though not without an element of
charlatanism. Francis Bacon (1561-1626; works ed. by Spedding, Ellis, and Heath,
1857-62) presumably needs no introduction. The tremendous success of his writings —
not so much in his day but during the Enlightenment and then during the nineteenth
century — is amply accounted for by the fact that he expressed with supreme ability
what a rapidly increasing number of people actually came to believe. He was the very
type of a 'representative man.’ But precisely because he was and because in conse-
quence his figure stands out so clearly, his ideas now seem much more novel and much
less in keeping with previous developments than they were. Therefore, his writings in-
culcated into the public mind the unreal contraposition of inductive research and
scholasticism in which, along with his contemporaries, he himself was so fond of be-
lieving, the more so because he probably knew very little about the work of the scholas-
tics. More than any other individual, he helped to foster the delusion that to this day
distorts the history of thought.

11 Outstanding examples from the history of economics are A. Smith’s criticism of
the 'mercantilists’ and Schmoller’s criticism of the English ‘classics.’ Both cases will be
discussed in their places.

SCHOLASTIC DOCTORS AND NATURAL LAW PHILOSOPHERS 91

which implies an attitude entirely unlike that of Aristotle; that with them
slavery was no longer a normal, let alone fundamental, institution; that they
gave their blessings to charity and to voluntary poverty; that their ideal of a
vita contemplativa carried, of course, a meaning that was quite foreign to
Aristotle’s corresponding ideal of life, though there are important similarities
between the two; that they repeated but qualified Aristotle’s views on com-
merce and commercial gain.

While all the other points apply to scholastic doctrine of all ages, the one mentioned
last holds fully only for the classic period. After the thirteenth century a significant
change occurred in the attitude of the scholastic doctors to commercial activity. But
the thirteenth-century scholastics undoubtedly held the opinion expressed by St.
Thomas, namely, that there is 'something base’ about commerce in itself ( negotiatio
secundum se considerata quandam turpitudinem habet , Summa 11, 2, quaest. lxxvii,
art. 4), though commercial gain might be justified (a) by the necessity of making one's
living; or (b) by a wish to acquire means for charitable purposes; or (c) by a wish to
serve publicam utilitatem, provided that the lucre be moderate and can be considered
as a reward of work ( stipendium laboris); or (d) by an improvement of the thing
traded; or (e) by intertemporal or interlocal differences in its value; or (f) by risk
( propter periculum). St. Thomas’ wording leaves some room for doubt about the con-
ditions in which he was prepared to admit considerations (d)-(f), and it may be true
that others, especially Duns Scotus (1266-1308) and a doctor whom I have not men-
tioned so far, Richard of Middleton (1249-1306), went somewhat further, especially as
regards justifying the social usefulness of the practice of buying in a cheaper market
and selling in a dearer one. However, even qualifications (b) and (c) go beyond Aris-
totle’s teaching. The emphasis all these authors place upon the element of remuner-
ation of some socially useful activity has given rise, on the one hand, to the opinion,
which may be correct, that the source of the (moral) ‘right to the produce of one’s
labor’ may be found in the scholastic literature, and,' on the other hand, to the error
that the scholastic doctors held a (analytic) labor theory of value, that is, that they
explained the phenomenon of value by the fact that (most) commodities cost labor.
For the moment, the reader should only notice that there is no logical relation be-
tween mere emphasis upon the necessity, moral or economic, of remunerating labor
(no matter whether we translate the Latin word by the English ‘labor’ or by 'activity’
or ‘effort’ or ‘trouble’) and what is technically known as the labor theory of value.

St. Thomas’ sociology of institutions , 12 political and other, is not what
readers will expect who are in the habit of tracing the political and social
doctrines of the nineteenth century to Locke or to the writers of the French
Enlightenment or to the English utilitarians. Considering that, in this respect,
the teaching of St. Thomas not only was representative of that of his con-
temporaries but also was accepted by all the scholastic doctors of later times,
its main points should be briefly indicated. There was the sacred precinct
of the Catholic Church. But for the rest, society was treated as a thoroughly
human affair, and moreover, as a mere agglomeration of individuals brought

12 Our main source for St. Thomas’ political sociology is a tract entitled De regimine
principum , widely used throughout the Middle Ages, and a letter to a Duchess of
Brabant. But only part of the former is certainly by St. Thomas himself; the rest may
be the work of another Dominican, Ptolemy of Lucca (d. 1327).

92 II: BEGINNINGS TO ABOUT 1790

together by their mundane needs. Government, too, was thought of as arising
from and existing for nothing but those utilitarian purposes that the individuals
cannot realize without such an organization. Its raison d’etre was the Public
Good. The ruler’s power was derived from the people, as we may say, by
delegation. The people are the sovereign and an unworthy ruler may be de-
posed. Duns Scotus came still nearer to adopting a social-contract theory of
the state . 13 This mixture of sociological analysis and normative argument is
remarkably individualist, utilitarian, and (in a sense) rationalist, a fact that
it is important to remember in view of the attempt we are going to make to
link this body of ideas with the laical and anti-Catholic political philosophies
of the eighteenth century. There is nothing metaphysical about this part of
scholastic doctrine. Nor did the Catholic doctors countenance political au-
thoritarianism. The divine right of monarchs, in particular, and the concept
of the omnipotent state are creations of the Protestant sponsors of the abso-
lutist tendencies that were to assert themselves in the national states.

The individualist and utilitarian streak and the emphasis upon a rationally
perceived Public Good run through the whole sociology of St. Thomas. One
example will suffice: the most important one, the theory of property. Having
disposed of the theological aspects of the matter, St. Thomas simply argues
that property is not against natural law but an invention of the human rea-
son , 14 which is justifiable because people will take better care of what they
possess for themselves than of what belongs to many or all; because they will
exert themselves more strenuously on their own account than on account of
others; because the social order will be better preserved if possessions are dis-
tinct, so that there is no occasion for quarreling about the use of things pos-
sessed in common — considerations that atteihpt to define the social ‘function’
of private property much as Aristotle had defined them before and much as
the nineteenth-century textbook was to define them afterward. And since he

18 This theory was not, of course, applied to the government of the Catholic Church.
When this was done by Marsilius of Padua (c. 1270-1342; Defensor pads, 1326), it
spelled heresy. From our standpoint two observations suggest themselves: first, the case
illustrates how implicit acceptance of supermundane authority in some respects may in
practice be complemented by extreme freedom of thought and action in other respects;
second, the case also shows why the question of the influence of supermundane au-
thority upon analysis cannot be answered once for all, but must be answered separately
for every individual argument. Since too much care cannot be expended on clearing up
this point, let us, by way of supplementing previous argument, introduce the following
tripartite distinction which applies to all authorities that ever did or do attempt to di-
rect opinion. First, as the case in hand shows, there were matters in which the Catholic
Church prescribed opinion and barred analysis that led to any other results. Second,
there were many matters in which, being indifferent to both opinion and analysis, it did
not interfere in any way. Third, there were matters (such as interest) in which it pre-
scribed opinion in the sense of moral judgment but did not bar analysis of facts.

14 Summa 11, 2, quaest. lxvi , art. 2: proprietas possessionum non est contra jus natu-
rale, sed juri naturali superadditur per adinventionem rationis humanae. On the mean-
ing to be attached to jus naturale, see next section.

SCHOLASTIC DOCTORS AND NATURAL LAW PHILOSOPHERS 93

found in Aristotle all he wished to say, he referred to him and accepted his
formulations.

This holds with added force for St. Thomas' ‘pure economics' ( oeconomia
with him means, however, simply household management). It was embryonic
and really consists of only part of his argument on Just Price ( Summa n, 2,
quaest. lxxvii, art. 1) and on Interest ( Summa 11, 2, quaest. lxxviii). The
relevant part of the argument on just price — the price that assures the ‘equiva-
lence' of commutative justice — is strictly Aristotelian and should be inter-
preted exactly as we have interpreted Aristotle’s. St. Thomas was as far as
was Aristotle from postulating the existence of a metaphysical or immutable
‘objective value.' His quantitas valoris is not something different from price
but is simply normal competitive price. The distinction he seems to make
between price and value is not a distinction between price and some value
that is not a price, but a distinction between the price paid in an individual
transaction and the price that ‘consists’ in the public’s evaluation of the com-
modity ( justum pretium ... in quadam aestimatione consistit ), which can
only mean normal competitive price, or value in the sense of normal com-
petitive price, where such a price exists . 15 In cases where no such price exists,
St. Thomas recognized, as coming within his concept of just price, the element
of the subjective value of an object to the seller, though not the element of
the subjective value of the object for the buyer — a point that is important for
scholastic treatment of interest. Beyond this he did not go in the article re-
ferred to. But other passages, perhaps, support the opinion that, by implication
at least, he did take a step beyond Aristotle which was more explicitly taken
by Duns Scotus, Richard of Middleton, and possibly others. Duns Scotus, at
all events, may be credited with having related just price to cost, that is, the
producers’ or traders’ expenditure of money and effort ( expensae et lahores ).
Though he presumably thought of nothing beyond providing a more precise
criterion of scholastic ‘commutative justice’ — which was rightly rejected by
the later scholastics — we must nevertheless credit him with having discovered
the condition of competitive equilibrium which came to be known in the
nineteenth century as the Law of Cost. This is not imputing too much: for
if we identify the just price of a good with its competitive common value,
as Duns Scotus certainly did, and if we further equate that just price to the
cost of the good (taking account of risk, as he did not fail to observe), then
we have ipso facto, at least by implication, stated the law of cost not only
as a normative but also as an analytic proposition.

Following Alexander of Hales and Albertus Magnus, St. Thomas condemned

15 This interpretation is supported by the fact that the quaestio, in which the theory
of just price is presented (quaest. lxxvii of n, 2) is entitled De fraudulentia and, in
fact, mainly deals ’with frauds perpetrated by sellers. If the just price were something
else than the normal competitive price, practices other than fraud would be more im-
portant. But if St. Thomas was thinking of what we call normal competitive price,
fraud becomes the chief phenomenon to be dealt with. For if there exists a competitive
market price, individual deviations from it are hardly possible except through fraudu-
lent representations about the quantity and quality of the goods.

94 II: BEGINNINGS TO ABOUT I79O

interest as contrary to commutative justice on a ground that proved a conun-
drum for almost all his scholastic successors: interest is a price paid for the
use of money; but, viewed from the standpoint of the individual holder, money
is consumed in the act of being used; therefore, like wine, it has no use that
could be separated from its substance as has, for example* a house; therefore
charging for its use is charging for something that does not exist, which is
illegitimate (usurious). Whatever may be thought of this argument, which
among other things neglects the possibility that 'pure' interest might be an
element of the price of money itself — instead of being a charge for a separable
use 16 — one thing is clear: exactly like the somewhat different Aristotelian
argument, it does not bear at all upon the question why interest is actually
paid. Since this question, the only one that is relevant to economic analysis,
was actually raised by the later scholastics, we defer the consideration of the
clues for an answer, which St. Thomas’ reasoning nevertheless suggests.

[(c) From the Fourteenth Century to the Seventeenth.] The last of the
three periods into which we have decided to divide the history of scholasticism
extends from the beginning of the fourteenth century to the first decades of
the seventeenth. It comprises practically the whole of the history of scholastic
economics. But, having already fully explained the setting and the nature of
scholastic work, we can now afford to be brief. In particular, no further ex-
planation seems to be needed for the ease with which the economics of the
doctors absorbed all the phenomena of nascent capitalism and, in consequence,
for the fact that it served so well as a basis of the analytic work of their suc-
cessors, not excluding A. Smith.

In order to achieve the maximum of economy, I shall mention only a very
few representative names and then attempt to draw a systematic sketch of
what I conceive the state of scholastic economics to have been about 1600.
Other names, of cpurse, would have to be mentioned for other purposes; we
are artificially narrowing down what was a very broad and deep stream.

For the fourteenth century we choose Buridanus and Oresmius as repre-
sentatives. 17 The latter’s treatise on money is usually described as the first

16 The reason why St. Thomas did not consider this possibility was obviously that
he placed implicit confidence in the proposition that the price of any commodity that
is chosen for the standard of value is unity by definition. Reasoning on from this, we
may easily arrive at the conclusion that any ‘pure’ premium cannot be anything else
but a fraudulent charge for a nonexistent use, since the price of the substance or
‘capital’ must necessarily be equal to the capital itself.

17 Joannes Buridanus (Jean Buridan, fl. 1328-58), professor in the University of Paris.
Of his many works, all drawn up on the Aristotelian frame, the most important for
us are: Quaestiones in decern libros Ethicorum Aristotelis (ed. used, 1637) and Quaes-
tiones super octo libros Politocorum Aristotelis (ed. used with notes by G. Baterel,
1513). His theory of volition ( Summula de dialectica, 1487, and Compendium logicae,
1487) led up to the familiar paradox of the logic of choice that is illustrated by the
perfectly rational ass that starves between two equally attractive bundles of hay owing
to his inability to make up his mind which to consume first. Nicole Oresme (1 3207-82),
Bishop of Lisieux, was a man of polyhistoric interests who also wrote on theology,
mathematics, and astronomy. The work in question, Tractatus de origine et jure nec non

SCHOLASTIC DOCTORS AND NATURAL LAW PHILOSOPHERS 95

treatise entirely devoted to an economic problem. But it is mainly legal and
political in nature and really does not contain much strictly economic ma-
terial — in particular, nothing that was not current doctrine among the scho-
lastics of the time — its chief purpose being to combat the prevalent practice
of debasing money, a topic that was treated later on in a copious literature
to be briefly noticed presently. Our fifteenth-century representatives will be
St. Antonine of Florence, perhaps the first man to whom it is possible to
ascribe a comprehensive vision of the economic process in all its major as-
pects, and Biel . 18 For the sixteenth century we select Mercado and, as repre-
sentatives of the literature on Justice and Law ( De justitia et jure) that in the
sixteenth century became the main scholastic repository of economic material,
the three great Jesuits whose works have been recently analyzed by Professor
Dempsey — Lessius, Molina, and de Lugo . 19

et de mutationibus monetarum, was written between 1350 and 1360 (ed. used 1605).
An extract is included in Monroe’s Early Economic Thought, pp. 79-102. After having
met with great success in its own time, it seems to have falllen into oblivion from
which it was rescued by,F. Meunier, Essai sur la vie et les ouvrages de Nicole Oresme
(1857) and especially by W. Roscher ('Em grosser Nationalokonom des vierzehnten
Jahrhunderts’ in Z eitschrift fur die gesamte Staatswissenschaft, 1863), who extolled its
merits, particularly its originality, beyond all reason, as discoverers of forgotten worthies
are apt to do — which naturally induced a reaction. There is quite a literature on Oresme.
Let us single out C. A. Conigliani, Le dottrine monetarie in Francia durante il medio
evo (1890).

18 St. Antonine (Antonio Pierozzi, also called Forciglioni; 1389-1459), Archbishop of
Florence, Summa theologica (ed. used: for the first and second parts, Lyons, 1516; for
the third, Venice, 1477); also Summa moralis (Verona, 1740). See B. Jarrett, S. Anto-
nino and Mediaeval Economics (1914). Gabriel Biel (14257-95), professor in the Uni-
versity of Tubingen, another discovery of Roscher’s ( Geschichte der Nationalokonomik
in Deutschland, 1874). His Tractatus de potestate et utilitate monetarum (1541; Eng-
lish trans., 1930) does not, however, contain anything that cannot be found in earlier
writers. Why he should have been called the last of the scholastics I am unable to
understand. But I have chosen him for reference because perusal of his work is par-
ticularly effective in destroying prejudices concerning the spirit of scholasticism. Really
more important seems to be Panormitanus (Nicolaus dei Tedeschi or Tudeschi, Arch-
bishop of Palermo, 1386-1445) to judge from quotations in the later scholastic
literature.

19 The choice was a difficult one and may give rise to valid objection particularly
against the exclusion of such men as John Major (d. 1549; cf. the comments of Ashley
in Economic History 1, Part 11), Navarrus (Martinus de Azpilcueta, d. 1586), Domingo
de Soto ( De justicia et jure, 1553), and Gaetanus (Cardinal Cajetan, Tommaso de Vio,
1468-1534) all of whom we shall have to mention, and others. Tomas de Mercado,
author of De los tratos de India y tratantes en ellas (1569; enlarged ed. of 1571, the
only one known to me, under the title Summa de tratos y contratos), has been included
only because of his ‘quantity theory of money’ and cannot be put on the same level
with Lessius, Molina, and de Lugo in any other respect. But I am positive that the
latter three must be included in any history of economics, though there was a further
motive for selecting them: Professor Dempsey’s book (B. W. Dempsey, Interest and
Usury, 1943, chs. vi-vin) contains a full exposition of their economics; this book com-

96 II : BEGINNINGS TO ABOUT 1790

All that need be said about the sociology of the later scholastics is that they
developed, in greater detail and with a fuller perception of implications, the
ideas that had crystallized in the works of their thirteenth-century predecessors.
Their political sociology in particular retained the same method of approach
to the phenomena of state and government and also the same 'radical’ spirit . 20
Their economic sociology, especially their theory of property, continued to
treat temporal institutions as utilitarian devices that were to be explained —
or 'justified’ — by considerations of social expedience centering in the concept
of the Public Good. And this social expedience might, according to historical
circumstances, sometimes tell in favor, and sometimes tell against, private
property. They no doubt believed that in civilized societies, that is, in societies
that were past the early or natural state in which all possessions were common
to all ( omnia omnibus sunt communia), these considerations told in favor of
private property ( divisio rerum); but there was neither a theoretical nor a moral
principle to prevent them from arriving at the opposite result whenever new
facts should suggest it . 21 Some methodological aspects of this will be dealt
with in the next section. But another point should be briefly mentioned.

The scholastics were not primarily concerned with the problems of the
national states and their power politics. This is precisely one of the most im-
portant links between them and the 'liberals’ of the eighteenth and even the
nineteenth centuries. But some of the phenomena that accompanied the rise
of these states were, nevertheless, bound to attract their critical attention, and
among them was fiscal policy. I mention this here, and not in connection
with their economics, because they hardly went at all into the specifically eco-
nomic problems of public finance, such as incidence of taxation, economic
effects of government expenditure, and the like: even when they did discuss
government borrowing (which, following the lead of St. Thomas, they mostly
condemned) or the question of the relative merits of taxes on wealth and taxes
on consumption (Molina, Lessius, and de Lugo, among others, touched upon

bines to a degree that is quite exceptional, thorough familiarity with scholastic thought
and with economic theory, so that the interested reader may be referred to it with con-
fidence. Lessius (Leonard de Leys, 1554-1623), Luis Molina (1535-1600), and de Lugo
(Juan de Lugo, 1583-1660) all wrote treatises de justitia et jure. Our chief guide will be
Molina. His treatise appeared in instalments in 1593, 1597, and in and after 1600;
(ed. used De justitia et jure, 1659).

20 Any doubt about this may be dispersed by a single reference: Juan de Mariana, De
rege et regis institutione, 1599. But even scholastics who did not go so far never wor-
shiped at the shrines of either absolute monarchs or omnipotent bureaucracies, see e.g.,
Molina, Tractatus secundus, disp. 22 and 26. The scholastic doctors, following their
own earlier tradition, must therefore be considered as the most important of the 'mon-
archomachs’ of the sixteenth century. On these, see especially J. W. Allen, A History
of Political Thought in the Sixteenth Century, 1928.

21 The reader will find a very characteristic quotation from Lessius in Dempsey’s
Interest and Usury, p. 132. It does not follow, of course, that Lessius, were he alive
today, would embrace political communism. The point is that in good logic he would
be free to arrive at the conclusion that private property no longer fulfils the require-
ments of social expedience and that economic communism does.

SCHOLASTIC DOCTORS AND NATURAL LAW PHILOSOPHERS 97

this question), they produced nothing that qualifies as economic analysis. What
they were most interested in was the 'justice’ of taxation in the widest accept-
ance of the term — such questions as whether and when taxes might be right-
fully imposed, by whom and on whom, for what purposes, and to what extent.
And below their normative propositions there was some sociological analysis
of the nature of taxation and of the relation between state and citizen. Both
these norms and this analysis, along with the rest of their political and eco-
nomic sociology, went into the work of their laical successors though the later
science of public finance grew mainly from other roots. 22

But while the economic sociology of the scholastic doctors of this period
was, in substance, not more than thirteenth-century doctrine worked out more
fully, the 'pure’ economics which they also handed down to those laical suc-
cessors was, practically in its entirety, their own creation. It is within their
systems of moral theology and law that economics gained definite if not sep-
arate existence, and it is they who come nearer than does any other group
to having been the 'founders’ of scientific economics. And not only that: it
will appear, even, that the bases they laid for a serviceable and well-integrated
body of analytic tools and propositions were sounder than was much subsequent
work, in the sense that a considerable part of the economics of the later nine-
teenth century might have been developed from those bases more quickly
and with less trouble than it actually cost to develop it, and that some of
that subsequent work was therefore in the nature of a time- and labor-con-
suming detour.

In what may be described as the applied economics of the scholastic doc-
tors, the pivotal concept was the same Public Good that also dominated their
economic sociology. This Public Good was conceived, in a distinctly utilitarian
spirit, with reference to the satisfaction of the economic wants of individuals
as discerned by the observer’s reason or ratio recta (see, below, next section) —
and is therefore, barring technique, exactly the same thing as the welfare con-
cept of modern Welfare Economics, Professor Pigou’s for instance. The most
important link between the latter and scholastic welfare economics is the
welfare economics of the Italian economists of the eighteenth century (see
below, ch. 3). So far as appraisal of economic policy and business practice is
concerned, the scholastics’ idea of what is 'unjust’ was associated — though never
identified — with their idea of what is contrary to public welfare in that sense.
To give at least one example: Molina declared that monopoly was in general
(regulariter) unjust and harmful to the public welfare (tract, n, disp. 345);
though he did not identify the two, their juxtaposition is nevertheless sig-
nificant.

The welfare economics of the scholastic doctors linked up with their 'pure’
economics through the pivotal concept of the latter, Value, which also was

22 The fact should, however, be recorded, that Nicolaus Cusanus (already men-
tioned in connection with the heliocentric theory) framed a comprehensive plan for the
reform of the finances of the German Empire, based upon a general income tax (ac-
tually introduced, for the Empire as distinguished from the component states, in 1920).

98 II : BEGINNINGS TO ABOUT I79O

based upon ‘wants and their satisfaction.’ Of course, there was nothing new
in this starting point itself. But the Aristotelian distinction between value in
use and value in exchange was deepened and developed into a fragmentary
but genuine subjective or utility theory of exchange value or price in a manner
for which there was no analogue in either Aristotle or St. Thomas, though
there was in both what we may describe as a pointer. First, by way of criticiz-
ing Duns Scotus and his followers, the late scholastics, particularly Molina,
made it quite clear that cost, though a factor in the determination of exchange
value (or price), was not its logical source or ‘cause . 7 23 Second, they adumbrated
with unmistakable clearness the theory of the utility which they considered
as the source or cause of value. Molina and Lugo, for instance, were as careful
as C. Menger was to be to point out that this utility was not a property of
the goods themselves or identical with any of their inherent qualities, but
was the reflex of the uses the individuals under observation proposed to make
of these goods and of the importance they attached to these uses. But a cen-
tury before that, St. Antonine, evidently motivated by the wish to divest the
relevant concept of undesirable ‘objective 7 meanings, had employed the un-
elassical but excellent term compldcibilitas — the exact equivalent of Professor
Irving Fisher’s ‘desiredness , 7 which also is used to express the fact that a thing
is actually being desired and nothing else. Third, the late scholastics, though
they did not explicitly resolve the ‘paradox of value 7 — that water though useful
has normally no exchange value — obviated the difficulty by making their, utility
concept, from the first, relative to abundance or scarcity; their utility was not
utility of goods in the abstract, but utility of the quantities of goods available
or producible in the individual’s particular situations. Finally, fourth, they
listed all the price-determining factors , 24 though they failed to integrate them
into a full-fledged theory of demand and supply. But the elements for such
a theory were all there and the technical apparatus of schedules and of marginal
concepts that developed during the nineteenth century is really all that had
to be added to them.

. There are two more aspects of this theory of exchange value that deserve
to be noticed. On the one hand, the late scholastics identified their just price
not, as Aristotle and also Duns Scotus seem to have done, with normal com-
petitive price but with any competitive price ( communis estimatio fori or
pretium currens ). Wherever such a price existed, it was ‘just’ to pay and to
accept it, whatever the consequences might be for the trading parties: if mer-

23 This statement, I think, renders fairly the meaning of Molina’s argument in tract.
n, disp. 348, if proper attention is paid to the analytic kernel in the word 'just. 7 Still
less than a cost theory of value can a labor theory of value be imputed to them, though
this has been done. We shall see later that the emotional appeal of the latter has in-
duced some historians to interpret as many authors as possible in this sense. It should
be borne in mind, therefore, that mere emphasis on the importance in the economic
process of the element of labor or effort or trouble does not amount to sponsorship
of the proposition that expenditure of labor explains, or is causal to, value — which is
what is meant by labor theory of value in this book.

24 ,Cf. especially a passage in Lessius, quoted by Dempsey, op. cit. p. 151.

SCHOLASTIC DOCTORS AND NATURAL LAW PHILOSOPHERS 99

chants, paying and accepting market prices, made gains, this was all right,
and if they suffered losses, this was bad luck or else a penalty for incompetence
so long as gain or loss resulted from the unhampered working of the market
mechanism though not if it resulted, for example , from price fixing by public
authority or monopolistic concerns 25 Molina’s disapproval of price fixing,
though qualified, and his approval of gains arising from high competitive
prices in times of scarcity are no doubt ethical judgments. But they reveal a
perception of the organic functions of commercial gains and of the price fluc-
tuations that are responsible for them, a fact that marks a considerable step in
analysis. This should be borne in mind, for we are not as a rule in the habit
of looking to the scholastics for the origin of the theories that are associated
with nineteenth-century laissez-faire liberalism.

On the other hand, the" late scholastics analyzed economic activity itself —
St. Antonine’s industria — and particularly commercial and speculative activity,
from a standpoint that was diametrically opposed to Aristotle’s. The Economic
Man of later times put in an appearance in the conception of ‘prudent eco-
nomic reason’ — a Thomistic phrase which acquired an entirely un-Thom isfic
connotation by de Lugo’s interpretation, which was to the effect that this
prudence implies the intention of gaining in every legitimate way. This did
not spell moral approval of profit hunting. As far as that goes, it is safe to
assume that neither de Lugo’s nor any other scholastic doctor’s feelings dif-
fered from Aristotle’s; St. Antonine, for example, was very explicit on this
point. But it spelled an improved analysis of business facts that was, of course,
partly induced by observation of the phenomena of rising capitalism. This
realistic character of the work of the late scholastics should be particularly
emphasized. They did not simply speculate. They did all the fact-finding that
it was possible for them to do in an age without statistical services. Their
generalizations invariably grew out of discussions of factual patterns and were
copiously illustrated by practical examples. Lessius described the practice of
the Antwerp exchange (bursa). Molina sallied forth from his study to interview
businessmen about their methods. Some of his investigations into the economic
conditions of his time and country, such as his study of the Spanish wool trade,
amount to little monographs.

As regards money, it will suffice to record the four following points. First,
reasoning on Aristotelian lines, the doctors presented, practically to a man,
a strictly metallist theory of money which, in fundamentals, did not differ
from that of A. Smith; we find the same genetic or pseudo-historical deduction
from the necessity of avoiding the inconveniences of direct barter, the same
conception of money as the most saleable commodity, and so on. Second, they
were not only theoretical but also practical metallists, disapproving, with vary-
ing degrees of severity, of debasement and of any gain that accrued from it
to princes. As mentioned before, the outstanding authority on this matter,
Oresmius, only formulated the doctors’ common opinion, which in this case

25 See, e.g., Molina, tract, n, disp. 348 and 364.

lOO

II: BEGINNINGS TO ABOUT 179O

was evidently shared by most people. 26 The modern student of monetary
theory, who may possibly sympathize with those princes and feel inclined to
regard them as worthy predecessors of the governments of his own day, should
observe that the doctors went but a very short way into the economic effects
of devaluation. They saw the effect on prices and felt that creditors and holders
of money were being defrauded but that was about all. Even in these matters
their analysis did not go beyond the obvious, and the idea that devaluation —
and other methods of increasing the amount of circulating monetary units —
might stimulate trade and employment was quite foreign to them; it first oc-
curred to those businessmen who wrote on monetary policy in the seventeenth
century (see below, ch. 6). Since this idea was almost entirely lost on the

26 Oresme, op. cit. ch. xv: Quod lucrum quod provenit Principi ex mutatione monetae
sit injustum. Cf. Jean Bodin’s precept in the sixth Book of his De re publica (Les six
livres de la Republique): princeps a nummorum corruptela debet abstinere. This adage
and similar ones resound from a large chorus of voices that were raised in protest
against governmental malpractices during those centuries of almost incessant monetary
disorders. But some writers who joined that chorus were not theoretical metallists. To
quote an example, Francois Grimaudet ( Des Monnoyes, 1576), though he insists that
the nominal value of a coin should not surpass the value of the material except for the
‘fraiz de fagon et quelque petit profit,’ yet states explicitly that the ‘essence of money’
is in that nominal value et non en la matiere. On the whole, I think, valor impositus
should be translated by nominal value, valor intrinsecus by value of material, and valor
extrinsecus by purchasing power (which is, however, also called potestas). Quantitas
also means nominal value, and not quantity. Devaluation is denoted by mutatio, cor-
ruptela, or augmentum. The last term corresponds to the English usage of the six-
teenth and seventeenth centuries (and even later times) when ‘raising’ money meant
debasement or devaluation.

In that large chorus of protesting voices, I cannot hear any note worth recording.
But I shall mention names of a few authors — not all of them scholastics — who seem to
have gained considerable contemporary reputation: C. A. Thesaurus’ Tractatus novus et
utilis de augmento ac variatione monetarum (1607), and M. Freher’s De re monetaria
(1605), do display some traces of the distinction between devaluation and depreciation,
and may on this account be assigned a special place. Also ran (among many others,
doctors and laics): Rene Budel, Joannes Aquila, Martinus Garratius, Franciscus Curtius,
Ioannes Regnandus, Joachimus Mynsinger, Didacus [Diego] Covarruvias (the famous
jurist), Henricus Hormannus, Franciscus de Aretio, Joannes Caephalus. There is some
difference, partly explained by the fact that they had different situations in mind, in
their solutions of the problem of the repayment of debts contracted in a currency
that was subsequently debased. This is the problem that really interested the public
and is responsible for the unending stream of publications of this kind. But the answers
are practical shifts and of no interest for us. One author should be added, however,
because his argument on usury secured him one of those places in the history of eco-
nomics that remain occupied indefinitely for no other reason than that nobody bothers
to revise the occupant’s claims. Charles Dumoulin (Carolus Molinaeus, 1500-1566)
was a French lawyer of reputation whose Tractatus commerciorum et usurarum reditu-
umque pecunia costitutorum d monetarum (I have used the 1st ed., 1546) was a great
success and enjoyed international reputation. There is nothing in it, however, that
could be described as a new contribution to economic analysis.

SCHOLASTIC DOCTORS AND NATURAL LAW PHILOSOPHERS 101

English ‘classics’ of the nineteenth century, we have here another of those
curious doctrinal affinities that exist between J. S. Mill and Father Molina.
Third, we note for future reference that some of the doctors, among whom
Mercado is the most important instance, adumbrated more or less clearly
what came to be called the quantity theory of money, at least in the sense
in which Bodin can be said to have held it. And, fourth, they dealt with a
number of problems in coinage , 27 foreign exchange, international gold and
silver movements, bimetallism, and credit in a manner that would merit more
attention and that compares favorably in some points with much later per-
formance.

Contrary to an opinion that has some adherents, the scholastic doctors did
not work out any theory of the physical aspect of production ('real capital’),
though they did eventually — since St. Antonine — block out a theory of the
role in production and commerce of monetary capital. Nor did they possess
any integrated theory of distribution, that is to say, they failed to apply their
embryonic demand-supply apparatus to the process of income formation as
a whole. Moreover, the rent of land and the wages of labor had not as yet
become analytic problems to them. In the case of rent, this was perhaps due
to the facts that, with farmers who tilled their own soil, the element of rent
does not readily display its distinctive character, and that rents paid to land-
lords were in the times of the doctors so mixed with dues of a different na-
ture that the economic rent, which was moreover traditionally fixed, did not
show up very distinctly even in this case. In the case of wages, too, they did
not ask the theoretical question; presumably they felt that nobody needs to
be told what it is wages are paid for. They proffered indeed moral considera-
tions and recommendations as to policy. However, even St. Antonine’s rec-
ommendations, noteworthy because of the broad social sympathies that in-
spired them, do not rest on any analytic foundations of the kind we are in-
terested in. The same applies to the considerable literature that developed in
the sixteenth century on relief of the poor, unemployment, mendicancy, and
the like, to which the doctors contributed copiously . 28 Much more important
were their contributions to the theories of the two types of income that they
did feel to be analytic problems, business profits and interest. The risk-effort
theory of business profit is undoubtedly due to them. In particular, it may be
mentioned that de Lugo — following a suggestion of St. Thomas — described
business profits as ‘a kind of wage’ for a social service. No less certain is it
that they launched the theory of interest.

So far, our sketch of scholastic economics has been drawn without much attention
to its methodological philosophy, which will be discussed in the next section, and also
without much attention to the logical processes involved in unwrapping the analytic

27 The eminence of Copernicus in other fields suggests special notice of his Monetae
cudendae ratio (1526).

28 De Soto’s Deliberacion en la causa de los pobres (1545), and Juan de Medina’s
De la orden que ... se ha puesta en la limosna . . . (1545), are examples of those
scholastic contributions. The subject will be briefly mentioned again (see below, ch. 5).

102

II : BEGINNINGS TO ABOUT 1790

element in the reasoning of the doctors from the normative considerations in which it
was embedded. In order to exhibit these processes and to show precisely how it was
that they came to ask the question which they were the first to ask — namely, the ques-
tion why interest is actually paid — we shall, in the case of interest, be more careful in
doing the unwrapping.

The motive of scholastic analysis was manifestly not pure scientific curiosity but the
desire to understand what they were called upon to judge, from a moral standpoint. 29
When the modern economist speaks of 'value judgments/ he refers to moral or cul-
tural appraisal of institutions. As we have seen, the scholastic doctors also passed value
judgments of this kind. Primarily, however, and so far as their practical task was con-
cerned, it was not the merits or demerits of institutions that mattered to them, but the
merits or demerits of individual behavior within the frame of given institutions and
conditions. More than anything else, they were directors of individual consciences or,
rather, teachers of directors of individual consciences. They wrote for many purposes
but principally for the instruction of confessors. In the first instance, therefore, they
had to expound moral precepts that were immutable on principle. Secondly, they had
to teach the application of these precepts to individual cases arising in an almost in-
finite variety of circumstances. 30 But this was not enough. In order to secure some-
thing approaching uniformity of practice among the numerous confessors, it was neces-
sary to work out concrete decisions for the more important types of cases that occur in
practice. Moreover, one of the considerations that are most helpful in deciding whether,
from the standpoint of a given individual, a given act is a sin, and if so, how serious
a sin it is, is whether or not it is common practice in the individual’s environment.
For both these reasons it was necessary for the doctors to investigate typical forms of
economic behavior and also the actual practices prevailing in the environments under
their observation — a task that was often so simple as not to call for special effort, but
was exceedingly difficult when it came to the complex phenomenon of interest. -

Thus the normative motive, so often the enemy of patient analytic work, in this in-
stance both set the task and supplied the method for the scholastic analysts. Once set,
the task was strictly scientific and logically independent of the moral theology whose
purposes were to be served. And the method was also strictly scientific; in particular,

29 For our purpose, the history of legislation on interest, whether proceeding from
temporal or spiritual authority, is not of any great importance. Moreover, the reader
will find in the Encyclopaedia of the Social Sciences or in Palgrave’s Dictionary all he
may wish to have in the way of general orientation. Nevertheless, a few facts about the
policy of the Catholic Church may be welcome at this point. In the times of the
Roman Empire the Catholic Church dealt very cautiously with interest, Aristotle and
St. Luke notwithstanding. The Council of Nicaea (325) did not go beyond a prohibition
addressed to the clergy, though more general disapproval was expressed. The decisive
step, which also included the declaration that secular legislation to the contrary was
invalid (St. Thomas had not thought so), was not taken until 1311. Prohibition was
then reaffirmed many times and is still in force. But its practical importance decreased
along with the decrease in importance of the cases that came under it, as will be ex-
plained in the text. Some notice of this was eventually taken in the encyclical Vix
pervenit, 1745. In 1838 a circular instructed confessors not to disturb penitents who
accept interest at current rates.

30 The theory of this was given, e.g., by St. Thomas ( Summa 11, 1, quaest. vii). The
chief reference, so far as moral theology is concerned, for what follows in the text is to
St. Alphonso de’Liguori (1696-1787; Theologia moralis, see Works, English ed.,
1887-95.)

SCHOLASTIC DOCTORS AND NATURAL LAW PHILOSOPHERS 103

it was eminently realistic, since it involved nothing beyond observation of facts and
their interpretation: it was a method of working out general principles from "cases’
somewhat akin to the method of English jurisprudence. Moral theology came in only
after the analytic work was done in each case, to subsume the result under one of
its rules.

It is not surprising, however, that to unsympathetic critics of scholastic work, scho-
lastic research into interest appeared in the light not only of "casuistry’ in a derogatory
sense of the term but even of a series of attempts to cover the retreat of the Catholic
Church from an untenable position by logical tricks or subterfuges, and to justify ex post
each fait accompli. The reader may judge for himself. But it is as well to point out a
fact that will seem to support that opinion. On the one hand, moral precept, however
immutable, will yield different results if applied to different circumstances; and capi-
talist evolution did create circumstances in which the cases that came under the pro-
hibition of usury rapidly decreased in importance. On the other hand, such an evolu-
tion will be inevitably paralleled by subterfuges of interested parties, who will try to
avail themselves of all the possibilities offered by a system of rules and exceptions that
grew increasingly complex; perhaps the most famous of these subterfuges was the abuse
of the element of more presently to be mentioned in the text, but there were many of
them. This parallelism cannot fail to impress the superficial observer, particularly if he
is not very well versed in either scholastic literature or economic theory. Moreover, we
are speaking of scholastic doctrine at its highest. It is of course not denied that the
ordinary clerical practitioners, like any bureaucracy, committed a great many mistakes
and fostered resort to subterfuges both by unintelligently restrictive interpretation of
the rules they were directed to apply and by well-meaning connivance at evasions.

Usury, then, was sinful. But what is usury? On the one hand, it does not
necessarily involve the exploitation of the needy: this element is morally rele-
vant in other respects but was not a constituent of the scholastic concept of
usury. On the other hand, usury is not always present when more than re-
payment of the sum lent is stipulated: simple exegesis of St. Thomas’ teaching
sufficed to justify compensation for the lender’s risk or trouble— particularly
evident in the purchase below par of notes — or compensation in cases where
the lender was deprived of his money against his will, as in cases of forced
loans, or of the debtor’s failure to repay at the stipulated time ( more debitoris).
Thomistic teaching even suggested Molina’s proposition that, since the lender
of any commodity is in any case entitled to receive back its full value at the
time of lending, more units might have to be repaid than were given ( esto
plus in quantitate sit accipiendum ), though no application was made of this,
so far as I know, to money loans. From all those cases emerged the principle
that a charge was to be considered as normal or unobjectionable whenever
the lender incurred any loss ( damnum emergens). Some doctors argued that
the lender in temporarily giving away his money always and inevitably suffers
such loss. But most of them refused to accept this view. Nor did the majority
admit that the gain the lender foregoes by lending ( lucrum cessans) is in it-
self a justification for making a charge. They did admit, however, that, as we
may put it, gain foregone turns into actual loss when the opportunity for
such gain is part of a man’s normal environment. This meant two things.
First, merchants themselves who hold money for business purposes, evaluating

104 II : BEGINNINGS TO ABOUT 179O

this money with reference to expected gains, were considered justified in
charging interest both on outright loans and in cases of deferred payment for
commodities. Second, if the opportunity of gain contingent on the possession
of money is quite general or, in other words, if there is a money market, then
everyone, even if not in business himself, may accept the interest determined
by the market mechanism. This proposition had to be handled with care, for
it evidently opened the door to all sorts of evasions. But it is no more than
a special case of the principle that everyone may, in justice, pay and ask the
current price for everything, and was not invented ad hoc: if it is not in evi-
dence in the thirteenth century and much in evidence in the sixteenth, this
is merely due to the fact that money markets had been uncommon in the
former century and became quite common in the latter . 31 Observe that when-
ever alternative opportunities of gain are normally available to everyone, the
argument from gain foregone will coincide with the argument from 'privation’:
foregoing gain is in this case precisely what the privation consists in. Observe
further that in all the cases mentioned justification rests on circumstances
that, however frequently or even generally they may prevail in a given en-
vironment, are logically accidental to the pure loan contract (mutuum), which
in itself was never held to justify interest. And observe finally that justification
was never, or hardly ever, based upon the advantages that the borrower might
reap from the loan; it was exclusively based on the disadvantages that lending
brought to the lender.

Dropping now the normative garb of scholastic interest analysis and the
moral doctrines that motivated their research, we may restate as follows the
causal -theories their research unearthed, on the understanding that the picture
cannot be quite satisfactory because the scholastic doctors did not much more
agree on the theory of interest than do we.

1. Interest, though construed on the more general model of loans of 'con-

31 This is no doubt a very imperfect account of a rich doctrinal development. Con-
siderations of space, however, make it impossible to present a more satisfactory one
which the interested reader will find in Professor Dempsey’s book. Also see A. M.
Knoll, Der Z ins in der Scholastik (1933). But a much discussed construction, associated
with the name of the famous Dr. Eck (1486-1543) and also favored by Navarrus and
Major, should be noticed, the triple contract, contractus trinus. It is, of course, licit
to enter into a partnership and to draw an income from it. Nothing prevents the part-
ner in a business from insuring his capital against loss; hence he may also do so with
his other partners in which case the price of the insurance will amount to a reduction
of his share in the profits. Finally, he may legally convert this reduced share in variable
profits into a constant annuity that will represent pure interest. This construction is in-
teresting from an analytic point of view because it exhibits the connection between
interest and business profits in a very instructive way. As a defense of usury it was,
however, rightly condemned. For either we accept the argument that the partner in
question has alternative business opportunities of the kind that justify the charging of
interest; then the construction is superfluous. Or we do not accept that argument; then
the failure of the second contract to reduce that partner’s share to zero (apart from a
remuneration of his work) would spell usury. The logical slip involved in Eck’s argu-
ment is worthy of the reader’s attention.

SCHOLASTIC DOCTORS AND NATURAL LAW PHILOSOPHERS 105

sumptibles/ is essentially a monetary phenomenon. There was no analytic merit
in this. The scholastic doctors simply accepted a surface fact exactly as had
Aristotle. They did sometimes relate interest on money to the returns of in-
come-bearing goods, land, mining rights, and the like that may be bought for
money. But this point — though used in some interest theories of the seven-
teenth and eighteenth centuries — was without analytical value because the
price of income-bearing goods and therefore the net return from them already
presupposes the existence of interest.

11. Interest is an element of the price of money. Calling it a price for the
use of money does not explain anything and at best restates the problem in
an unenlightening way. In itself, it is an empty phrase. Nor is the analogy of
interest with interlocal premia or discounts on money more than a restate-
ment of the problem. For these interlocal premia and discounts are explained
by risks and costs of transfers whereas pure interest, as distinguished from
compensation for risks and costs, is an intertemporal premium which the
analogy does not help to explain. The uncritical appeal to mere lapse of time
per se is valueless — circumstances are easily conceivable in which it would
fail to produce a deviation from zero interest. Though negative only, these
propositions are of great analytical value. They clear the ground and prove
that the scholastic doctors — in this respect much superior to nine-tenths of
the interest analysts of the nineteenth century — saw the real logical problem
involved. In fact, these propositions define it. This is why they should be
credited with having launched the theory of interest.

hi. Hence deviation of interest from zero is a problem the solution of which
can be found only by analysis of the particular circumstances that account
for the emergence of a positive rate of interest. Such analysis reveals that the
fundamental factor that raises interest above zero is the prevalence of business
profit — all the other facts that may produce the same results are not neces-
sarily inherent in the capitalist process. This proposition constitutes the main
positive contribution of scholastic interest analysis. Adumbrated before, it
was first clearly stated by St. Antonine, who explained that though the cir-
culating coin might be sterile, money capital is not so because command of
it is a condition for embarking upon business . 32 Molina and his contempo-
raries, while rightly insisting that money was 'in itself’ not productive and no
factor of production, yet accepted a similar view: they coined the significant
phrase that money was the Merchant’s Tool. Moreover, they quite understood

32 This, of course, was a frontal attack on Aristotle’s ‘sterility of money.’ It is inter-
esting to note that St. Thomas’ argument proffered a clue for this. After having taught
that there was no reason why money should ordinarily carry a premium, he went on to
say that there were secondary employments of money in which something might be
charged for it. This would be the case, for instance, if somebody lent money for the
purpose of enabling the borrower to deposit it as a pledge or guarantee ( loco pignoris).
St. Thomas certainly did not mean to include business loans in these ‘secondary uses,’
of money. But this was done in Jacobus Ferrarius’ Digressio resolutoria . . . (1623),
where the author went so far as to include all loans made for any legitimate purposes
whatsoever.

io6 ii : beginnings to about 1790

the mechanism by which this premium, if capitalist business be sufficiently
active and — relative to the rest . of the environment — sufficiently important,
will tend to become an all-pervading normal phenomenon'. And their ideas
on lucrum cessans and damnum emergens complement their analysis as re-
gards the supply side of the money market.

Further than this they did not go. Their theory of business profits in par-
ticular was not sufficiently developed to allow them to reap the full benefit
from the insight that led them to trace interest to profit as its source. Also,
being the first in this field, they groped for their generalizations rather than
stated them. In this prolonged process of groping they slipped up frequently
and used many inadequate and even faulty arguments. But if we are to treat
them as we treat other groups of analytic workers, merits prevail greatly over
shortcomings, especially if we give them credit, as we ought to, for much of
what successors and even opponents learned from their analysis.

But what, if that be so, becomes of the great battle on interest between
scholastic and anti-scholastic writers that is supposed to have raged in the six-
teenth and seventeenth centuries? So far as the history of economic analysis
is concerned, the only answer is that there was no battle. No analytic progress
was made and no new analytic ideas on interest were proffered for a long time
to come. Even the most famous leaders on the anti-scholastic side such as
Molinaeus or Salmasius 33 had nothing new to say: Molinaeus and Navarrus —
contemporaries roughly speaking — were about on a par in theoretical grasp
of the interest problem. Salmasius only reformulated the scholastic theory
about lucrum cessans from available business opportunities that we find in
Molina. So far as the moral issue was concerned, the Protestant theologians
and the laic lawyers differed among themselves on the subject of interest, but
were also content to repeat arguments forged by the scholastics, whichever
side they espoused. 34 But, in addition there was a legislative or administrative
issue, and it is this that accounts for the controversy in question. As we have

33 Molinaeus (Charles Dumoulin) has been discussed above. Salmasius (Claude de
Saumaise, 1588-1653) wrote a number of tracts on interest, of which it is sufficient to
mention two: De usuris (1638; but there seems to have been a previous ed., 1630) and
De foenore trapezitico (1640).

34 We may as well dispose of this matter once for all. Scholastic doctrine was taught
by Richard Baxter (1615-91; see, e.g., his Christian Directory). On a lower level, the
same holds for the considerable literature on interest that, representing the popular re-
action to the financial aspects of rising capitalism, denounced usury on purely moral
grounds. Here are a few English samples which, I think, are fairly representative:
Thomas Wilson, Discourse upon Usurie (1584, but there was an earlier ed., in 1572,
according to the Kress Library Catalogue; new ed., with introduction by R. H. Tawney,
1925). Philippus Caesar, General Discourse against the Damnable Sect of Usurers
(1578), purely moral invective; Anon., Death of Usury or the Disgrace of Usurers . . .
(1594); Anon., Usurie Arraigned and Condemned (1625). There were, of course, plenty
of sermons that I have not investigated. Roger Fenton ( Treatise of Usurie, 1612) may
stand for the defense of interest on a ground that was known to the scholastics but not
accepted by them as relevant to the moral issue, viz. the advantage that accrues to the
borrower.

SCHOLASTIC DOCTORS AND NATURAL LAW PHILOSOPHERS

seen, the scholastics held that interest had to be justified on grounds not in-
herent in the loan contract ( mutuum ) as such. But this amounted to saying
that each case, or at least each type of case, was on trial and not to be ap-
proved without investigation. Though they did not always object to secular
legislation that permitted interest , 35 it is easy to imagine what inconvenience
this principle must have caused after interest had become a normal phenom-
enon. The question naturally arose, that was in the end answered affirmatively
by Popes Pius VIII and Gregory XVI, whether in such circumstances an over-
complicated set of rules, however correct logically, should not be replaced by
admitting a sweeping presumption that the acceptance of a market rate of
interest was all right. This is really all that a steadily increasing number of
laical and even clerical writers demanded. But they did not put it this way,
partly because they were not able to understand the finely spun logic of the
scholastics and therefore set it down as mere sophistry, and partly because,
most of them being enemies of the Catholic Church or the scholastic doctors
for political and religious reasons, they could not bring themselves to argue
the question of policy without sneers or invective. This created the impression
that there was a battle between old and new theoretical principles which,
Since it distorts the picture of a phase in the history of economic analysis,
it seemed worth while to dispel.

5. The Concept of Natural Law 1

We must now attend to a subject the consideration of which we have twice
deferred. It is beset with difficulties and an inexhaustible source of misunder-
standings which cannot be straightened out entirely in the available space. An
appeal for the patient co-operation pf the reader is, however, justified by its
fundamental importance for the origins and early history of all social sciences.
For the first discovery of every science is the discovery of itself. Awareness of
the presence of a set of interrelated phenomena that give rise to 'problems'
is evidently the prerequisite of all analytic effort. And in the case of the social
sciences, this awareness shaped itself in the concept of natural law. We shall
try to disentangle its various meanings and to catch their subtle changes and
associations.

35 St. Thomas even went so far as to say (loc. cit. ad tertium ) that, in the condition
of imperfect man, many useful things would be impeded ( multae utilitates impediren-
tur) if all sins were strictly forbidden by human law.

1 From the large literature on the subject, I select for the reader’s general informa-
tion Sir Frederick Pollock’s 'History of the Law of Nature' (in his Essays in the Law,
republ. 1922). Also see P. Struve, 'L’ldee de loi naturelle dans la science economique, 7
Revue d’economie politique , July 1921. The only study I can commend for correct ap-
praisal of the work done under the auspices of the natural-law idea (though of the
work of the successors of the scholastics rather than of the scholastics themselves) is
O. H. Taylor's 'Economics and the Idea of Natural Laws,’ Quarterly Journal of Eco-
nomics, November 1929. Vinogradofi’s well-known Outlines of Historical Jurisprudence
(1920-22) may prove helpful.

105 II : BEGINNINGS TO ABOUT 179O

(a) The Ethico-Legal Concept. The scholastic doctors themselves traced
their concept of natural law back to Aristotle and the Roman jurists, although,
as we shall presently see, they made of it something totally different. Aristotle,
speaking of justice, distinguished the ‘naturally just’ (tpucrixov 5(«aiov) from the
‘institutionally just’ (vo|aucov 8ixaiov) (Ethics v, 7). But in that passage, the
term Natural must be understood in a very narrow sense. Aristotle there means
to refer only to forms of behavior that are enforced by very general necessities
of life that man shares with other animals. But elsewhere he used the term
Natural in a much wider sense, in fact in all the senses it ever acquired with-
out distinguishing, let alone defining, them clearly. And the Natural in the
wider senses, also, he associated with the Just, thus setting an example for
ages to come — even the English ‘classical’ economists sometimes mixed up
the natural and the just — though he was not quite consistent about it: he
sometimes approved of what he did not call natural; but he never disapproved
of anything to which he affixed this label.

The Romans, not much given to philosophizing, simply accepted the Aristo-
telian definition: Gaius ( Instit . 1, 2) said naively that natural law ( jus naturale)
‘is what nature has taught all animals’ ( quod natura omnia animalia docuit ).
Ulpian said the same thing. They simply accepted this Natural Law as a source
of legal rules that was just as good as, and in fact superior to, any of the
sources of positive law, statutory and other. But there are two important points
to be noticed in addition. First, there developed a tendency among Romans of
literary propensities, such as Cicero, to affix the term jus naturale to what was
officially called jus gentium. The reason was that the latter, embodying as it did
rules of equity, seemed somehow more ‘natural’ than the formalistic civil law.
The reader should observe that this sense of natural law, the sense that ulti-
mately prevailed (while, as we have seen, the term jus gentium acquired in the
seventeenth century the meaning of Law of Nations) is not identical with the
sense defined by Aristotle in Ethics v, 7, though it has more to do with the
other senses in which Aristotle actually used the word Natural. Second, the
Roman jurists also associated different meanings with the words Nature and
Natural, of which one is important for us: 2 the rei natura or the nature of
the case. For instance, when we are confronted by a legal question arising out
of a contract, we must first find out what the ‘nature of the business’ was that
the parties to the contract intended to effect. At first sight, this nature of the
case seems to have nothing to do with natural law in any sense — as many legal
treatises try to explain that are written by jurists who, under the influence of the
historical school, have come to hate the very phrase Natural Law.. But we
shall presently see that it has a lot to do with it.

St. Thomas 3 accepted the Aristotelian definition in the legalist formulation

2 Other meanings are embodied in such terms as naturale negotii and naturalis
obligatio with which I do not want to bother the reader. All of these and other
meanings, though distinct, are of course related.

3 What may be termed the Thomistic theory of law, natural and positive, is pre-
sented in Summa n, 1, quaest. xcrv, xcv, and xcvii; 11, 2, quaest. lvii, art. 2 and 3.
Interpretation is not easy. My thesis of the mutability of natural law is gleaned from

SCHOLASTIC DOCTORS AND NATURAL LAW PHILOSOPHERS IO9

of the Roman Jurists but merely as a matter of form. Actually, his attempt to
put logical order into Aristotle's various uses of it produced something that was
neither Aristotelian nor Roman. 4 In the first place, natural law or the ‘naturally
just’ ( lex naturdis, justum naturde ) may be the set of rules that nature im-
poses upon all animals and also may be, in the sense of Aristotle’s definition,
immutable on principle. But since these rules work out differently in different
conditions of time and place and with different people, and since it is possible
to add to them or to subtract from them, even this natural law became his-
torically variable in practice (see, especially, Summa n, 1, quaest. xciv, art. 4
and 5). In the second place, there was another meaning of natural law that St.
Thomas explains only by examples but which really equates natural law to the
set of rules that conform ( habet quondam commensurationem ) to social neces-
sity or expedience, the historical relativity of which St. Thomas never tired of
stressing. Natural law in this sense is almost, though not quite, identified with
jus gentium in the Roman official sense. In the third place, it is held that
human positive law necessarily consists either in deductions from this natural
law or in adjustments of its rules to particular conditions. An enactment that
violates any rule of this natural law does not make valid law at all. The reader
will notice the political implications of this doctrine.

To make a long story short, we leap from St. Thomas to Molina. Molina
clearly identified natural law, on the one hand, with the dictates of reason
( ratio recta), and with what is socially expedient or necessary (expediens et
necessarium ), oil the other. These propositions, in themselves, are nothing but
Thomism formulated more pointedly. But he took a further step (tract. 1, disp.
4): after repeating the Aristotelian definition he added, apparently by way of
explaining its meaning: ‘that is to say,’ the naturally just is that which obligates
us by virtue of the nature of the case ( cuius obligatio oritur ex natura rei ). But
this is not at all what Aristotle meant. Molina does not interpret his meaning
but adds a new one: he definitely married natural law to our rational diagnosis,
with reference to the Common Good, of the cases — whether individual con-
tracts or social institutions — which we observe in research or practice. Molina’s

an argument that purports to prove the contrary but so qualifies and hedges in the
principle that the subsequent statement in the text seems warranted. St. Thomas
also argued that natural law was the same apud omnes and again the practical upshot
is relativity: his emphasis upon what is loco temporique conveniens suffices to estab-
lish this, though different interpretations may very well be appropriate from philo-
sophical or theological standpoints.

4 Many critics will disagree. They will point to the references to Aristotle and
Ulpian by which St. Thomas supported his exposition. Very likely, these critics and
I will have to agree to differ, because no agreement can be expected in matters into
which the personal equation of interpreters must inevitably enter. The personal equa-
tion in this case refers to the importance we attach to passing remarks, obiter dicta,
hints. I admit that pointers to St. Thomas’ teaching can be found in Aristotle and the
Roman jurists (also in Cicero). But their weight appears to be so great only because
it is precisely such passages that St. Thomas brought together. Taken independently
of what he made of them they amount to very little.

II : BEGINNINGS TO ABOUT 179O

view about 'the nature of natural law’ is mentioned only as an example of
what was the general opinion of the doctors in his and even an earlier time.
De Soto’s concept of the Command of Reason ( rationis ordinatio ) amounts to
the same thing.

..One way of putting this result is to say that all speculative or metaphysical or non-
empirical elements had evaporated from Molina’s natural-law concept, and that there
was nothing left but reason applied to particular facts, though, so far, applied from
the normative standpoint. Unfortunately, however, the subject is more complicated
than this. The doctrine of the scholastics also contains the sources of two currents of
thought that are the very opposites of sober matter-of-factness. These must be men-
tioned because they contributed substantially to the prevailing confusion about natural
law. First, there is the association of natural law with primitive conditions. We have
seen that, following Aristotle, the doctors, like A. Smith, frequently made use of a
pseudo-historical method of exposition: they liked to start, in explaining a social phe-
nomenon such as property or money, from an imaginary 'early state’ of society. They
did not, so far as I can see, make any improper use of this construction. But the
Natural was the Just and if the Natural is particularly clearly revealed in primitive con-
ditions, as that method of exposition implies, then primitive conditions become just
as well as natural. From this standpoint starts an uninterrupted line that runs right
into Rousseau’s glorification of the natural, in the sense of primitive, state of humanity
—an association that is entirely immaterial but did not add to the standing of the con-
cept. The scholastics themselves, needless to say, displayed no tendency to glorify primi-
tive conditions.

Second, there is a relation between the scholastic natural law and the Rights of Man,
droits de Vhomme, and similar eighteenth-century constructs including the laborer’s
natural right to his product. The existence of this relation cannot be doubted. For the
natural law of the doctors was considered as a source of valid legal rules about rights
and duties, and all the framers of the droits de Vhomme pretended to do was to draw
on this source for the Command of Reason or rationis ordinatio with respect to the
political rights of civilized man. Moreover, some items in the list of these rights are
clearly recognized by scholastic writers. And yet, the speculative character of these and
similarly conceived rights is a commonplace. It is precisely this sort of thing, more
than anything else, which accounts for the distaste many of the best economists have
felt for the concept of natural law, and which has made it a byword for unhistoric
and unscientific metaphysics. So much is this the case that, with some of us, a propo-
sition need only be linked up with natural law in order to be put out of court; in
fact, one of the most common reasons for wholesale rejection of economic theory to
this day is that it is nothing but an offshoot of unscientific natural-law philosophies.
We have, therefore, every motive for looking more closely at the indictment. This will
be done under the next heading.

(b) The Analytic Concept. So far we have been inquiring into the develop-
ment of the natural-law concept in its role within the ethical and legal sphere
or, what amounts to the same thing, of natural law considered as a source of
morally and legally valid imperatives. After what has been said in preceding
sections of this chapter, it is easy to find the bridge to the natural-law concept
in its analytic role. In fact, we need only generalize our findings in the special
case of the theory of interest. For this purpose, let us ask the question: why

SCHOLASTIC DOCTORS AND NATURAL LAW PHILOSOPHERS 111

should Aristotle have called certain forms of behavior 'naturally jusf in the
narrow sense of his definition? Evidently because these forms of behavior were
necessary conditions of the survival of (as he thought) animal life in general.
A similar answer will hold true for the 'naturally just’ in the wider sense that
covers the necessities of social life in the actual historical circumstances of any
given human society. Therefore, in order to find out what is naturally just in
any particular case, it is first necessary to analyze these circumstances. The gen-
eralizations that we may derive by so doing can be called natural law in the
analytic sense: the normative natural law presupposes an explanatory natural
law. The former is nothing but a particular kind of value judgment passed
upon the facts and the relations between facts unearthed by the latter. The
two are logically as distinct and practically as distinguishable as are the value
judgments and analytic propositions of any economist. For instance, A. Smith
had a theory of wages that consists of statements of fact and of generalizations
derived from them. But he also said ( Wealth , Bk. i, ch. 8) that 'the produce
of labour constitutes the natural recompence or wages of labour/ Since by
produce of labor he there meant the whole product, and since, on his own
showing, the wages do not normally amount to that, we have here clearly a
natural-law proposition in the philosophical or value-judgment sense. But
when we are interested in scientific analysis only, we have no difficulty in dis-
carding this sentence. Or, a modern economist may both analyze the phe-
nomenon of price discrimination and pass a value judgment upon it. If he does
the latter by calling it unjust, he is adopting a natural-law rule that does not
differ, in this case, from that of the scholastics. If he approves of the Robinson-
Patman Act, which forbids discrimination, he does what the scholastics would
have done in their day by saying that this act is valid law because it conforms
to an imperative of natural law. We may indeed call this, or any value judg-
ment of any kind, unscientific or extrascientific. But there is no point in throw-
ing out the analytic baby with the philosophic bath -water. And this is precisely
what is being done by those who dispose of the economics of the scholastic
doctors or their laical successors merely by pointing to its associations with a
system of moral and legal imperatives — of natural laws in the analytic sense
because of its association with a system of natural laws in the normative sense.

The main objection raised against natural-law jurisprudence and eco-
nomics by the historical school was, however, not this but a different
though related one: natural law was supposed to be entirely divorced
from historic reality. We have seen that this objection is unfounded so
far as the scholastic doctors, who always stressed the historical relativity
of social phenomena, are concerned. It is better founded in the case of
some of their successors. But it should be observed that, whether well or
ill founded, this objection touches only the use of the concept and not
the concept itself. Any concept can be faultily used. Moreover, any
theory may be inadequate or wrong. In particular, it may claim for its
propositions an undue amount of generality. The theoretical views asso-

112

n: BEGINNINGS TO ABOUT I79O

dated with the droits de Vhomme, for instance, certainly did. But an in-
adequate — or even wrong — scientific theory is still a scientific theory. On
the other hand, we shall understand that the absolute claims made in
the eighteenth century on behalf of certain legislative programs, without
due reference to conditions of time and place, fostered all sorts of mis-
understandings of the true character of natural-law analysis.

I have said that social science discovered itself in the concept of natural
law. This will be particularly clear if we visualize it in the form of
Molina's definition — as distilled from the 'nature of the case,’ the rei
natura. Taken in this sense, the ideal of natural law embodies the dis-
covery that the data of a social situation determine — in the most favor-
able case, uniquely — a certain sequence of events, a logically coherent
process or state, or would do so if they were allowed to work themselves
out without further disturbance. This is putting it in modern terms. But
the reason why we may attribute this idea, in however rudimentary a
form, to the scholastic doctors is in their concept of justice. This
(Aristotelian) concept of justice St. Thomas explained by relating the
word 'justice' to adjustment and the word 'just' to adjusted. Just is
what is adjusted, or conforms, to — what? The only answer we can give
if we take the clue proffered by Molina’s rei natura is: to the social
pattern involved, as viewed from a utilitarian Common Good or social
expediency. Hence the equations between just and natural, natural and
normal . 5 Hence also the ease with which they passed from normative
doctrine to the analytic theorem and vice versa, and with which we can
pass, for example, from their just price to the price of (short- or long-
run) competitive equilibrium. Hence, ' finally, the relation — not, of
course, amounting to identification — that subsists with them between
justification and explanation. Therefore, while it is true, as a matter of

5 This relation between natural in the sense of normal and natural in the sense
of just explains why the term Natural survived so long — almost until Marshall — in
the former sense and also why some authors, who had certain philosophical ideas
about 'natural liberty,' continued to link it with the just. But this is not all of it.
The proviso about absence of disturbance that occurs in our text a few sentences
earlier indicates a somewhat different but related meaning of such phrases as natural
prices, natural wages, and so on: in these phrases Natural simply means that disturb-
ances other than such as may have been included in the data are assumed to be
absent, or that we intend to investigate a process or state as it would be if left to
itself. Also, it is, of course, absurd to look for natural-law philosophies wherever the
word Natural occurs: 'naturally' in particular simply means the same as 'obviously.'
We do not commit ourselves to any philosophy when we state that a man is 'naturally'
offended after having been called a fool. It seems worth while adding that the term
Normal must not be understood in the statistical sense but rather in the sense in
which we speak of normal eyesight: a physiologist, from his grasp of the rei natura,
in this case of the structure of the human eye, may arrive at a concept of normality
that may be far removed from any statistical measure of the actual eyesights observable
in any given population.

SCHOLASTIC DOCTORS AND NATURAL LAW PHILOSOPHERS 11 3

history, that modern economics stems from the scholastic writers, as its

critics hold, it is also true that this fact does not constitute an objection . 6

(c) Natural Law and Sociological 'Rationalism, i. A comment on philosophi-
cal rationalism. In order to exhibit a point that is important for us, we select
the following meaning of the protean word Rationalism. We call Philosophi-
cal Rationalism the belief not only that our mind (‘natural reason’) is the
source of truths that are antecedent to experience, but also that our mind is
able to produce results about supermundane subjects, such as the existence of
God . 7 In this sense, St. Thomas was a metaphysical rationalist because, unlike
other (mainly Scotist) scholastics, he believed that the existence of God can
be logically, proved. He was not a metaphysical rationalist in the sense in
which this phrase came to be used in the seventeenth and eighteenth cen-
turies, namely, that human reason was the only admissible source of knowl-
edge in matters of theology, for he also admitted revelation. Now, if a man
believes that, also by the unaided powers of his own logical apparatus, he can
prove that God does not exist, he is indeed, in this particular matter, contra-
dictorily opposed to St. Thomas. But there is a point in which they are
nevertheless brothers in the spirit: the rationalist deist and the rationalist
atheist are both rationalists in the sense defined and allies against anyone who
does not trust his reason to soar as high as that, in particular against any
logical positivist of today. Of course, there is nothing surprising in this. It is a
most common occurrence that people who hold different views, nevertheless
recognize, and appeal to, the same authority. But it was necessary to advert
to this fact because it will help us to see continuity in doctrinal development
where, without its help, we should see nothing but break and antagonism.

ii. Sociological rationalism. Scientific activity is often looked upon as the
standard instance of rational activity in the sense that the worker, whatever
his ultimate aim, allows himself to be guided by the rules of logical inference.
This is indeed not quite accurate: precisely the strongest achievements in
science proceed not from observation or experimentation and orderly logic-

6 Some historians of economics have believed that the normative element acquired
added significance owing to its theological nature (observe, by the way, the meaning
of 'nature’ in this sentence). This has been held to be relevant even for an appraisal
of the physiocrat system (see below, ch. 4, sec. 3). This, however, is another error.
For the scholastic order of things, physical and social, is entirely autonomous within
the scholastic theology, the only influence of which — beyond ethical imperatives —
concerns the problems of miracles and of creation. Apart from miracles and creation,
this order is to be understood entirely by the light of human reason. No doubt, in
analyzing it, reason is analyzing part of God’s works. But since God’s plan in any
case includes any amount of 'evil,’ not even evaluation is seriously restricted by asso-
ciation with theology, and analysis is left entirely free. For discussion of an exactly
opposite error of interpretation, see the next section.

7 I have to apologize for the innumerable shortcomings of this definition. It is,
however, brief and it is sufficient for the purpose of making the one point that is
relevant to our subject.

114 11 : BEGINNINGS to about 1790

chopping but from something that is best called vision and is akin to artistic
creation. Still, results have to be 'proved’ by the logical or rational procedure
dictated by professional standards and this suffices to impress rationality in
this sense — which has nothing to do with the sense discussed above — upon
the stock of scientific knowledge that we possess at any time. But this con-
cept of scientific rationality refers only to the attitude of the analysts and not
to the behavior of the object analyzed. The alienist may ‘rationally’ investi-
gate the reactions of madmen, the sociologist may rationally investigate war
psychologies or the behavior of maddened crowds, without implying that the
words and actions observed ‘make sense.’ So far as this goes, we are all of us,
including the scholastic doctors no less than their worst enemies, of necessity
Methodological Rationalists, that is, we all believe that some rational methods
are applicable to the description of social phenomena. Generalizations result-
ing from the application of such methods may be called natural laws, and this
is the only indispensable relation that exists between the natural-law concept
and the ‘right reason’ or ratio recta.

But Sociological or Economic Rationalism means something else. Just as we
may look upon the physical universe — in the way first made fashionable by the
Stoics — as a logically consistent whole that is modeled upon an orderly plan
— so we may look upon society as a cosmos that is possessed of inherent logical
consistency. For us, it matters little whether this order is imposed upon it by
divine will — directed to some definite ends by an invisible hand — or is in-
herent merely in the sense that the observer discovers in it plan and purpose
that are independent of his analytic rationality, because in either case noth-
ing is allowed to enter that ‘rational’ cosmos, but what comes within the
grasp of the light of reason. We must, however, further distinguish Objective
Sociological or Economic Rationalism which does not, and Subjective Socio-
logical Rationalism which does, postulate that this order or plan is or can be
realized by the rational action of the individuals or groups that compose so-
ciety. Both must evidently be attributed to the scholastic doctors as well as to
most of their successors down to our own time. And this lends additional color
to their concept of Natural Law and establishes another relation between it
and their ratio recta that is quite distinct from the one established in the pre-
ceding paragraph — the relation formulated for all times by St. Thomas: rationis
autem prima regula est lex naturae (Summa, n, 1, quaest. xcv, art. 2).

This, of course, is inacceptable from the standpoint of modem positivism. It consti-
tutes in fact the one justification for finding ‘speculation’ not only in the normative
but also in the analytic concept of natural law. All the more important is it to repeat
that sociological or economic rationalism bears only upon the interpretation of natural-
law propositions and not necessarily upon their content. We may drop the former and
retain the latter. It is true, however, that the postulate of subjective rationalism em-
bodies an exaggerated opinion of the explanatory value of rational action and tempts
us into placing undue confidence in teleological arguments and into similar errors. This
is especially serious if associated with a habit economists have of setting themselves
up as judges of the rationality not only of means but of ends (motives), that is to say,
if they approve, as rational, of ends (motives) that seem ‘reasonable’ to themselves and

SCHOLASTIC DOCTORS AND NATURAL LAW PHILOSOPHERS 1 1 5

dispose of all others as irrational. The scholastic doctors are guilty on all these counts.
But it is interesting to note that so are we: in this respect, too, as in so many others,
we are their heirs. No better example can he found to illustrate this point than Alfred
Marshall.

iii. Ratio recta and la raison. Observe that sociological or economic ration-
alism need not lead to ‘conservative' attitudes in practice. Like metaphysical
rationalism it cuts both ways. We may indeed infer from our belief in the
existence of an economic order or cosmos that all is always for the best in the
world as it actually is — the view that Voltaire ridiculed in the figure of Dr.
Pangloss (in Candide). But we need not assume that the rational order of
things actually exists in the things as they are. It is sufficient to believe in a
rational order that exists only in the realm of reason and that reason itself calls
upon us to assert as against a deviating reality. This is the meaning sociological
or economic rationalism carries with all reforming groups who propose ‘to
apply reason to social phenomena' — with the men of the Enlightenment
whose cult of la raison was of this type, with the Benthamites, and with most
liberals, radicals, and socialists of today. And all of them descend from the
scholastics. For the political sociology of the doctors is by itself sufficient to
prove that they held the second and not the first view concerning the social
cosmos or the natural law. All the differences in the results of the application
of the ‘light of reason’ — amply accounted for as they are by differences of
standpoints and circumstances — are immaterial so far as the point under dis-
cussion is concerned. It is the same methodological principle that pervades all
sociological and political thought that is not anti-intellectualist. The Greeks
were the first to give it articulate expression. But the scholastics were the first
to do so in the Germanic world. Whatever la raison revolted against in the
eighteenth century, it was not a mode of thought. Epistemologically, there is
perfect continuity, and ratio recta (equal to naturalis ratio ) is the mother of
la raison.

This need not surprise or shock anybody. The sword that was forged by
angels might easily fall into the hand of devils. And the sword that was
forged by devils might be wrenched from them by angels — only that, in this
case, the devils are entitled to the kind of recognition that every civilized
socialist extends to the achievements of capitalism.

6. The Philosophers of Natural Law: Natural-Law Analysis
in the Seventeenth Century

We now part company with the scholastic doctors in order to consider the
work of their immediate successors. The eternal questions about the govern-
ment of mankind continued to be asked, of course, and others arose during the
seventeenth century from the welter of new political patterns and problems.
Especially in England, these produced a torrent of pamphlets of all types that
ranged all the way from closely reasoned argument — I suppose that the writ-
ings of (George Savile, Marquess of) Halifax, the ‘trimmer,’ will always stand

110 II : BEGINNINGS TO ABOUT 1790

out as the peak achievements of this literature — to rantings nourished on apoc-
alyptic quotations. But the craving for answers was also satisfied, on the level
of general principle, by a group of writers whom we shall call Philosophers of
Natural Law . 1

(a) The Protestant or Laical Scholastics , Though separated from the scho-
lastics by the religious split and by the change in the political scene, they
were of the same professional type as the scholastics and they went about
the same task, by the same method, in much the same spirit — so much so,
in fact, that the best way of characterizing them is to call them Protestant
(or laical) scholastics. They would not, of course, have agreed with this diag-
nosis. Nor is the characterization likely to appeal to modern students of either
Catholic or Protestant or ‘liberal’ sympathies. They all emphasize the differ-
ences in religious and political beliefs or doctrines and, from their standpoints,
are quite right in seeing contrast where we see similarity. It cannot be too often
repeated that in this book we are concerned only with the methods and re-
sults of analysis and that everything else comes in only so far as it sheds light
on them. And these methods and results do not differ substantially from those
of the late scholastics. This does not mean that the philosophers of natural
law copied the scholastics without saying so. Though in many cases scholastic
influence is clear beyond reasonable doubt, there presumably was also redis-
covery or development from the same sources— -the Roman jurists in particular.

The current of thought that the philosophers sponsored was much too im-
portant to leave any educated person untouched. Moreover, as will become
clear presently, they were but a link in a sequence that runs far into the
nineteenth century. For both reasons it is impossible to speak of them as a
definitely delimited group. Just now we shall exclude not only all those
authors whom it is usual to appraise as mere economists but also all those
contributions that do not bear any relation to the philosophy of natural law,
even though the men who wrote them belonged to the group. On this under-
standing, it will suffice to mention a very few representative seventeenth-cen-
tury names: Grotius, Hobbes, Locke, Pufendorf.

Hugo Grotius or Huigh de Groot (1583-1645, De jure belli ac pads, 1st ed., 1625;
2nd rev. ed., 1631) was first and last a great jurist whose fame rests upon his out-
standing performance in international law. He dealt but briefly with economic subjects,
such as prices, monopolies, money, interest, and usury in Book n, ch. 12 — very sensibly
no doubt but without adding anything of note to the teaching of the late scholastics.

Thomas Hobbes (1588-1679; besides the Leviathan (1651), De dve (1642) and De
corpore politico (1650) should be mentioned; Sir Leslie Stephen’s biography may be
recommended as one of the best sketches of the cultural backgrounds of that time) was
an Oxford man of the private-tutor type and, first and last, a political sociologist. He
was not more interested in economics than was Grotius, though he also touched upon
economic subjects, especially money. His importance for us is due not so much to the
powerful originality of his political philosophy (which really fits in better with the sub-
ject of the next chapter) but rather to the fact that, more than any other philosopher
of natural law, he was open to the incipient mechanistic materialism of his time and

This term I have adopted on the advice of Professor A. P, Usher.

SCHOLASTIC DOCTORS AND NATURAL LAW PHILOSOPHERS 117

that he transmitted its influence, particularly through his ethical and psychological (sen-
sationalist) teaching, to the social sciences. It is relevant to note that though he was
not a good, let alone creative, mathematician and physicist, he took a more than dilet-
tantic interest in both these fields; and that all this did not prevent him from making
several excursions into speculative theology besides using theological arguments and
biblical quotations within his sociological analysis.

John Locke, the philosopher (1632-1704; a first and incomplete collection of his
works appeared in 1714, a nine- volume one in 1853; there are many lives), was also a
product of Oxford. He started his career by tutoring and lecturing and then entered
the civil service, in which, under the wings of Whig protectors (whom he furnished
with advice and ideologies), he eventually rose to a seat in the Board of Trade. His
work is of first-rate importance for us on a number of counts. First, as a philosopher
in the narrow sense of the word, he led the empiricist tendency to victory first in Eng-
land and then on the Continent, especially in France, as against Cartesian rationalism
(the decisive work was his Essay concerning Human Understanding, publ. 1690). This
was indeed a break with the scholastic tradition (Aristotle) and a quite decisive one.
The reader should reflect, however, that this does not imply that there was a similar
break in political or economic theory: it is essential to keep these things distinct. ’ Sec-
ond, as an advocate of (qualified) tolerance, of the liberty of the press, and of ex-
tended education, Locke was instrumental in building up the general scheme of later
political liberalism, which fact must be mentioned in passing because of its relation
to economic liberalism. Third, as a political theorist (see especially his Two Treatises of
Government , publ. 1690) Locke may claim a front-rank place among the philosophers
of natural law, though he added little to Grotius and Pufendorf. Fourth, as an econo-
mist (see below, ch. 6) he made significant contributions which will, however, be dealt
with in another connection because they stand in no relation to either his philosophy
or his political theory. Finally, we must again note his theological interests (see espe-
cially his Reasonableness of Christianity, 1695).

Samuel von Pufendorf (1632-94) was a jurist of the academic type and successively
professor at the Universities of Heidelberg, Lund (Sweden), and Berlin. He was not
much more than a follower of Grotius. But he wrote a treatise that became a textbook
of international reputation and sums up and represents the whole structure of the social
science of the philosophers of natural law much better thah do the works of the greater
men mentioned before: De jure naturae et gentium, libri octo (1st ed. [the one used],
1672); more important than his earlier Elementa jurisprudentiae universalis (1660). It
is the work to consult to get a general idea of the range and level of that type of
social science. Moreover, Pufendorf went much further into economics than did Grotius
(Book v, chs. 1-8), though he still does not seem to me to have added much to the
stock of knowledge and to the analytic apparatus of the late scholastics. But he pre-
sented the material in a systematic form. Characteristically enough, he also wrote a
theological tract: De habitu christianae religionis ad vitam civilem.

Other names might be mentioned, among them some the reader is likely to miss.
But the great name of Leibniz and that of his faithful henchman, Christian Wolff, are
left out advisedly: they were polyhistors, of course, and greatly interested, among other
things, in the economic events and policies of their day; but they made no contribu-
tion to our subject. However, perhaps I should have mentioned Thomasius (1655-1728)
because his writings shed interesting light on the concept of natural law as used by
the group.

Exactly like the scholastics, the philosophers of natural law aimed at a
comprehensive social science — a comprehensive theory of society in all its

1 1 8 II : BEGINNINGS TO ABOUT I 79 O

aspects and activities — in which economics was neither a very important nor
an independent element. This social science of the philosophers first appeared
in the form of systems of jurisprudence that were similar to the scholastic
treatises De justitia et jure: Grotius and Pufendorf were primarily lawyers and
their treatises are primarily treatises on law. They dealt with legal and political
principles for which very general validity was claimed on the ground that they
were natural in the sense that they derived from general properties of human
nature and not, like positive law, from the particular conditions of individual
countries . 2 And all the rest of what has been said in the preceding section
about the methodological character and the various meanings of natural law
of the late scholastics, particularly on the relation between its normative and
its analytic aspect, would now have to be repeated for the natural law of the
laical philosophers. But though it is grossly inaccurate either to ascribe to the
latter the conception itself and its exploitation for purely analytic purposes, or
to style them as innovators who rose against scholastic methods of thought,
there are several contributions of theirs to record, some of them more felicitous
than others.

(b) Mathematics and Physics. The philosophers of natural law lived in the
heroic age of mathematics and physics. Spectacular discoveries in what for the
general public — though not for us — was the ‘new experimental philosophy'
were attended by no less spectacular popularity of physics, even with mere
men of letters and great ladies. First in Italy, then everywhere else, experi-
menters and mathematicians gathered in order to discuss results and fight out
differences; but their meetings drew the curious who wished to have things
explained and were welcomed because of the assistance they were able to
render financially and otherwise . 3 Those successes and this fashion were not
lost upon the philosophers of natural law. They — or some of them — looked
at their tools and wondered whether they did not after all bear some similarity

2 Hobbes, Leviathan , r, chs. 14 and 15, enumerated 19 such principles which he
called natural laws. The ‘science’ of these laws he called Moral Philosophy, a term
that will presently be introduced in a different sense.

3 For our purpose, it will suffice to mention the example of the English Royal
Society, chartered, after having existed informally for about twenty years, in 1662 —
King Charles II took a dilettantic but intelligent interest in it. For a century to come,
it was precisely such a gathering of professional physicists and interested laymen. Sir
Isaac Newton (1642-1727) was president from 1703 to his death and published his
P hilosophiae naturalis principia mathematica (1687) under its auspices. Its organ, the
Philosophical Transactions, began to appear shortly after the granting of the charter.
The term Natural Philosophy was used to denote what we call the physical (as dis-
tinguished ,from social) sciences until the first decades of the nineteenth century. This
use of the word ‘natural’ further contributed to confusion.

It was, I believe, the curiosity awakened by the achievements of the physical sci-
ences which, spreading beyond its original habitat, created a demand for a type of
work that was substantially new, the encyclopaedia. The first achievements in this field
were Pierre Bayle’s (1647-1706) Dictionnaire historique et critique (1697) — the fore-
runner of the much more comprehensive work of the encyclopedistes of the eighteenth
century whom we shall mention later on— and John Harris’ Lexicon technicum (1704).

SCHOLASTIC DOCTORS AND NATURAL LAW PHILOSOPHERS 119

to those of the victorious physicists; Pufendorf professed to use a methodus
mathematica, though actually he did not do so. Hobbes declared that ‘civil
philosophy’ — a term clearly used for the sake of the parallelism to natural
philosophy in the sense of physical science — dated from the publication of his
own book, De cive (1642), and that he was the first to apply to this civil
philosophy the methods of Copernicus and Galileo (which he, however, con-
ceived of as deduction from an abstract and universal ‘law of motion’). This
sort of thing, mere talk though it was, had a most unfortunate consequence.

We have seen that later critics, mainly those in sympathy with the historical school,
attacked the natural-law concept on the ground that it was metaphysical and specu-
lative. Other nineteenth-century writers who took that talk at its face value, as critics
are apt to do, condemned it as too ‘naturalist,’ that is to say, as implying an attempt
to copy physical methods of analysis. It even happened that the same critic raised
both objections, which, in addition to being unfounded, are mutually exclusive. So the
unfortunate concept of natural law eventually met disaster under fire from two oppo-
site quarters. Or rather, the phrase did; for the idea lived on.

It cannot even be asserted that the laical philosophers were less theology-minded
than the late scholastics, though theirs was, of course, a different theology. They wrote
books on theological questions. They quoted scripture in support of their arguments.
The fourth Part of Hobbes’s Leviathan (1651) is entitled ‘Of the Kingdom of Dark-
nesse’ and contains a chapter on Daemonology, though the demons are no doubt re-
duced to a symbolic existence as are angels in the third Part.

(c) Economic and Political Sociology. Into this conception of human nature
the philosophers of natural law introduced elements which, though not en-
tirely new, received an emphasis that was. The more important of these are
due to Hobbes. The scholastic doctors had implied that private property owes
its origin, in part, to the necessity of avoiding a chaotic struggle for goods,
and government its origin to the necessity of enforcing peace and order. But
they did not go as far as to speak of an original war of all against all ( bellum
omnium contra omnes ) or of every man’s being a wolf to every other man
(homo homini lupus). This sort of thing did not become general doctrine and
can hardly be called an analytic improvement. Similarly, the social contract,
more delicately adumbrated by the doctors and by Grotius, came out with
brutal naivete in Hobbes’s system. In the Leviathan (11, chs. 17 and 18) he lets
a commonwealth or civitas, ‘that great Leviathan,’ actually be generated by an
agreement or covenant, which everyone enters into with everyone else for the
purpose of transferring each one’s right to govern himself to a man or an
assembly of men. This doctrine, restated in its baldest as well as most influential
form by Locke, did command almost general assent. But the omnipotence with
which Hobbes invested this government did not; Locke in particular was in no
mind to argue that the subjects cannot change the form of government, and
that the power of the government cannot be forfeited. In any case, the thesis
of governmental omnipotence has no analytic standing. For it is not, like
some of the juridical arguments of the doctors and the philosophers, the cloak
of an analytic proposition, but just a juridical argument and nothing else;
Hobbes simply deduced it from the imaginary covenant by arbitrarily inter-

120

II: BEGINNINGS TO ABOUT 179O

preting it in such a way as to imply unconditional surrender of the citizen.
Finally, we may note that Locke 'justified’ private property from everyone’s
right to his own person, which includes the right to one’s labor, which includes
the right to the results of one’s labor — again a purely juridical argument and
an obviously inadequate one at that. It hardly needs to be added that this
argument has nothing whatever to do with a labor theory of value.

If this were all, then the contribution of the philosophers to political and
economic sociology would be indeed a poor one. But there is something else,
namely, a contribution to what we may call Metasociology or Philosophical
Anthropology: some of the philosophers probed into that human nature from
which their natural laws were to be derived. 4 Again, Hobbes is the outstanding
example. The first Part of the Leviathan, entitled 'Of Man,’ which leads up to
the natural-law concept, blocks out a whole philosophy of the human mind
and deals with the psychology and social psychology of thought, imagination,
speech, religion, and the like. Much of this has Aristotelian and scholastic
roots, though Hobbes adopted the all but general practice of indicating an-
tagonism where there was development. But, in a definite direction, he actu-
ally went much further than either Aristotle or the scholastics had gone.' He
defined 'thought’ — an individual thought, the same thing as Locke’s 'idea’—
as the 'representation of an external object’ and let the human mind be
furnished by sense impression. It may indeed be asserted that he anticipated
the substance of Locke’s empiricism as well as the principle of associationist
psychology that was to become so closely allied to economics in the times
of the two Mills, father and son (see below, Part in, eh. 3, sec. 5).

By Philosophical Empiricism we mean the doctrine, adumbrated by
the Greeks (Aristotle, Epicureans, Stoics) but developed mainly by Eng-
lish thinkers of the seventeenth and eighteenth centuries (especially
by Hobbes, Locke, and Hume), that (a) all knowledge of the individual
is derived through experience during his own life; (b) that this experience
may be equated to the sense impressions to which his mind is exposed;

(c) that prior to this experience his mind is not only a complete blank
but even without 'conative’ activity of its own and also without innate
ideas in the sense of categories by which the sense impressions are
marshalled — so that it would perhaps be logical to say that, as such,
‘mind’ does not exist at all; (d) that the impressions are the ultimate ele-
ments into which all mental phenomena may be resolved, not only re-
membrance, attention, reasoning — including the construction of causal
sequences — but also the affective ones, the 'passions’: all these are but

4 Metasociology, then, denotes investigations into human nature or human behavior
or, more generally, into the wide realm of all the facts that, though relevant for
sociology, do not belong to it in a professional sense but lie beyond or behind it,
such as investigations into the formation of habits or into the properties of physical
environments. Analogously, we may speak of Metaeconomics. The term Philosophical
Anthropology denotes the same thing as Metasociology, the adjective distinguishing it
from Anthropology in the usual sense (study of physical characteristics).

SCHOLASTIC DOCTORS AND NATURAL LAW PHILOSOPHERS 121

agglomerations of elemental impressions and produced by their random
"associations/ This resolution of the human "mind' or "soul’ into atomic
impressions may be likened to the reduction of all physical phenomena
to atomistic mechanics, a much employed analogy that made empiricism
popular to some and hateful to other people. The reader will please ob-
serve that the term Empiricism is here used in what is only one of its
many meanings, which is why the adjective Philosophical is added. It has,
in particular, nothing whatever to do with Scientific Empiricism, a term
that merely denotes the attitude that extols the Toles of experiment and
observation at the expense of that of "theory/ More specific labels are
Sensualism or Sensationalism.

As a philosophy. Empiricism or Sensualism or Sensationalism, although
brilliantly defended by Hume in the eighteenth century and by J. S.

Mill in the nineteenth, and although it always had a considerable vogue
among English nonphilosophers, did not wear well. Leibniz raised the
obvious though not decisive objection — what is it? — at the beginning
of the eighteenth century. Bishop Berkeley, a little later, produced a
different argument that amounted to rejection ( Principles of Human
Knowledge, 1710), and even in England, let alone Scotland or Germany,
the battle among / professional philosophers went mostly against it. But
Associationist Psychology fared much better and in fact commanded the
explicit or implicit allegiance of English economists and their conti-
nental allies until about 1900 and beyond. A distinguished economist,
James Mill, is even responsible for its most uncompromising nineteenth-
century exposition. By Psychological Associationism we mean exactly
the same doctrine that we called Philosophical Empiricism before. The
difference that calls for a separate term is this. Whereas the latter is,
or pretends to be, a philosophy in the strict sense of the term and also
an epistemology or theory of knowledge, the former denotes the same
doctrine, but considered as a fundamental hypothesis in the study of the
various problems that come within the professional field of psychology,
such as the theory of imagination, or attention, or language, and so on.
The reader is requested to keep all this in mind for future reference.

Another point cannot be too strongly impressed upon the reader. The
scholastic doctors had taught the doctrines of natural liberty and natural
equality of men. With them, however, this natural equality was not an as-
sertion about facts of human nature but a moral ideal or postulate: it rested
on Christian beliefs such as that the Saviour died for the salvation of all. But
Hobbes, when explaining the conditions that produce his original state of
war of all against all, asserted as a fact ( Leviathan , ch. 13) that man’s faculties
of mind and body are about equal in the sense that the range of their varia-
tions is so narrowly limited as to make complete equality a permissible work-
ing hypothesis. And this was the general opinion of the philosophers. Hence-
forth we denote this proposition by the phrase Analytic Equalitarianism in
order to distinguish it from the Christian ideal, which we shall call Normative

122

II: BEGINNINGS TO ABOUT 179O

Equalitarianism. Now, first, it should be obvious that analytic equalitarianism
is of immense importance, not only for economic sociology and not only for
the wider implications of economics proper, but also for many problems of
economic theory itself. We need only replace it by the opposite assertion of
fact in order to realize that this would change the whole picture of the eco-
nomic process. Second, with few exceptions and with little qualification, most
economists have accepted, and are accepting to this day, analytic equalitarian-
ism. But they never made any serious attempt to verify it, though one would
think that they had every reason for making sure of the reliability of such a
pillar of their analytic structures. We shall return to this most curious fact
in our survey of the Wealth of Nations.

(d) Contribution to Economics. The economics of the philosophers could
have been taken from Molina. It will suffice to advert to the well-rounded
presentation in Pufendorf s treatise. Distinguishing value in use and value in
exchange (or pretium emineris), he lets the latter be determined by the rela-
tive scarcity or abundance of goods and money. Market price then gravitates
toward the costs that must normally be incurred in production. His analysis
of interest (in which he proves himself not averse to biblical quotations) is
distinctly inferior to that of the late scholastics. He goes on to discuss various
problems of public policy, such as the repression of luxury by sumptuary laws,
the regulation of monopolies, craft guilds, inheritance, entails, population.
Good sense and moderation are invariably in evidence as is also a sense of
the historic flux of things. The welfare aspect is always kept in view. Again,
we behold an embryonic Wealth of Nations.

7. The Philosophers of Natural Law:

Natural-Law Analysis in the Eighteenth Century and After

By 1700, developments that are to be surveyed in the next chapter had
already outdistanced the economics of the philosophers of natural law. It will
prove helpful, however, to stay for a moment in order to follow the subsequent
fortunes of that little body of economic truth until it loses its individuality
and, merging with a broader stream, vanishes from our sight (see below, sub-
sec. g).

The sixty or seventy years that preceded the French Revolution are com-
monly referred to as the Enlightenment. This phrase is meant to indicate
quickened advance on many fronts, or rather a quickened sense of advance —
general enthusiasm for progress and reforms. Applying reason to what appeared
to be the heap of nonsense inherited from the past was the program of the
epoch. A wave of religious, political, and economic criticism that was pathetic-
ally uncritical of its own dogmatic standards swept over the intellectual centers
of Europe. French society in particular was rapidly disintegrating, but as yet
felt perfectly safe. Like all disintegrating societies that do not want to face
their danger, it delighted in protecting its enemies and thus provided a milieu
of unique charm for a literature that will attract even those of us who sense
a flavor of decay — and sometimes, what is worse, also a flavor of mediocrity —

SCHOLASTIC DOCTORS AND NATURAL LAW PHILOSOPHERS 123

when they turn to these old volumes that harbor so much complacency. The
best antidote to the compliments that the men of that self-styled Age of Rea-
son were in the habit of paying to themselves is to read them. Fortunately,
there are better performances to record than those of Voltaire and Rousseau.
It is, however, impossible to convey, in the space available, a picture of either
that intellectual situation or its social background . 1 We can only touch upon
the irreducible minimum of essential points.

[(a) The Science of Human Nature: Psychologism.] The only fact that need
be noticed in matters of theology is that a Natural Theology as distinguished
from the sacra doctrina — remember that this distinction goes back to the
thirteenth century — definitely established itself as a separate field of laical
social science. Its properly theological contents tended to shrink to an insipid
Deism . 2 But more interesting was the development of a sociology of religion —
a theory of the origin and social practice of religious ideas — the first substantial
beginnings of which we located with Hobbes. The most important fact about
philosophical thought is the victorious progress of English empiricism or sen-
sationalism — of Hobbes’s and Locke's teaching — which is all the more re-
markable because, methodologically, it does not agree as well as does philo-
sophical rationalism with all the claims that were being made, in theology and

1 Both have been described innumerable times. It is very difficult, however, to
present a helpful selection. Perhaps the best advice to give is that the reader turn to
Hippolyte Taine’s famous book, Les Origines de la France contemporaine (1876-93)
or to Henri See’s Les Idees politiques en France au XVlII e siecle (1920). But the
portrait not only of an individual but of a civilization is , so excellently drawn by
Lytton Strachey in a brief essay on Morellet ( Portraits in Miniature, 1931) that half
an hour invested in reading it plus another half-hour of pondering over it will do
more for the reader than would many hours spent on heavier works. For England,
Sir Leslie Stephen’s old standard work, History of English Thought in the Eighteenth
Century (1876), or his English Literature and Society in the Eighteenth Century
(1904), and H. J. Laski’s Political Thought in England from' Locke to Bentham
(1920) may be recommended. J. Bonar’s Philosophy and Political Economy (3rd ed.,
1922) is always a stand-by, of course.

2 This statement illustrates well the difficulties inherent in the drawing of any
sketches such as this. It had to be made in order not to miss an important back-
ground fact, and it is of course true. Nevertheless, it is quite misleading in its effects.
On the one hand, it misses the affinity of mere Deism with frank philosophical ma-
terialism and hence its true nature. Therefore, let us note the fact that philosophical
materialism also developed in a form in which it was not known in the Middle Ages.
Holbach’s Systeme de la nature (1770) may stand as an example. On the other hand,
the statement in our text neglects the fact that in the eighteenth century there were
a number of religious revivals which are the symptoms of currents that perhaps sum
up to more than the Deism and materialism combined. This holds even for France:
the intellectual activity within the French Church is, of course, not wholly repre-
sented by infidel abbes whose cloth was important to them chiefly as a title to pre-
bends. In this connection, the activities of the Soci6t6 de l’abbaye de Saint-Germain-
des Pres, of which Jean Mabillon was the center, should be mentioned. We must
hurry on, however.

124 n: BEGINNINGS TO ABOUT, I79O

elsewhere, on behalf of la raison. This, of course, greatly favored the success
of associationist psychology. Let us call a halt in order to glance at three
figures who are not only of outstanding importance for us but also represent-
ative of the spirit of the age at its highest, Condillac, Hume, and Hartley.
The first two we shall meet again in the role of simple economists. The third
points directly to James Mill’s performance of 1829. 3 All three did not phi-
losophize simply for the sake of philosophizing but in order to develop the
Science of Man or of Human Nature that was to be the basis of the science
— or the sciences — of society: more than anything else, they were metasoci-
ologists or philosophical anthropologists. No doubt, they were convinced that
both in aim and method — the 'experimental’ method, for which they invoked

3 Etienne Bonnot de Condillac (1714-80; Oeuvres completes, 1821-2; see, for gen
eral information, R. Lenoir’s Condillac, 1924), worked out Locke’s sensationalism inte
an elaborate system (Essai sur I’origine des connaissances humaines, 1746; Traite des
sensations, 1754), which constitutes the most important continental response to the
English lead, both in its philosophical and in its psychological aspects. But the achieve-
ment does not consist in systematic elaboration only, for the work presents many
original elements, and some of them, such as the theory of the role of language and
other symbolisms ( Langue de calculs, 1798), point far into the future, in spite of
the introspective method used, even to the Watsonian behaviorism of our time.

David Hume (1711-76) — who, among other things, exerted formative influence on
A. Smith — claims our attention in three quite different and almost unconnected in-
carnations: as an economist, in which incarnation he swam outside of the natural-law
current now under discussion; as a historian, in which incarnation he will be noticed
presently; and as a philosopher and metasociologist, which is the incarnation that
matters just now. The work of his youth — strikingly illustrative both of the truth of
Ostwald’s thesis that original creation is the privilege of men under thirty and of the
other truth that part of this subjective originality is due to the young author’s blissful
ignorance of the previous development of his subject — the Treatise of Human Nature:
being an Attempt to introduce the Experimental Method of Reasoning [sic, J. A. S.]
into Moral Subjects (1st two vols., 1739, 3rd vol., 1740), remodeled (infelicitously)
into the Philosophical Essays of 1748 (republished as Enquiry concerning Human
Understanding, 1758) is the most important stepping-stone between Locke and Kant,
far above the former and almost on the intellectual level of the latter. The most im-
portant contribution was Hume’s theory of causality. This also was Hume’s opinion,
for it is this topic he singled out for relatively full treatment in the Abstract of a
Treatise of Human Nature which he published in 1740 and which was retrieved and
republished in 1938 with an introduction by J. M. Keynes and P. Sraffa. Works
(modern ed. by Green and Grose, with introduction and bibliography); Life and
Correspondence by J. H. Burton (1846); Letters to Strahan, ed. by J. Birkbeck Hill
(1888). Further Letters of great interest, ed. by J. Y. T. Greig (1932).

David Hartley (1705-57) was not, any more than was Condillac, the father of asso-
ciationist psychology. But his Observations on Man . . . (1749) did for it what, to
use an economic analogy that the reader will appreciate later, Malthus’ Essay on
Population was to do for the theory contained in it. Also he imparted to it a slant
that was new, so far as I know: he linked sense impressions and their associations with
'nerve vibrations’ and thus psychology with physiology. Finally, he worked out a
theory of ethics and even of natural theology on this basis.

SCHOLASTIC DOCTORS AND NATURAL LAW PHILOSOPHERS 12 5

the authority of Francis Bacon — their work meant a new departure. All the
more important is it to realize that this was not the case. In aim as well as
in method they had been clearly anticipated by Hobbes. But we know that
Hobbes, though original in a number of important individual points, was a
philosopher of natural law like Grotius or Pufendorf and that in fundamental
aim and method he did not differ from them. Condillac, Hume, and Hartley
were certainly more articulate; with clearer purpose, they developed this sci-
ence of human nature more fully. The idea of this science itself, however,
and the program of deriving from it the basic propositions of the individual
social sciences are the idea and the program of the philosophers of natural
law and indirectly of the scholastics. The affinity shows in many details: for
instance, the germs of associationist psychology are to be found in Aristotle’s
concepts of similarity and contiguity and in the corresponding concepts of
scholastic psychology. Moreover, the methods actually used by the eighteenth-
century men were exactly the same as, and in particular not more 'experi-
mental’ than, those of their predecessors. Therefore, just as we expressed an
important aspect of the work of the philosophers of natural law by calling
them laical scholastics, so we may now express an important aspect of the
work of the Condillacs, Humes, and Hartleys by calling them eighteenth-
century philosophers of natural law . 4 Two points about this science of man
are of special interest for us.

First, the metasociology of Condillac, Hartley, and Hume was essentially
psychological. And their associationist psychology was essentially introspective,
that is to say, it admitted the analyst’s observation of his own psychic proc-
esses as a valid source of information. Both these features are of obvious sig-
nificance for the history of economic analysis but we are now particularly
interested in the first. Those authors and most of their contemporaries evi-
dently believed that psychological considerations will explain not only the
psychological mechanisms of individual and group behavior, and the ways in
which social facts are reflected in, and interpreted by, individual or group
minds, but also these social facts themselves. They would not have denied,
of course, that in order to explain any actual event, institution, or process
we must also take account of facts other than psychological. But they did
not develop any general theories about them or admit them into their meta-
sociology: the only stock of general knowledge needed in all the branches of
science that have anything to do with human actions or attitudes was psy-
chology and all these branches of science were nothing but applied psychology.

4 The affinity I wished to exhibit may be underlined by a contrast: modern special-
ists in the various social sciences never think of looking to a mother science of human
nature for guidance. They just attack the facts and problems of their special fields
directly, using the methods and making the hypotheses that seem most useful for
their particular purposes. In fact, if there be any particular ‘modernity’ about such
authors as Hume — apart from their hostility to metaphysics — it would have to be
found in the facts that they failed to carry out their program and that, as economists,
for instance, they actually reasoned without much reference to their science of human
nature. This is one of the reasons why their economics will be dealt with separately.

1 20 II : BEGINNINGS TO ABOUT 1790

This view is, however, not the only possible one. We may think that other
than psychological data, for instance, geographical, technological, biological
facts, are much more important in the practical work of analysis than anything
a psychological science of human nature has to contribute. Hence metasoci-
ology should be built up from materials other than psychological; and even —
which was, for instance, the opinion of Karl Marx— that social processes are
governed by a super-individual logic of their own, to the understanding of
which the psychology of individuals and groups has nothing to contribute
except the knowledge of surface phenomena for the sake of which, moreover,
it is not necessary to go very far into psychology. No matter which of these
two views of the nature and method of the social sciences we make our own,
we must never forget that the one sponsored by our representative authors
cannot simply be taken for granted. In order to emphasize this we will give
it a distinctive label, Psychologism.

Second, the sociology that was based upon that science of man tended to
overstress, just as Aristotle's had overstressed, the element of rationality in
behavior. It is therefore interesting to note that the best brains began to react
against this. For instance — curious lag phenomenon! — while the contrat social
was carried to the high-water mark of its popularity by such writers as Rous-
seau, Hume already denounced it as a completely imaginary and, moreover,
unnecessary construct. In addition, he fired another shot at a similar target
when he penned the pithy sentence: ‘ 'tis not, therefore, reason which is the
guide of life but custom* ( Abstract , p. 16).

[(b) Analytic Aesthetics and Ethics .] The way in which that fundamental
science of man — of human nature, human knowledge, and human behavior —
produced all sorts of "natural laws' may be illustrated best by what may be
described as the English "natural aesthetics’ and the "natural ethics’ of the
eighteenth century. Of course, not all speculations on aesthetics and ethics
were offshoots of that science, even in England, but we are interested only
in those that were, because these present highly revealing analysis by methods
that were to serve economic analysis for more than a century to come.

Natural aesthetics and ethics were, first, analytic aesthetics and ethics:
though the normative purpose was never discarded, it was not allowed to
interfere with the primary task of explaining actual, behavior. This analytic
point of view had been brought to the fore already during the seventeenth
century, for aesthetics, by a number of Italian writers and, for ethics, by
Hobbes and Spinoza. 5 Second, the analytic task was tackled in the spirit of

5 Baruch Spinoza (1632-77). The two works relevant to the subject in hand are his
Ethics and his Tractatus politicus (both of which appeared posthumously, 1677). The
purely scientific program in question is obscured by the fact that Spinoza's ethics
eventually weld into a highly metaphysical system. But he did emphasize the necessity
of analyzing human passions as they are instead of preaching about them. Since this
is our only opportunity of saluting that great thinker, let me quote here a sentence
of his which, though it refers to politics and- ethics, every economist ought to be able
to repeat on his deathbed: ut ea quae ad hanc scientiam spectant, eadem animi liber-
tate, qua res mathematicas solemus, inquirerem sedulo curavi (I have sedulously tried

SCHOLASTIC DOCTORS AND NATURAL LAW PHILOSOPHERS 1 27

what was defined above as psychologism: not only was psychology to provide
the approach to the aesthetical and ethical phenomena, but it was to explain
all there was to explain about them. Third, the psychology actually used,
though not always strictly associationist, was always individual psychology,
introspective, and of the most primitive kind, rarely if ever involving anything
beyond some simple hypothesis about the reactions of the individual psyche
from which everything else followed by deduction. Aesthetical and ethical
values were thus explained in a manner suggestive of that in which Italian
and French economists in the eighteenth century, and the majority of econo-
mists of all countries in the nineteenth, explained economic values. This pro-
cedure was called empirical and in a sense it was, but only in the sense in
which, for example, the Jevons-Menger-Walras theory of marginal utility is.
There was nothing ‘experimental’ or inductive about it and it was in fact not
very realistic, notwithstanding all the programmatic utterances, war cries, and
appeals to Francis Bacon.

Aesthetics, then, tended to shrink, so far as this school of thought is con-
cerned, to an analysis of the pleasurable sensations evoked by a work of art,
the psychology of the creative effort of the artist receiving less attention . 6 In
order to exhibit the analogy that interests us, we shall compare the objective
fact that a work of art is considered as ‘beautiful’ in a given social group with
the objective fact of market price. The aesthetic theory in question will then
be seen to explain the former fact by subjective valuations of the members
of the group, much as the analogous economic theory explains the latter fact
by subjective valuations of the individuals participating in a market. In both
cases subjective valuation creates the objective value — we know that this had
been taught, in the case of commodities, by the scholastic doctors- — and not
the other way round: a thing is beautiful because it pleases, it does not please
because it is ‘objectively’ beautiful. Of course, we may go on to ask why certain
things please certain people and we may probe into the origins of our ideas
about the beautiful. But however far we may get in these and similar prob-
lems, we always move within the range of a particular conception of the mean-
ing of things, even if we introduce, by special hypothesis, a ‘sense’ of the
beautiful. Different authors went to different lengths in ‘subjectivizing’ aes-
thetics. Nevertheless, it was this subjectivization that constituted the main
contribution of the school in question and which, moreover, its members felt
to be the particularly realistic or ‘experimental’ or nonspeculative element in
it. The principal English authors to mention are Shaftesbury, Hutcheson,
Hume, and Alison. The first three are much more important for ethics . 7

to deal with the subject of this science with the same serene detachment to which we
are accustomed in mathematics).

6 This is only broadly true, and even so only for the English theory envisaged. The
psycho-sociological meaning of artistic creation was touched upon by Hobbes and sub-
jected to searching analysis by Vico.

7 A. Ashley Cooper, third Earl of Shaftesbury (1671-1713), the grandson of the
politician of doubtful fame. The work that co-ordinates his earlier publications, and
hence the only one that needs to be mentioned, is Characteristicks of Men, Manners,

125 II : BEGINNINGS TO ABOUT 1790

The preceding argument fully applies also to ethics but must be supple-
mented, in this case, by some additional considerations. So far as analytic
ethics— analysis of actual conduct — is concerned, the main points of the story
are quickly told. Hobbes had described actual conduct, by means of what he
supposed to be its determining factor, individual and hedonist egotism. This
may have appeared to him as the acme of realism but is, as a matter of fact,
nothing but a postulate or hypothesis and an obviously unrealistic one at that.
Shaftesbury countered this theory by another hypothesis, the hypothesis of
altruism: he explained that for man who habitually lives in society it is just
as natural to develop fellow feelings and hence to value the good of other
people as it is to develop self-interest and to value his own good. On this he
superimposed still another hypothesis, also derived from introspection, ac-
cording to which the virtuous experience pleasure from doing good irrespective
of their appreciation of its effects. This is what is specifically known as
Shaftesbury’s moral-sense theory, which, though its explanatory value is evi-
dently not great, met with considerable success precisely because of the ex-
treme simplicity of the 'psychology’ involved. Shaftesbury’s position was sys-
tematically elaborated by Hutcheson. And Hume, under the influence of all
three, created the moral type of the amiable, easy-going, humane, soberly
pleasure-loving egotist that summed up the sort of person he was himself:
no asceticism or any other 'monkish’ virtue for him — no indeed! — and hence,
of course, not for anyone else. That unprejudiced analysis of these monkish
virtues might, perchance, unearth the true key to the ethical phenomenon
was quite beyond his range of vision. Abraham Tucker (1705-74) 8 similarly
posited satisfaction of individual desires as the ultimate goal and universal
motive of action. I do not think I am wrong in attributing the Hume-Tucker
opinion also to Bentham, who held that the only interests an individual can
be relied on to consult are his own, but added a qualifying note by emphasizing
reasonable or enlightened self-interest that does take account also of other
people’s interests, feelings, and reactions.

The English moralists of the eighteenth century were, however, no more
prepared to do without a normative standard of conduct and judgment than
any other moralists ever have been. Some were content to fall back upon a
moral law that men know and accept intuitively, an idea that foreshadowed

Opinions, Times (1711). Francis Hutcheson (1694-1746), owing to his having been
the teacher (and a predecessor in the Glasgow chair) of A. Smith, is for us a 'key man.’
A vital and most successful teacher — perhaps all the more successful because he seems
not to have despised occasional phraseological fireworks — he exerted widespread in-
fluence. His chief work embodies the harvest of years of lecturing: A System of Moral
Philosophy (publ. posthumously in 1755; see below subsec. e). For the subject in hand,
as well as for some subjects that are to follow, we must mention his Inquiry into the
Original of our Ideas of Beauty and Virtue (1725). See W. R. Scott, Francis Hutche-
son . . . (1900). Archibald Alison’s Essays on the Nature and Principles of Taste
(1790), is particularly characteristic of the possibilities and limitations of the psy-
chologists approach.

8 Light of Nature Pursued (1768-77, republ. 1805).

SCHOLASTIC DOCTORS AND NATURAL LAW PHILOSOPHERS 129

the moral imperative of Kant. Even Locke appealed to such intuition, though
this was a bad lapse from grace for an empiricist. But solutions of this type
would never have done for Hume or Bentham. To their way of thinking all
that was empty metaphysics. At the same time they were quite ready to turn
their humane egotism into an ideal, that is to say, to convert their theory of
conduct into a source of norms for conduct. We have seen that Hume modeled
the moral world to his own image . 9 It is plain that, with delightful naivete,
he thoroughly approved of this image: the schema of his own preferences was
the reasonable schema. On the other hand, reason had eliminated all super-
personal values except the good of society. But, in view of that philosophy of
human values, what else could this good of society consist in but the sum
total of all the satisfactions accruing to all individuals from the realization of
their hedonic schemes of preference? If this be so, have we not discovered,
at one stroke, the rationale of social values, the relation between them and
individual values, and also the only norm of morality that can possibly be
meaningful? Affirmative answers to these questions had been suggested already
in the seventeenth century, especially by Bishop Cumberland 10 and, less dis-
tinctly, by Grotius, who did not go far^eyond the common-good concept of
the scholastics. The eighteenth-century writers, especially those between Hume
and Bentham, only elaborated the fundamental canon of Utilitarian Ethics:
good is every action that promotes, bad is every action that impairs, social
welfare. Before we consider this canon in its wider aspects, we must glance
at a work of particular interest to the economist, that of A. Smith . 11

With the possible exception of Shaftesbury's this performance must, I
think, be placed far above all others. First, he distinguished, like Hutcheson
but more clearly than anyone else, between ethics as a theory of behavior and
qthics as a theory of people’s judgments about behavior, and resolutely con-
centrated on the latter. Second, this theory of ethical judgment is based upon
our ability to place ourselves, as it were, in the other man’s place (‘sympathy’)

9 This tendency of the social philosopher to exalt his own schema of life’s values
into an ethical norm from which to judge the habits and tastes of all other men
deserves attention because it runs through the whole economic literature and explains
a great part of the value judgments of economists. Marshall, for instance, had a very
definite conception of the Noble Life (see below. Part iv). It does not take much
trouble to realize that this conception was shaped on the model of the typical life
of a Cambridge professor. Tastes, pursuits, levels of comfort widely different from it,
he at best viewed with indulgence but without ever embracing them with full under-
standing. It hardly needs to be emphasized how important this is for an appreciation
of economists’ attitudes to the social worlds they live in.

10 De legibus naturae (1672).

11 The Theory of Moral Sentiments ; or, An Essay towards an Analysis of the Prin-
ciples by which Men naturally judge concerning the Conduct and Character, first of
their Neighbours, and afterwards of themselves. To which is added, A Dissertation
on the Origin of Languages. This is the title of the 6th ed., 1790. The 1st appeared
in 1759 under the title of The Theory of Moral Sentiments. The differences between
the two, though considerable, are (apart from the Dissertation ) not of any great im-
portance.

130 II: BEGINNINGS TO ABOUT 1790

and to understand him, the judgment of our own acts being then derived
from our principles of judging others. Third, the natural is conceived of as
that which is psychologically normal — to be analyzed realistically — and not
identified with, but distinguished from, the ideal rule of reason (see vol. i,
p. 128, 6th ed.). Fourth, the influence of utility upon aesthetic and ethical
approbation is not treated simply as a postulate but as a problem in the actual
practice of judging (Part iv). Fifth, custom and fashion are not only recog-
nized as relevant factors but systematically investigated (Part v). ‘Systems of
Moral Philosophy,’ that is, theories other than A. Smith’s own, come in for
criticism that is occasionally trite but on the whole strikingly successful (Part
vii). Plan and performance are quite similar to the plan and the performance
of the Wealth of Nations.

[(c) Self-Interest, the Common Good, and Utilitarianism.] We know that
both Self-Interest and the Common Good were old stagers. But around the
middle of the eighteenth century, they asserted themselves with a new energy,
not only in ethics, but over the whole field of social thought. In particular,
they were, or were supposed to be, the basic and unifying principles of all the
social sciences, practically the only ones ‘reason’ had espoused. Helvetius 12
(1715-71) compared the role of the principle of self-interest in the social world
to the role of the law .of gravitation in the physical world. Even the great
Beccaria 13 went to the length of asserting that man is wholly egotistic and
egocentric and does not trouble at all about any other man’s (or the common)
good. It should be observed once more that this individual self-interest was
oriented on rational expectation of individual pleasure and pain, 14 which must,
in turn, be defined in a narrowly hedonist sense. It is true that the eighteenth-
century authors added qualifications and recognized pleasures that are not
usually classed as hedonist, such as pleasures from malevolence, from the ae-
quisition of power, and even from religious belief and practice. In consequence,
defenders of that doctrine have been to some extent successful in their attempt
to redeem it from the allegation that has made human behavior turn on beef-
steaks. But this success — apart from the fact that it does not touch all the
other objections that may be raised against any theory that overstresses ration-
ality in behavior — was more apparent than real. For if we go very far beyond

12 De VEsprit (1758), Discours 11, ch. 2. The book, one of the continental forerunners
of English utilitarianism, enjoyed a sweeping success. Few writers have ever professed
more naive and more unconditional belief in education and legislation — that work, of
course, upon a perfectly malleable human material which reacts mechanically to phys-
ical experience.

13 The work that is relevant for us at the moment is his famous treatise Dei delitti
e delle pene (1764), which, a beacon light in the history of the emergence of modern
criminal law, illustrates the truth that analytic and practical merit do not necessarily
go together.

14 The standard reference on this subject is Verri’s essay on the nature of pleasure
and pain published, long after it had circulated and influenced minds, in his D iscorsi
di argomento filosofico (1781). Systematic classification and - analysis of the various
pleasures and pains is due to Bentham.

, SCHOLASTIC DOCTORS AND NATURAL LAW PHILOSOPHERS 131

the grossest gratifications of the simplest appetites, we come dangerously near
to identifying expectation of 'pleasure’ with all possible motives whatsoever,
even with intentional suffering of pain, and then, of course, the doctrine be-
comes an empty tautology. Worse still, if we allow too much scope to such
'pleasures’ as may be afforded by exertion, victory, cruelty, and the like, we
may get a picture of human behavior and of society that differs totally from
the one those men actually envisaged. Thus, if we are to derive the conclusion
they derived from their ideas about pleasure and pain, we have after all no
choice but to adopt a definition of the latter that may indeed allow some
freedom for going beyond beefsteaks, but only a limited one; that is to say,
we have no choice but to adopt a theory of behavior that is at variance with
the most obvious facts. Why, then, was it so readily adopted by many good
brains? The answer seems to be that these good brains belonged to practical
reformers who fought a historically given state of things that seemed to them
'irrational/ In such a struggle, simplicity and even triteness are the chief virtues
of an argument, and beefsteak philosophies the best answer to a system of
supermundanely sanctified rights and duties. Not that these authors were in-
sincere: we all of us quickly convince ourselves of nonsense that we habitually
preach.

We have seen above how the common good or social expediency of the
scholastic doctors was harnessed into a particular shape by the eighteenth-
century votaries of reason. Let us repeat and reformulate. The pleasures and
pains of each individual are assumed to be measurable quantities capable of
being (algebraically) added into a quantity called the individual’s happiness
(felicitd); a frequently used German term was Gliickseligkeit. These individual
'happinesses’ are again summed up into a social total, all of them being
weighted equally: 'everyone to count for one, nobody to count for more than
one.’ Finally, that social total is substituted for, or identified with, the common
good or welfare of society, which is thus resolved into individual sensations
of pleasure or pain, the only ultimate realities. This yields the normative prin-
ciple of Utilitarianism, namely, the Greatest Happiness of the Greatest Num-
ber, which is chiefly associated, in recognition of ardent advocacy, careful
elaboration, and extensive application, with the name of Bentham . 15 If the

15 Jeremy Bentham (1748-1832), trained as a lawyer, though he early retired to a
life of research and propaganda, became the undisputed leader of the utilitarian circle
and the central figure of a group usually described as Philosophical Radicals. His per-
formance in the field of economics will be noticed elsewhere. Here he interests us
as a philosopher, sociologist, and theorist of legislation. The only one of his many
voluminous works (ed. John Bowring, 1838-43) that need be mentioned is An Intro-
duction to the Principles of Morals and Legislation (1789), which widely influenced
thought and legislative practice though, on the Continent, similar ideas spread from
domestic roots particularly in Italy and France.

The essentials of the utilitarian system had, however, been presented before in the
Principles of Moral and Political Philosophy (1785) by William Paley (1743-1803),
and some of them in the Essay on the first Principles of Government (1768) by
Joseph Priestley (1733-1804), the versatile theologian and scientist who, besides being

132 II: BEGINNINGS TO ABOUT 1790

idea was of ancient origin and grew so slowly as to defy dating, the slogan
itself may be dated more precisely: so far as I know, it occurs first in Hutcheson
(op. cit. 1725), then in Beccaria (op. cit. 1764, la massima felicitd divisd nel
maggior numero); after that in Priestley (op. cit. 1768), to whom Bentham
gives the credit for what to him was a 'sacred truth/ Hume does not have the
slogan, but should be included in this series all the same. The word Utilitarian-
ism is Bentham’s. 16

The essential point to grasp is that utilitarianism was nothing but another
natural-law system. This holds not only in the sense that the utilitarians were
the historical successors of the seventeenth-century philosophers of natural
law; nor only in the sense that the utilitarian system developed from the sys-
tem of the philosophers which, though evident, can be proved in detail from
the history of ethics, on the one hand, and from the history of the common-
good concept, on the other; but it holds also in the much more significant
sense, that in approach, in methodology, and in the nature of its results utili-
tarianism actually was another, the last, natural-law system. The program of
deriving, by the light of reason, 'laws’ about man in society from a very stable
and highly simplified human nature fits the utilitarians not less well than the
philosophers or the scholastics; and if we look at this human nature and the
way in which it was supposed to work, as we did above, we realize that the
affinity goes much further than that.

Like the systems of the philosophers or the scholastics, utilitarianism
presents a threefold appeal. First it was a philosophy of life, exhibiting
a scheme of 'ultimate values.’ It is here that we must look for the source
of the ineradicable impression that utilitarianism, Bentham’s especially,
was something new and fundamentally antagonistic to the older systems.
But, as the reader should know by now, the difference was not great so
far as the philosophy of the current business of everyday life is concerned.

a church historian of note and a famous controversialist on theological matters, was
also a recognized research worker in electricity and chemistry. That essay may be
called the bridge between Locke’s theory of government and James Mill’s unfortunate
exploits in this field. Neither Paley nor Priestley, however, contributed much that
cannot be found in earlier writings, e.g. in Cumberland’s work already referred to.
-Of continental 'precursors’ it is sufficient to mention again Beccaria, Verri, and
Helvetius. With Beccaria, the relation, to be presently discussed, of utilitarianism to
earlier natural-law systems is particularly clear.

From the large literature on English utilitarianism and on the Philosophical Radi-
cals, J. S. Mill’s essay on Utilitarianism (publ. 1863) deserves the reader’s first attention.
Also see: Sir Leslie Stephen’s work. The English Utilitarians (1900), H. J. Laski’s
Political Thought . . . already referred to, W. L. Davidson’s Political Thought in
England: The Utilitarians from Bentham to J. S. Mill (1915), and Graham Wallas’
charming book on Francis Place (1898).

16 The interesting note of skepticism sounded by A. Smith in a famous dictum of
his should be recorded here: he remarked in passing that, so far as conscious happiness
is concerned, there is not much difference between any state that we accept as per-
manent and any other.

SCHOLASTIC DOCTORS AND NATURAL LAW PHILOSOPHERS I33

For the sphere of stable, barn, shop, and market, the scholastic doctors
were utilitarian enough. The real difference was that the doctors confined
the utilitarian point of view to purely utilitarian activity where it is
(nearly — not even there wholly) adequate, whereas the utilitarians re-
duced the whole world of human values to the same schema, ruling out,
as contrary to reason, all that really matters to man. Thus they are indeed
entitled to the credit of having created something that was new in litera-
ture — for it cannot be attributed to Epicurus — namely, the shallowest of
all conceivable philosophies of life that stands indeed in a position of
irreconcilable antagonism to the rest of them.

Second, utilitarianism was a normative system with a strong legal slant.

It was, like the scholastic system, a system of moral imperatives, on the
one hand, and of legislative principles, on the other. Bentham considered
himself primarily a moralist and legislator , 17 and it was as a criterion of
'good' and 'bad’ legislation that the principle of greatest happiness of the
greatest number acquired for him paramount importance. Observe once
more the equalitarian element in it which was as essential as the element
of happiness. And these two together with the belief not only that any
individual was very much like any other, but also that every individual
was nondescript and malleable material with few or no innate charac-
teristics of his own, then produced the fundamental political 'plank’ of
Benthamism: educate people and let them vote freely and everything
else will take care of itself . 18

But, third, again like the natural law of the philosophers and the scho-
lastics, utilitarianism also was a comprehensive system of social science
embodying a uniform method of analysis. And this aspect of it is sep-
arable from the two others in the same sense in which the analytic work
of the scholastics and the philosophers is separable from the rest of their
thought. In other words, it is logically possible to despise utilitarianism,

17 Before Bentham, the catalogue of utilitarian moralists does not quite coincide
with the catalogue of utilitarian legislators, and in a more complete exposition it
might be advisable to distinguish the histories of moral and political utilitarianism.
Most of the important names, however, would occur in both, and in view of the
close relation we need not insist further on that distinction.

18 It should be observed that these political principles do not uniquely determine
a man’s allegiance to a political party or the position he will take on any practical
political question. Bentham impressed his personal preferences upon a group of per-
sonal adherents — the Philosophical Radicals already mentioned — and the strong co-
herence of this group accounts for a definite program (in substance laissez-faire com-
bined with universal suffrage) and the impression that this program followed inexorably
from analytic premisses. But in other times and countries, the Benthamites might
have been conservatives — Hume was, and most of the Italian utilitarians were — or
else socialists. There is nothing surprising in this so soon as it is realized that prefer-
ence plays so large a part in arriving at conclusions as to practical policy that it bends
almost any analytic structure to its dictate. A man may accept Marx’s analytic work
entirely and yet be a conservative in practice.

134 II: beginnings to about 1790

root and branch, both as a philosophy of life and as a political program
and yet to accept it, as an engine of analysis, in all or some of the de-
partments of the social sciences. But since, on the one hand, utilitarian-
ism may be not much more valuable as an engine of analysis than it is
in the other two respects and since, on the other hand, many economists
have not hesitated to declare that it is basic to economic theory — Jevons
even defined economic theory as 'a calculus of pleasure and pain 7 — the
extent of its influence upon analytic work should be cleared up at once.

It is the common failing of laymen, philosophers, and historians of
thought to pay exaggerated respect to whatever presents itself as a funda-
mental principle. Actually, people do not always make use, in scientific
work any more than in the practical concerns of life, of the fundamental
principles to which they profess allegiance. Utilitarianism being a set of
such fundamental principles, we must therefore inquire in every case
what role it was allowed to play. So far as economics is concerned, we
may, however, return broad answers for four types of cases. First, utili-
tarian hypotheses are completely valueless in questions of interpretations
of history or in questions touching the moving forces of economic history.
Second, utilitarian hypotheses are worse than valueless in all problems
involving questions of actual schemes of motivation, for example, in such
a problem as the economic effects of inheritance. Third, utilitarian hy-
potheses are in fact basic to that part of economic theory that is usually
referred to as Welfare Economics — the heir to Italian eighteenth-century
theories on felicita pubblica. We adopt these hypotheses habitually when
discussing such problems as the effects of Transfers of wealth from the
relatively rich to the relatively poor . 7 And this is precisely the reason
why the propositions of welfare economics never convince anyone who
is not already convinced beforehand and irrespective of any argument.
For though there is, of course, an aspect of these problems to which the
utilitarian approach is appropriate — provided we believe it to be methodo-
logically admissible — this aspect is evidently not the only one: we have
proved very little, when we have proved that transferring a rich man's
dollar to a poor man increases welfare in the utilitarian sense. Fourth,
in the field of economic theory in the narrowest sense of the term, utili-
tarian hypotheses are unnecessary but harmless. For instance, we can
state and discuss the properties of economic equilibrium without intro-
ducing them. But if we do introduce them, results are not materially
affected, hence not impaired. This makes it possible for us to salvage
much of economic analysis that at first sight seems hopelessly vitiated by
utilitarian preconceptions.

[(d) Historical Sociology .] The writers of the eighteenth century have often
been blamed for lack of 'historical sense , 7 a disability that went in fact so far
with some of them as to make them blind to the values of bygone civilizations.
All the more necessary is it to point out that the antidote developed along
with the disease. If we find, in some instances, the most foolish contempt for

SCHOLASTIC DOCTORS AND NATURAL LAW PHILOSOPHERS 135

Greek art — Voltaire being put above Homer, for instance — we also find the
origins of its modern cult. If we sometimes find a perfectly stupendous absence
of interest in history, we also find a rich crop of serious historical work that
laid the foundations of nineteenth-century developments. We cannot do more
than list five essential points: a good beginning was made with systematic
collection of materials; new methods of interpretation and criticism of docu-
ments were worked out; 19 economic and cultural history began to divert some
of the attention previously all but monopolized by political and military his-
tory; the (relatively speaking) detached report that renders documentary evi-
dence began to prevail over epics or preachings (Hume, William Robertson,
Gibbon); 20 and the awakening of interest of the public is attested by the
success of popular universal and national histories. Of course, there is such
a thing as unhistorical history, that is to say, a man may do historical work
without ever getting the specifically historical angle. But Hume’s History of
England (8 vols., 1763) was not of this kind. Though hopelessly out of date
by now, it will always be a landmark of historiography — which shows that he,
at least, was not a slave to his utilitarianism.

Still more noteworthy from our standpoint is the emergence of Historical
Sociology — sometimes called Philosophy of History 21 — that is to say, of so-
ciological theories that, on the one hand, used historical material in order to
arrive at generalizations and were, on the other hand, intended to explain
individual historical states and processes. The greater part of this kind of
work was dilettantic and of a nature to disgust serious historians. Some of it
was, moreover, unhistorical in the sense just defined: historical fact was often
twisted to fit the preconceptions of la raison. Nevertheless, there were also
considerable and even path-breaking performances. By way of example, I may
mention Condorcet, Montesquieu, and one who was one of the greatest thinkers
to be found in any age in the field of the social sciences — Vico. 22 Condorcet’s

19 F. A. Wolfs (1759-1824) seminal Prolegomena ad Homemm appeared in 1795,
but was the result of earlier work.

20 To this day historians have not ceased to preach, to bestow praise and blame,
and to air their personal, social, and national prides and hates. What I mean to convey
is that substantial progress was made toward presentation of facts in something like
a scientific spirit and away from the epic.

21 See Robert Flint, History of the Philosophy of History (1893).

22 The Marquis de Condorcet (1743-94; Oeuvres, ed. 1847-9; English readers are
perhaps best referred to Lord Morley’s essay on him, republ. in Critical Miscellanies,
1886-1908, vol. n), one of the encyclopedistes (see below, sub e), roamed over almost
all fields of science and policy. Among other things, he was a trained mathematician;
his ventures in the application of the calculus of probabilities to legal and political
judgments, though not wholly felicitous, gave an important impulse; he propagated
‘natural rights,’ popular sovereignty, and equal rights for women, and was a great
hater of Christianity — in all of which, ardor completely extinguished his critical faculty.
His contributions to economics are not worth mentioning. The work relevant here is
Esquisse d’un tableau historique des progr&s de V esprit humain (1795; English trans.
1802).

Montesquieu (1689-1755) presumably needs no introduction beyond the remark that

136 II : BEGINNINGS TO ABOUT 1790

Esquisse presents a definite theory of historical evolution or ‘progress’: its goal
is equality 23 and its motive force is the ever-increasing knowledge that the
indefinitely perfectible human mind keeps on acquiring. This, of course, is
very poor sociology. But the work is the outstanding example of an uncom-
promisingly ‘intellectualist’ view of the historical process. In sharp contrast,
Montesquieu’s Esprit des lois, despite inadequate workmanship — especially
inadequate as to critical use of material — is serious sociology. The chief virtue
of the latter work, both as regards method and performance, is that it en-
visaged historical states of societies and their changes in the light of a num-
ber of objective factors , 24 which yield realistic explanations and in this sense
analytic theories but no simple, in particular no rationalist, general formula.
This was indeed a new departure and methodologically spelled a significant
break with natural-law ideas: it was sociology based upon actual observation
of individual temporal and local patterns, not merely of general properties of
human nature. For our purposes, this was Montesquieu’s essential achieve-
ment, foreshadowed in this treatment of the particular case of ancient Rome.
His success, at the time and later, was of course due to the appeal of his
‘constitutional’ theories — contrebalance des pouvoirs and the like — which are
of no interest to us.

he was one of the most influential thinkers of all times and that in particular, though
his economics is insignificant — without originality, force, or scholarship — he greatly
influenced A. Smith in other respects. The three works to mention are the — also in-
significant — Lettres persanes (1721), the Considerations sur les causes de la grandeur
des Romdins et de leur decadence (1734), and of course his magnum opus, De VEsprit
des lois (1748), which is so much more than mere ‘esprit sur les lois .’

Giambattista Vico (1668-1744; Opere, newest ed. Nicolini, 1911-31; bibliography
by B. Croce, 1904; revised, enlarged ed. 1947-8}. Part of the extensive Vico literature
is impaired by attempts of authors to claim the great name for tendencies of their
own, but see Croce’s essay (English trans. by Collingwood, 1913), R. Flint’s Vico
(1884), and a few beautiful pages on Vico in Tagliacozzo’s Economisti napoletani
(1937); there are several good German books, especially those by Werner and Klemm.
Vico was professor in Naples, professing to teach ‘all the knowable’ ( tutto lo scibile).
The fact that, among other things, he was a lawyer and always stressed legal aspects
(the history of law was to him the history of the human mind) is important because
it brings out his relation to the philosophers of natural law. The influences that con-
tributed to shaping his thought and the problems raised by the various cases of earlier
occurrence of ideas similar to his own are much too complex for us. The Greeks, the
Roman jurists, Grotius, the English empiricists, Descartes (by way of antagonism),
the scholastics, and many other groups would have to be mentioned, among them
also the Arab historian Abu Said Ibn Khaldun (1332-1406; see de Slane’s French
trans. of the first introductory part of his history, 1863-8, all I know). The only work
of Vico’s that need be mentioned specifically is Principii di una scienza nuova . . .
(1725; almost rewritten for the 2nd ed. of 1730).

23 The sociologist of thought will, of course, see in this a secularized scheme of
salvation.

24 The emphasis upon the influence of geographic environments that may have hailed
from Thucydides and may have inspired later anthropogeographical researches such as
that of Vidal de la Blache deserves to be specially noticed.

SCHOLASTIC DOCTORS AND NATURAL LAW PHILOSOPHERS 1 37

Vico’s achievement was quite different and met with little success until late
in the nineteenth century. His New Science ( scienza nuova) is best described
by the phrase 'an evolutionary science of mind and society.’ But this must
not be interpreted to mean that the evolution of the human mind shapes the
evolution of human society; nor, though this would be nearer the truth, that
the historical evolution of societies shapes the evolution of the human mind;
but that mind and society are two aspects of the same evolutionary process.
Reason, in the sense of the rational or logical operations of the human mind,
is no causal factor in this process which Vico conceived in a thoroughly anti-
intellectual spirit. Neither has reason, in the sense of goals or meanings per-
ceived by the observer’s reason, anything to do with it: Vico’s theory of re-
current processes ( corsi e ricorsi) emphatically denies any tendency toward,
and in fact the existence of, any such goals and meanings. In this scheme
philosophy and sociology had become one — thought and action had become
one — and this unit was essentially historical in nature. 25 And, after all, though
the common currents of eighteenth-century waters did not reach up to his
knees, Vico too was eighteenth century.

[(e) The Encyclopedistes .] We have had occasion to notice the increase in
the demand for dictionaries or encyclopaedias during the seventeenth century.
Further increasing during the eighteenth, this demand was satisfied by ever
more ambitious ventures (Chambers’ Cyclopaedia, Zedler’s Universal-Lexicon,
and others). All of these were surpassed by the great French Encyclopedic
(from 1751 on), 26 which, among other things, excelled the other works of its
type and time by the number and quality of its articles on economic subjects.
But it is mentioned here for an entirely different reason: whoever believes at
all in the concept of the ‘spirit’ of an age will be inclined to look upon the
Encyclopedie as the very incarnation of the eighteenth-century spirit. So far
as this is correct, the work itself is an important part of the cultural back-
ground of which we are trying to reconstruct some patches. But how far is
it correct? Like all encyclopaedias of such range, this one contained articles
that differed widely not only in quality but also in point of view. The eco-
nomic articles referred to, for instance, were written by writers as far apart
from one another as were Quesnay and Forbonnais, while the bulk of the
articles — physics and technology were particularly attended to — left -no scope
for difference of point of view in the philosophical or political sense. Never-
theless, the strong personality of the editor-in-chief,’ Diderot, succeeded in
imparting some uniformity to what was called the Tower of Babel by hostile
critics. In order to realize this, it is sufficient to name a few of the leading

25 This scheme, very obviously, points forward toward Hegel and, less obviously,
toward Husserl. This fact explains both his comparative failure in his own day and his
success after nearly two centuries. But it should not be allowed to obliterate the purely
analytic aspects of his work which parallel (i.e. anticipate) some feature of the less
spacious and profound work of Montesquieu, especially as regards emphasis upon en-
vironmental factors.

26 The reader will find more than enough information in the Encyclopaedia Britan-
nica’s article ‘Encyclopedia.’

138 II: BEGINNINGS TO ABOUT I79O

members of the circle that gathered round Diderot: d’Alembert, Voltaire,
Condorcet, Holbach, Helvetius — all vowed to the service of la raison in the
particular sense in which it meant enmity to the Christian faith and especially
to the Catholic Church. With varying measures of reserve, the opportunity
afforded by the articles on history, philosophy, and religion was exploited for
purposes of propaganda in that respect. But this was all. In other respects
not much uniformity was either aimed at or achieved. The philosophy is mainly
empiricist, but not wholly so. The politics reflects the opinions about state,
public administration, and policy that were carried far beyond the specifically
encyclopaedist circle. Beyond this there was no definite program. In particular,
there was no revolutionary program: those intellectuals no doubt had their
dig at the regime of Louis XV and occasionally aimed at its special features;
on the whole, however, they felt too comfortable to long for a violent up-
heaval; some of them saw points in the enlightened despots of their time
who reformed — and paid well; those who lived to witness the realities of revo-
lution were not very happy about it. Thus, though it remains true that the
great French venture may be taken as a symbol of an important current of
thought, its importance for us is not as considerable as it seemed to its con-
temporary enemies, who insured its success by fighting it.

There is one point, however, that should be emphasized or emphasized again (see
above, sec. 5), namely, the relation of the thought of the encyclopedistes to that of the
seventeenth-century philosophers of natural law. The teaching of the latter fared quite
well at the hands of the former. The encyclopedistes — and all the writers whom this
term, in a wider sense, may be said to cover — did not always give credit to the philoso-
phers as they should have done. But they displayed no hostility to the natural-law system
and in fact developed its ideas. Nor is this surprising. Was not natural law derived, by
reason, from human nature and hence the very .embodiment of their own program?
And the Natural Rights of the philosophers were, of course, thoroughly to their taste.
The religious barrier hid from them the true origin of these ideas: they could not have
quoted St. Thomas’ statement that the natural law was rationis regula. But no such,
barrier existed in the case of the philosophers who were, at least, no Catholics. And so
the encyclopedistes, within and without the volumes of the encyclopaedia, and many
other men, such as Quesnay, who were not encyclopedistes in the strict sense (even if
they were contributors), continued to use the philosophers’ analytic schema and, some-
times, even their most dubious arguments. Quesnay’s ordre naturel would be recogniz-
able as an offshoot of the natural-law stem, even if Quesnay had never written his
article on droit naturel. The Abbe Morellet, an ardent free trader, was quite content
to argue that, since man is naturally free and since this implies that he can buy and sell
where he pleases, protection stands condemned for violation of natural law — which ar-
gument occurs also in other writings of the time and must evidently have impressed
some people, 27 a most interesting comment upon the age of reason.

27 The Abbe Andre Morellet (.1727-1819) was, it is true, a very minor light among
the encyclopedistes — not more than an effective pamphleteer. We need not mention
his economic works. But he is interesting as a type, which is why perusal of Lytton
Strachey’s essay on him has been recommended above. However, he collected materials
that went into Peuchet’s Dictionnaire universel de la geographie commergante (1799-
1800), which is an important link in the long chain of economic or semi-economic
dictionaries.

SCHOLASTIC DOCTORS AND NATURAL LAW PHILOSOPHERS 1 39

[(f) The Semi-Socialist Writers .] It has been stated that, as a body, the
encyclopedistes were not politically revolutionary. Neither were they social-
ists. The equalitarianism of the time — both normative and analytic — suggested
the criticisms of inequalities, especially great inequalities, of wealth that we
find in Helvetius and many other writers. And the obvious weaknesses of
natural-law philosophies about the natural right to property that were ex-
pounded either on the lines of Locke or in the special form adopted by the
physiocrats (see below, eh. 4), invited criticism that sometimes went from
attack upon particular arguments in defense of property to attack upon prop-
erty itself. But though the historian of socialist ideas is no doubt able to
compile a lengthy list of socialist or communist or near-communist publica-
tions that were not without influence on nineteenth-century socialism, the his-
torian of economic analysis has little of interest to record: he can only agree
with Karl Marx’s opinion about that literature. It should be observed, however,
that socialist or semi-socialist writers, when arguing against conclusions drawn
from natural-law premisses by natural-law methods, almost invariably used
these premisses and methods themselves. Thus, exactly as the votaries of la
raison fought scholasticism while remaining its pupils so far as methods and
results of analysis are concerned, so the socialist or semi-socialist writers of
the eighteenth century remained natural-law philosophers in their way of
thinking: the concepts of natural law and of natural rights were quite capable
of serving opposite practical aims, and few if any writers thought of attacking
the method they embodied. Rousseau, Brissot, Morelly, and Mably are illus-
trative examples. For the sake of convenience, we add here a very different
figure, Godwin, whose only contribution to economic analysis will, however,
have to be considered later.

J. J. Rousseau (1712-78), in spite of his glorification of the natural
state of society and of equality, can hardly be called a socialist — he was
typically what our term 'semi-socialist’ is meant to convey. But neither
can he be called an economist. His article on political economy in the
Encyclopedic contains next to no economics. His essay on the origin of
inequality (1755) is not a serious effort to account for the phenomenon.

In particular, despite some superficial similarities in phrasing, he was
not a physiocrat or a forerunner of the physiocrats. Such ideas as he en-
tertained on economic subjects were, however, of considerable influence
with the public. J. P. Brissot de Warville (1754-93), a Girondist politician
executed in 1793, holds a place among reformers of criminal law. The
work relevant for our subject, the Recherches philosophiques sur le droit
de propriete et sur le vol . . . (1780), is pure natural-law speculation of
the kind that made later critics of natural-law sociology and economics
completely overlook its serious achievements. The nonexistence of the
right to private property is the thema probandum. Brissot seems to have
been unaware of practically all the realistic and really damaging argu-
ments that may be forged against it. The doctrine that Property is Theft,
made famous in the nineteenth century by Proudhon is the centerpiece

140 II : BEGINNINGS TO ABOUT 179O

of the book. Morelly’s Code de la nature (1755) is a program of full-
fledged state communism of considerable merit: it presents, in minute
detail, solutions of the practical problems of the structure and manage-
ment of a communist society, many of which turn up, mostly without
acknowledgment, in the nineteenth-century literature of socialism and
most of which reflect a sober sense of ‘workability/ The doctrine, much
more often implied than frankly stated, that all the deviations from
normal behavior that are felt to be immoral are caused by the conditions
of life in capitalist society, was, so far as I know, first stated in this book.
We cannot go beyond pointing out that this book, too, is pure natural-
law philosophy: strictly state-controlled communism is the form of ex-
istence that corresponds ideally to natural laws discerned by reason.
Gabriel Bonnot de Mably (1709-85), though he was not a communist
from the beginning, and though in the end he resigned himself to prac-
tical programs that did not go beyond rather commonplace reforms,
must also be classed as a straight communist on the strength of the
implications of the only work that can be mentioned here, Doutes
proposes aux philosophes economistes sur Vordre naturel et essentiel des
societes politiques (1768). This work contains an elaborate attack not
only upon the physiocrat theory of private property but also upon private
property itself, which is held to be an almost unmixed evil. But though
one-sided and otherwise defective analysis, Mably’s argument is still
analysis of facts and not merely a discussion of ‘rights/ The theory that
property in land is the ultimate cause of all inequalities of wealth —
repeatedly espoused in the nineteenth century and, by F. Oppenheimer
in the twentieth— may be wrong, but is still an analytic proposition or
theory. The authors mentioned as well as many others have received con-
siderable attention from historians of thought, including economists pri-
marily interested in the history of thought. See, for example, A. Lichten-
berger, Le Socialisme au XVIII 6 siecle (1895).

The French ideas of the Enlightenment were good sailors (crossing the
Channel easily), the more so because they had important English — es-
pecially empiricist and associationist — roots. High above the common
run of enthusiasm rose the book that is to represent this literature for
us, William Godwin’s Enquiry concerning Political Justice (1793). It is
only semi-socialist and even this only by virtue of its dogma that property
in the product of other people’s labor is ‘unjust.’ Perhaps those are right
who, on the strength of Godwin’s extreme distaste for violence and com-
pulsion of any kind, class him as an anarchist. In any case, the view of
human nature, according to which man’s mind is a blank — but indefi-
nitely perfectible — to be filled in by experience conditioned by social
institutions has hardly ever, before or after, been made to serve absolute
equalitarianism so uncompromisingly. Godwin was indeed goaded into
doing a piece of analytic work by the attack of Malthus. But his work
itself is essentially nonanalytic and therefore beyond the range of scien-

SCHOLASTIC DOCTORS AND NATURAL LAW PHILOSOPHERS I4I

tific criticism. It expounds a creed that is impervious to argument and

at the present time counts more adherents than it ever did.

[(g) Moral Philosophy.} All the facts presented above about eighteenth-cen-
tury thought go to show that the natural-law. approach to sociology and eco-
nomics held its own to a considerable extent and that the notion that a new
'experimental’ spirit rose victoriously against it — or else that the cult of la raison
was something fundamentally new — is as illusory as is the analogous notion
that the work of the seventeenth-century philosophers of natural law spelled
a violent break with scholastic analysis. In other words, these facts teach a
lesson of continuity in development. Nevertheless, the natural-law system of
thought disintegrated or, at least, underwent a transformation. We know that,
originally, it had been a system of jurisprudence and that all nonlegal ma-
terial had been fitted into the legal framework in an ancillary role. But in the
eighteenth century, the increase of this material and the addition of new
fields of research burst that framework. From having been in the position of
a governing holding company that unified and co-ordinated everything, 'natural
jurisprudence’ became merely a specialty of a new comprehensive unit that
was no longer primarily legal in character . 28 This new unit was called, especially
in Germany and Scotland, Moral Philosophy — the word philosophy being
taken in its old sense of the sum total of sciences (St. Thomas’ philosophicae
disciplinae) , so that, roughly, moral philosophy means the social sciences (the
sciences of 'mind and society’) in contrast to Natural Philosophy that denoted
the physical sciences plus mathematics. It was the subject of a standard course
offered within the university curricula and consisted, mainly, of natural the-
ology, natural ethics, natural jurisprudence, and policy (or ‘police’) which in-
cluded economics and also public finance (‘revenue ’). 29 Francis Hutcheson,
the teacher of A. Smith, was professor of moral philosophy in this sense at
the University of Glasgow, and so was A. Smith. Both the Moral Senti-
ments and the Wealth of Nations are blocks cut out from a larger systematic
whole. Thus the old universal social science of the scholastic doctors and of
the philosophers of natural law survived in the new form. But not for very
long. Though the moral-philosophy course figures in university curricula even

28 As we already know, the Historical School of Jurisprudence was very hostile to

this natural jurisprudence and saw nothing in it hut entirely unscientific speculation.
This view was very influential; it was in fact from the lawyers of this school that
people learned to despise everything that was in any way connected with the concept
of natural law. It should be repeated, however, that this view, while quite under-
standable considering the abuse of the idea of natural rights of all kinds, neglects an
important nonspeculative core of natural-law analysis. The natural jurisprudence of
which I speak in the text was an inadequate but still scientific theory — or general
logic — of law for which it is possible to make out a case similar to that which can
be made out for economic theory. ,

29 The contents of the course varied, however. Also, the division of all sciences into
moral and natural philosophy was neither complete nor invariable. Pure philosophy
in the narrow sense stood outside and so did logic, philology and literature, history,
and other fields.

142 II: BEGINNINGS TO ABOUT 1790

in the first half of the nineteenth century — universities are conservative — it
was rapidly losing, in most places, its old meaning and position toward the
end of the eighteenth.

This was due to the same cause that burst the natural-law system. The
accession of material in the individual branches of moral philosophy tended
to bring them into the hands of specialists, every one of whom had inevitably
to concentrate on his own branch and to neglect both the other branches and
the comprehensive principles. This applies with particular force to economics
because in this case the new material came from outside (see next chapter).
It is highly significant that A. Smith found it impossible to do what Hutcheson
had done as a matter of course, namely, to produce a complete system of
moral philosophy or social science at one throw. The time for doing this had
passed: absorption of the new material — both facts and analyses — had become
a full-time job.

As long as this absorption was not consummated, the little body of scien-
tific economic knowledge that had been inherited from the scholastics and
nursed along by the philosophers of natural law retained not only independent
existence but also a distinctive character of its own. Owing to the greater in-
tellectual refinement of the men who had created it, and to their detachment
from the immediately practical issues of economic policy, their economic anal-
ysis was different from the analysis of other people. Beholding it we cannot
fail to notice more correct formulation of fundamentals and a wider view of
practical problems, both anticipating much later opinions. But so soon as that
absorption was consummated, we naturally lose sight of it, though we do not
lose its contribution. This happened, roughly speaking, between 1776 and
1848: the latest natural-law system, utilitarianism, getting under sail when
the economic specialists had established their claim to autonomy, was not, as
were its predecessors, able to exert effective control over them.

CHAPTER 3

The Consultant Administrators

and the Pamphleteers

i. More Facts from Social History 143

[(a) Incidental Factors in the Emergence of the National States] 144

[(b) Why the National States Were Aggressive] 146

[(c) Influence of Special Circumstances on the Contemporary Literature ] 148

[2. The Economic Literature of the Period] 155

[(a) The Material Excluded] 156

[(b) The Consultant Administrators ] 159

[(c) The Pamphleteers] 160

3. Sixteenth-Century Systems 161

[(a) The Work of Carafa] 162

[(b) Representative Performances: Bodin and Botero] 164

[(c) Spain and England] 165

4. The Systems, 1600-1776 167

[(a) Representatives of the Earlier Stages] 167

[(b) Justi: the Welfare State] 170

[(c) France and England] 174

[(d) High Level of the Italian Contribution] 176

[(e) Adam Smith and the Wealth of Nations] 181

5. Quasi-Systems 194

6. Public Finance. Once More 199

7. Note on Utopias 206

1. More Facts from Social History

We know already that, as the eighteenth century wore on, economics
settled down into what we have decided to call a Classical Situation, and
that, mainly in consequence of this, it then acquired the status of a recognized
field of tooled knowledge. But the sifting and co-ordinating works of that
period, among which the Wealth of Nations was the outstanding success, did
not simply broaden and deepen the rivulet that flowed from the studies of
the schoolmen and of the philosophers of natural law. They also absorbed
the waters of another and more boisterous stream that sprang from the forum
where men of affairs, pamphleteers, and, later on, teachers debated the policies
of their day. In this chapter we shall take a bird’s eye view of the various
types of economic literature produced by these debates, reserving for subse-
quent chapters fuller treatment of works and topics that seem to require it.

This literature is not a logical or historical unit. The men who wrote it, un-
like the philosophers of natural law, form no homogeneous group. Neverthe-
less there is a link between them all which it is necessary to -emphasize: they
discussed immediately practical problems of economic policy, and these prob-
lems were the problems of the rising National State. Therefore, if we are to
understand the spirit that animates those writers, their lines of reasoning, the

i43

144 11 : beginnings to about 1790

data they took for granted, we must for a moment digress into the sociology
of those states whose structure, behavior, and vicissitudes shaped European
history — thought as well as action — from the fifteenth century on. The im-
portant point to grasp is that neither the emergence nor the behavior (‘poli-
cies’) of those states were simply manifestations of capitalist evolution. Whether
we like it or not, we have to face the fact that they were the products of a
combination of circumstances that, viewed from the standpoint of the capi-
talist process as such, must be considered as accidental . 1

[(a) Incidental Factors in the Emergence of the National States .] First, it
was an accident that the rise of capitalism impinged upon a social framework
of quite unusual strength. ‘Feudalism’ no doubt gave way, but the warrior
classes that had ruled the feudal organism did not. On the contrary, they con-
tinued to rule for centuries and the rising bourgeoisie had to submit. They
even succeeded in absorbing a great part of the new wealth for their own pur-
poses. The result was a political structure that fostered but also exploited the
bourgeois interest and was not bourgeois in nature and spirit: it was feudalism
run on a capitalist basis; an aristocratic and military society that fed on capital-
ism; an amphibial case very far removed from bourgeois control. This pattern
produced problems and — ‘militarist’ — angles from which to look at them,
which were completely different from what the mere logic of the basic
process would lead us to expect . 2 Thus, for the majority of economists, mon-
archs that were primarily warlords and the class of aristocratic landowners, re-
mained the pivots of the social system as late as the middle of the eighteenth
century, at least on the continent of Europe. The reader should therefore ap-
ply the requisite qualification to what he has read in the preceding chapter
on the increasing social weight of the bourgeoisie.

Also, it was an accident that the conquest of South America produced a
torrent of precious metals. The growth of capitalist enterprise might pre-
sumably have been expected to produce inflationary situations in any case, but
this torrent made a lot of difference to the course of events. In a way that is
too obvious to need elaboration, it speeded up capitalist development, but
much more important are two other facts about it that point in the opposite
direction. On the one hand, this access of liquid means greatly strengthened

1 Like all theorists, theorists of social history are reluctant to admit not only the
importance of causal factors other than the ones emphasized by their own theories
but also the importance of chance in the evolution of actual patterns. But the his-
torical processes that produced the situations, created the problems, and shaped the
attitudes reflected in that literature cannot be interpreted as many observers, Marxists
especially, would like to interpret them, viz., as effects of the rise of capitalism. Even
so far as they are traceable to capitalist evolution, they worked out in a way that'
differed radically from that prescribed by either capitalist interests or the capitalist
mind. Let us note in passing how important this is not only for our own limited
purpose but also for our diagnosis of the nature and modus operandi of the capitalist
system in general — and even for our philosophy of history in general.

2 I tried to illustrate this by a short analysis of an outstanding instance, the state
of Louis XIV, in Capitalism, Socialism , and Democracy, ch. xn.

CONSULTANT ADMINISTRATORS AND PAMPHLETEERS 145

the position of those rulers who were able to get hold of them. Under the cir-
cumstances of the times, this conferred a decisive advantage in the planning
of military ventures on lines that often, as for instance in the case of the
Spanish Hapsburgs, were quite unconnected with bourgeois interests in the
component parts of their farflung empire or with the logic of the capitalist
process. On the other hand, the price revolution that ensued 3 spelled social
disorganization, and hence was not only a propelling but also a distorting
factor. Much that might have been gradual change, if nothing but the basic
process had been at work, became explosive in the feverish atmosphere of in-
flation. Particular notice must be taken of the effect on the agrarian world.
By the time that inflation set in, the greater part of the dues that continental
peasants owed to their lords had been converted into terms of money. With
the purchasing power of money rapidly falling, the lords attempted in many
countries to raise the monetary values of those dues. The peasants resisted.
Agrarian revolutions were the consequence, and the revolutionary temper thus
engendered was an important factor in the political and religious upheavals of
that epoch. But, owing to the strength of the top feudal stratum, these revolu-
tions did not, as we might have expected, accelerate 'social developments in
accordance with the basic process. The risings of the peasants and of the other
groups that had revolted in sympathy were put down with ruthless energy.
The religious movements met with success only so far as they were sponsored
by the aristocracies and in the most important cases quickly lost such social
or political radicalism as had been originally associated with some of them.
Princes and barons, armies and clergies, emerged from the trial with enhanced
prestige and power whereas the prestige and the political power of the bour-
geoisie declined, especially in Germany, France, and Spain. The great excep-
tion, on the Continent, was the Netherlands.

A third historic event of prime — and lasting — importance was the break-
down of the only effective international authority the world has ever seen. As
has been pointed out, the medieval world was a cultural unit and, in principle
at least, professed allegiance both to the Empire and to the Catholic Church.
Although widely different- views were held as to their true relation to one
another, these two together formed a supernational power that was not only
ideologically acknowledged but also politically invincible so long as they were
united. According to the traditional view, this power was bound to wane as
soon as the acids of capitalism began to dissolve the basis of medieval society
and its beliefs. This is not so. Whatever those acids might have eventually
done to that dual power, they had nothing to do with the actual breakdown
that occurred long before those beliefs were impaired, simply because of the
fact — which, from the standpoint of the basic process, was again accidental —
that, for reasons which cannot be analyzed here, the empire was unable either

3 This price revolution set in "before the impact of the new gold and silver had
made itself felt, and was at no time a function of their inflow alone. For our pur-
poses, however, the popular opinion that it was may be allowed to stand as an
approximation.

146 II: BEGINNINGS TO ABOUT 1790

to accept the supremacy of the Popes or to conquer them. A prolonged struggle
that shook the Christian world to its foundations ended in a Pyrrhic victory
of the Popes in the time of Frederick II (1194-1250). But in this struggle
both parties had so thoroughly exhausted their political resources that it is
more correct to speak of a common defeat of both: the Popes lost authority,
the empire disintegrated. In consequence, medieval internationalism was at an
end and the national states began to assert their independence from that super-
national authority which had been formidable only so long as the Roman
church co-operated with the 'temporal sword’ of Germany. 4

[(b) Why the National States Were Aggressive .] It must be left to the
reader to develop the implications of all this. But it should be clear that it
was the persistence of aristocratic rule, the access of ideally disposable wealth,
and the breakdown of the supernational power of the Middle Ages — rather
than anything derivable from the capitalist process itself — that explain not
only the emergence but also the political physiognomy of the modern state.
In particular, those facts explain why the modern state was 'national' from the
first, and refractory to any supernational consideration; why it insisted and
was compelled to insist on absolute sovereignty; why it fostered national
churches even in Catholic countries — as instanced by Gallicanism in France;
and above all why it was so aggressive. The new sovereign powers were warlike
by virtue of their social structures. They had emerged in a haphazard way.
None of them had all it wanted; each of them had what others wanted. And
they were soon surrounded by new worlds inviting competitive conquest. Be-
cause both of this situation and the social structure of the epoch, aggression
— or, what is the same thing, 'defense’ — became the pivot of policy. In this
fermenting world, peace was but armistice, war the normal remedy for political
disequilibrium, the foreigner ipso facto the enemy — as he had been in primitive
times. All this made for strong governments; and strong governments, chroni-
cally suffering from political ambitions that went beyond their economic
means, were driven to increasingly successful attempts to make themselves
still stronger by developing the resources of their territories and harnessing
them into their service. This in turn explains, among other things, why taxation

4 Perhaps it is misleading to stress the national element in this change. Though it
shows well enough in the most important cases, those of France, Spain, and, earlier
than anywhere else, in England, the true nature of the phenomenon will be more
clearly visualized if we take account of the fact that in Germany and Italy, the coun-
tries that had been immediately subordinated to the imperial power, such states or
‘principalities’ emerged on a nonnational basis: it was not, at first, national feeling that
welded those units but rather the interest of feudal princes who were strong enough
to organize, to defend, and to rule a territory. Frederick II’s own kingdom of Naples
and Sicily is the earliest example, the Prussian state of another Frederick II the most
telling. Popular support that might be linked up with capitalist interests and national
sentiment came later and was as much the consequence of habit-forming conditions
as it was a causal factor in subsequent developments. Nevertheless we shall, for con-
venience, go on speaking of the National State.

CONSULTANT ADMINISTRATORS AND PAMPHLETEERS 147

assumed not only a much greater but a new significance (see sec. 6 of this
chapter).

These facts, though fundamentally the same all over Western and Central
Europe, produced somewhat different results according to the circumstances
of different nations. Neglecting smaller countries, we find the main differ-
ence was between England and the Continent. In Germany, economic and
political trends were broken by the course of events centering in the Thirty
Years’ War (1618-48), which created an entirely new situation and changed
the political and cultural pattern of Germany for good. On the ravaged soil
and in a population that had in places been reduced to less than 10 per cent,
the princes, their soldiers, and their bureaucracies were, in the greater part
of the national territory, practically all that was left of the political forces
of the past. In Italy, alien rule and also devastation were responsible for a
situation that differed from the German one only in degree. France and
Spain did not have to go through experiences like these, but religious troubles
and unending war efforts produced similar impoverishment in Spain and similar
political and administrative conditions in both France and Spain.

In most of these countries — one exception is instanced by Switzerland and
another by Hungary — the prince came to personify the state and the nation
from the sixteenth century on. He succeeded in subjecting all classes to his
authority — the nobility and the clergy not less than the bourgeoisie and peas-
antry, though the two former on the understanding that they should continue
to hold a position of social and economic privilege. The wealth and power of
this state was the unquestioned object of policy: maximum public revenue —
for the court and the army to consume — was the purpose of economic policy,
conquest the purpose of foreign policy. There should be no need for showing
how concern for the welfare of the classes on which that social system fed
entered into that policy: this welfare was not looked upon simply as a means
to an end; it was an end in itself for many a great monarch or administrator,
exactly as the welfare of his workmen was and is an end in itself for many a
great industrialist; but it had to fit in with the given political pattern and with
the given social system. All this — precisely where concern for the welfare of
manufacturers, farmers, and laborers was most real — meant management of
everything which in turn meant the rise of modern bureaucracy, a fact that is
no less important than is the rise of the business class. The resulting economy
was a Planned Economy; and it was planned, primarily, with a view to war. 5

5 This might be illustrated by the careers and policies of many great administrators
of international and historical reputation. Comparative study of these men and their
measures also brings out interesting differences and, above all, the fact that precisely
the greatest of them cannot be said to have followed any consistent system of prin-
ciples at all. One aspect of this will be mentioned presently in our text. We must
confine ourselves to a brief comment upon Colbert, who has been and still is con-
sidered by many historians as tbe typical representative of that imaginary entity, the
'mercantilist system’ — so much so that Colbertism is often used, especially in Italian,
as a synonym of mercantilism. Jean Baptiste Colbert (1619-83), of bourgeois origin,
was a civil servant who rose to be minister of finance (this, although various other

148 II : BEGINNINGS TO ABOUT 1790

In England we observe the same tendencies. But there they were weaker
and resistance to them was stronger because she was saved from the experi-
ences that elsewhere broke the backbone of aristocracies and bourgeoisies alike.
This was perhaps not merely a matter of a few miles of channel; but we may
for brevity’s sake adopt a theory which is only inadequate not untrue, namely,
that it was the absence of actual foreign invasions and the rarity of serious
threats of invasion that reduced the necessity for a military establishment —
a navy of course carries much less political weight — and, in consequence of
this, the power and prestige of the crown and of all the administrative agencies
dependent upon the crown. The most obvious symptom of the difference this
made, the survival in England alone of the old semifeudal constitution, is not
in itself important for us. But all the more so is the fact that, throughout, the
English state did not succeed in taking hold of national life as did the states
elsewhere and that in particular the economic sector of national life, colonial
venture included, remained relatively autonomous. Planning, if not absent, was
more limited in scope — concerned principally- with the relations of the Eng-
lish economy to Ireland and the colonies, and with foreign trade — and, what
is still more to the point, was less strictly enforced than it was in most conti-
nental countries. But for the writers on economic topics this made less differ-
ence than we might expect. Some of them nevertheless reveled in visions of
planning. And while some voiced the businessman’s views, others voiced
those of the bureaucrat. Also, we must never forget, if we wish to understand
them, that practically all of these writers, in spite of what has just been said,
consistently wrote with war and conquest in their minds. After all, notwith-
standing her own relatively sheltered position, England was then going through
the buccaneering stage of her imperialism.

[(c) Influence of Special Circumstances on the Contemporary Literature .]
Unfortunately, the literature to be surveyed cannot be understood from the

offices were added from time to time, is the best way in which to describe his main
function, which must, however, be understood to cover the affairs of industry, com-
merce, and agriculture as well) in the first period of Louis XIV’ s reign. He was an
honest, able, and energetic administrator who knew how to raise money, intimidate
creditors, improve administrative and accounting methods, stimulate industry, build
palaces and harbors, develop the navy, and so on, though he was distinctly unlucky
in the execution of his larger plans, e.g. colonial enterprise, the history of which shows
that the wastes of public planning may easily surpass anything that, on the score of
wastefulness, can be charged to private enterprise. There is no reason to extol his
achievement, especially to see in him the oversized champion of some great principle,
as did some of his admirers. See on Colbert and his immediate successors, C. W. Cole,
Colbert and a Century of French Mercantilism (1939), and French Mercantilism,
1683-1700 (1943). In his review of the former book, in Economic History (February
1940), Sir John Clapham voiced a reaction against unintelligent admiration that is
almost amusing in its vehemence: according to him, Colbert had 'no single original
idea’ (which is true but beside the point in the appraisal of an administrator) and was ,
a ‘big stupid man,’ tyrannical, brutal, fussy. For the period preceding his administra-
tion, see J. U. Nef, Industry and Government in France and England, 1540-1640

(1940)-

CONSULTANT ADMINISTRATORS AND PAMPHLETEERS 149

facts referred to alone. Much of it is conditioned by individual situations in
individual countries that writers took for granted, and by individual issues
that arose from these situations. Even books and pamphlets that do not deal
with questions raised by an individual bill or practice can hardly be appreci-
ated without full knowledge of the particular national patterns as seen by theii
authors. A lengthy list of mistakes in interpretation and appraisal that were
committed, especially by nineteenth-century ‘liberal’ critics of that literature
but also by later ones, could be compiled to illustrate this truth. But there is
nothing we can do about it here 6 beyond offering the following generalities.
A few other facts will be added where necessary as we go along.

i. All the economics of those times — with the possible exception of the
Dutch branch of it — was written in and for countries that were poor. This
holds without exception if ‘poor’ is equated with ‘undeveloped.’ All European
countries stood at the beginning of their industrial and even of their agricul-
tural careers and everybody realized this. With us, economic expansion is pri-
marily linked with new wants and methods; that age, however, had practically
inexhaustible possibilities before it with existing wants and technologies, in
addition to what it was coming to expect from technological progress and from
conquest. But our proposition applies in a different sense and with added force
to the great continental countries that in the second half of the seventeenth
century were faced also with an immense reconstruction problem. They were
poor even relatively to what they had been in the sixteenth century. It should
be clear that in such conditions policies and reasonings may have had mean-
ing that seemed mere nonsense to observers who viewed them from the stand-
point of nineteenth-century conditions.

ii. Throughout, all countries — even England — were predominantly agrarian.
Their economic problems were primarily agrarian problems, the masses of their
people were agrarian masses — peasants, farmers, agrarian laborers. In the six-
teenth, seventeenth, and eighteenth centuries, this agrarian world underwent
changes that revolutionized it completely: economic historians rightly speak
of an agrarian revolution, or rather of several agrarian revolutions. This phrase
indicates two distinct, though of course related, types of change that rein-
forced each other and would have broken down the framework of medieval
society even if nothing had happened in the industrial sector. On the one
hand, there was a long series of changes in the technologies of all branches
of agrarian production — this process gained momentum in the eighteenth
century but started at the beginning of the sixteenth. On the other hand,
there was, in sympathy with the technological revolutions, a process of organi-
zational change that turned medieval manors into grain, wool, and meat fac-
tories and destroyed the old relations between lords and peasants or farmers.

6 It is impossible, even, to give an annotated reading list, for it would fill a volume.
Going to the other extreme, therefore, I shall mention but two well-known standard
works which in any case are, or ought to, be, in every student’s hands: E. F. Heckscher’s
Mercantilism (1931, English trans. by M. Shapiro, 1935) and P. Mantoux’s The In-
dustrial Revolution in the Eighteenth Century (rev. ed., 1927, English trans. by M.
Vernon). These works contain the bulk of what the reader ought to know.

150 II : BEGINNINGS TO ABOUT 1790

It must suffice to mention the chief English form of this type of change, En-
closures. Governments and, accordingly, writers took two characteristically
different attitudes to this change. On the Continent, and especially in Ger-
many, governments made a determined and largely successful effort to save the
peasants and to turn them eventually into a class of small landowners. In Eng-
land, the land-owning and land-tilling yeomanry was allowed to disappear
and, deserted-village emotionality notwithstanding, the large estate prevailed,
not however as a producing unit but as a unit of administration that left
production to the workman-capitalist, the farmer.

in. But it is by no means surprising that manufacturing and international
trade, comparatively insignificant though they were, attracted more literary
attention than did agriculture. They were the young children and, moreover,
the children on whom the future of the family was mainly felt to depend.
Also, they had more motive and opportunity than had the landowners and
farmers to spill ink on their own behalf. For economics this simply meant that
there were more 'industrial and commercial’ than 'agricultural’ economists..
But the existence of these two groups of writers was primarily a phenomenon
of division of labor as it is now: their very natural antagonisms should not be
sublimated into antagonisms between philosophies either of life or of economics
except in cases — the only important one is that of the physiocrats (see below,
ch. 4) — where there is some provable warrant for it.

Large-scale enterprise — large relatively to environmental standards — emerged,
to a significant extent, in the fourteenth century in Italy, in the fifteenth in
Germany, in the sixteenth (under Elizabeth) in England, first in the financial
and commercial sphere and then in the sphere of production. But, substan-
tially, the manufacturing industry that economists beheld and reasoned about
was all along the manufacturing industry of the artisan (still organized in
craft guilds), of the 'master’ of domestic industry, and of the owner-manager
of factories that were few and mostly quite small. In Western Europe, es-
pecially in England, this changed (significantly but not fundamentally) in the
Industrial Revolution of the last decades of the eighteenth century, but the
full consequences did not reveal themselves before the first decades of the
nineteenth. Many authors, occasionally even A. Smith, class the manufacturer
with the workman. No author, not even A. Smith, had any very clear idea
of what the processes really meant that led to what economic historians have
dubbed the Industrial Revolution. A. Smith felt that the corporate form of
industry was an anomaly except in such cases as canals and the like. To him
and his contemporaries big business still meant commercial and financial big
business — colonial enterprise particularly. And they looked upon it much as
modem economists look upon any kind of largest-scale business, namely, with
feelings of resentful distrust.

rv. This industrial and commercial evolution was characterized, almost until
the end of the period under discussion, by 'monopolistic’ policies and business
practices that were one of the chief topics of the economic literature of that
period and have been visited with sweeping condemnation by economists and
economic historians from A. Smith to this day. By 'monopolistic' public policy

CONSULTANT ADMINISTRATORS AND PAMPHLETEERS 151

and private business practice, we mean measures and forms of behavior in-
tended to secure profitable 'vent 7 for the products or services of an individual
or group by (1) beeping the foreigner out of national and international mar-
kets — which, so long as national territories had not become economic units,
often included keeping out the producers and traders of the neighboring town
or district; (2) keeping out of a trade, so far as possible, all connationals other
than the favored individual or group — for instance, keeping retailers out of
the merchant’s business; (3) restricting the output of the favored individual
or group itself and regulating its distribution between markets. Let us stay
for a moment in order to^analyze, in the light of the preceding considerations,
the reasons for the prevalence of this policy and practice.

First, we might expect that, if fullfledged capitalism had suddenly burst
upon the world and if it had been permitted to unfold without being dis-
torted by the factors referred to, both business behavior and public policy
would have been from the first what they became in fact, for a time, in the
nineteenth century. That is to say, we might expect that in this case there
would have been, in countries that were so poor in goods and so rich in possi-
bilities, an onward rush of competitive enterprise. This expectation would be,
however, only in part justified. Poverty is a bad customer, and normal risks
of doing business are greatly increased in an environment where the wealth
from which demand is to proceed has not only to be attracted but created.
In business as elsewhere, forward strategy very often requires defensive tactics
as a complement, though most economists of all ages stubbornly refuse to see
this. But under conditions in which long-run advance was inevitably slow,
each stage had to be safeguarded with particular care in order to gain means
and time for advancing beyond it. It is quite .natural that the observing his-
torian should be much more impressed by the practices and policies that
aimed at protective restriction, which dominate the scene at every point of
time, than by the picture of the process over time. 7 But it is true nevertheless
that even an ideally rational government, actuated by the sole motive of fos-
tering industrial development, would have had to grant privileges of monopoly
in many cases in which enterprise would not have been possible at all without
it, and that, in others, it would have had to permit monopolistic practice on
the part of the businessmen concerned. This holds, of course, with added
force for those countries that had been ravaged by war, such as Germany,
where only prospects of abnormal gain could call forth entrepreneurial effort
from a population immersed in misery and despair.

Second, however, capitalism did not burst upon a world that was a blank:
it grew by slow degrees from a pre-existing pattern dominated, in the respect
under discussion, by the spirit, institutions, and practice of craft guilds. New

7 There is no better illustration for this attitude than the late George Unwin’s
brilliant essay on the Merchant Adventurers in Studies in Economic History (1927).
Professor Heckscher (op. cit.), with less reluctance to penetrate beyond that short-run
view, formalized the situation into the two polar concepts of ‘hunger for goods’ and
‘fear of goods,' which do not express well the economics of it.

152 II: BEGINNINGS TO ABOUT 1790

products, new methods of production, and new forms of enterprise are re-
sisted by any environment; but in these centuries there was in existence a
legal machinery of resistance that worked automatically. This bears upon our
topic in two ways. On the one hand, legislation and administration in all
countries, under pressure from craft guilds and in their interest, subjected the
newer Tree’ enterprise to various regulations that spelled restriction of output.
On the other hand, though these regulations have no roots in the capitalist
system, but spell distortion of it, the merchants, masters, and so on who were
affected by them naturally made the best of a bad business and organized
themselves in a similar way. There were several reasons — besides the gains to
be expected from restrictive regulation — why this came easily to them: the
merchants and masters were themselves the products of a world in which
organization and corporate action was the recognized thing and they had no
objection to accepting ‘ethical’ and religious codes, enjoining standardized be-
havior, prayer meetings included. They lacked standing and political weight
so long as they acted as individuals, whereas each Worshipful Company was
a political power; and, in the most important case of overseas trade, the need
of providing for physical protection and aggression — there were such things
as joint stock companies formed for no other business than piracy — was a
motive that was bound to throw traders together and to invite corporate
action in other respects also. The Chartered Company, not a trading company
itself but rather the organizational shell for the trade of its members, was,
partly in opposition to, and partly in alliance with, the medieval Staple System
( jus emporii ), the obvious answer to all these needs and the natural instru-
ment for making the most of the opportunities afforded by the protectionism
of the age . 8

Third, the governments of the national states had particular motives of their
own for creating or favoring more or less ‘monopolistic’ organizations or posi-
tions. One of these motives has been mentioned already, the reconstruction
motive. Another was the prospect of personal gain for the rulers — Queen
Elizabeth participated personally in the gains (and losses) of ‘monopolistic’
ventures, even in the proceeds of downright robbery. The same great monarch
offers outstanding examples of the method of providing for favorites by grant-
ing them letters patent of monopoly. Also, ‘monopolist’ organizations were
sponges, which it was much easier to squeeze than it would have been to

8 It is unfortunate that we cannot go more fully into the meaning and structure of
both. Reference to Professor Heckscher’s work must suffice. One point must be men-
tioned, however. The staple system has been called medieval because it grew out of
the pattern of craft-guild industries in the thirteenth century (it had spread to England
by the time of Edward III, as his ordinance on staples shows). But, adapting itself
to changing conditions, it survived, as a general method of regulating international
trade through the greater part of the period under survey, in Venice even until the
Napoleonic occupation. In England, the loss of Calais in 1558 killed one form of it
but in another form it continued to prevail: in fact, it was fully developed only by
the Navigation Act of 1660 (for the policy of the Navigation Acts is but a special
type of staple policy) and by the Staple Act of 1663.

CONSULTANT ADMINISTRATORS AND PAMPHLETEERS 1 53

squeeze a large number of independent entrepreneurs. And, finally, given
strong governments, such organizations are not only easier to exploit but also
easier to manage: their own administrative organs are so many ready-made
handles for governments to seize. This aspect will appear in its full importance
if we remember the nature of the policy of those governments for whom
measures concerning trade were just one of the instruments of aggressive power
politics: to force trade in one direction, to stop it entirely in another, was in
some cases almost as effective as was a campaign; moreover, colonial com-
panies of different nations might wage war upon each other while the re-
spective national governments were officially at peace . 9

Very naturally, the public at large resented being exploited in any of those
ways and for any of those purposes without troubling to distinguish between
them and without asking the question whether or not there were any com-
pensating advantages to those practices in some cases, for instance, in cases
where certain articles could not have been provided at all without them. The
copious literature on the subject — the reader knows most of it if he knows
the corresponding popular literature of today — simply reflected this resent-
ment and rarely 10 went beyond denouncing favored individuals and groups,
the East India Company and the Merchant Adventurers being, in England,
the most popular targets. Even the businessmen joined the fray against re-
striction and privilege in almost every case that was not the writer’s own:
everyone was the sworn enemy of everyone else’s privilege. Thus, most search-

9 Again we may appeal to Dr. Unwin’s lectures (op. cit.) for illustration of a kind
of ‘liberal’ criticism of such attitudes and policies that tends to obstruct historical
understanding even where it asserts nothing that is not correct. He offers strong reasons
for believing that England did not net any national advantage from either her
‘monopolistic’ policies or her buccaneering (though it is going rather far to assert that
robbery of treasure was not nationally remunerative because it destroyed the essential
thing, credit) and, so far as this goes, errs only by ignoring the long-run aspects of
‘monopolistic’ restriction and ‘monopolistic’ gains. But his case, were it even stronger
than it is, must remain inconclusive precisely because it is the case of the nineteenth-
century liberal. The pattern of sixteenth and seventeenth-century behavior must be
considered from the standpoint of sixteenth and seventeenth-century data . and. men.
If we do this, even from a purely economic angle, irrationality is not so obvious. But
in a situation of perennial warfare, where harming the other fellow is an end in itself,
purely economic considerations are obviously inadequate. And there is something else.
In discussing historical situations we must always distinguish between the principles
underlying a form of behavior and the efficiency with which they are acted upon.
This is very important. A. Smith, for instance, argued as much against the corruption
and mistakes incident to the state management of his own and earlier times as he
argued against state management per se. And so do we: the present-day argument
against socialism or against extension of bureaucratic control is as much an argument
from inefficiency to be expected in the application of the principles of socialism or
control as it is an argument against these principles themselves. Both types of argument
have their place but they must be kept separate.

10 The most important instance is the ‘discovery’ of oligopoly (see below, ch. 6,
sec. 3c).

154 11 : beginnings to about 1790

ing analysis was produced principally by ‘special pleaders’ who defended in-
dividual cases. 11 Let us recall, however, from Part 1 that the motives of the
analyst are not relevant to the question whether his facts or arguments are
or are not true, valuable or not valuable, and that the presence of ‘interested
motive,’ however effective its revelation may be in popular discussion, no more
invalidates the reasoning that proceeds from it than its absence avails to vali-
date a man’s reasoning. For us, the special pleader’s facts and argument are
just as good or bad as those of the 'detached philosopher,’ even if he exist.

Explanations too obvious to detain us may be offered for the fact that the
public’s reaction to restrictive practice was much stronger in England than
it was on the Continent: to mention a symptom, free trade, which in the
seventeenth century meant, among other things, abolition of the staple system
or abolition of the chartered companies or at least every trader's right to be-
come a member of the latter, found support in parliament and a fairly sweep-
ing bill against restrictions of trading — not, of course, for free trade in the
later sense of the term — was introduced, though not carried, as early as 1 604.
But there is another point of difference that is of considerable interest to us.
The reader may have observed that, however objectionable to the man in the
street most of the restrictive practices and legislative measures may have been,
they did not create monopolists in the strict Sense of Single Sellers, 12 and did
not result in specifically monopolistic pricing. Nevertheless, the general outcry
against them all was against monopoly. The reason is not far to seek. Though
the English public of Queen Elizabeth’s time can hardly have been influenced
by the fact that monopoly had been stigmatized already by Aristotle and the
scholastics, it harbored old resentments, dating from the Middle Ages, against
corners and the like. These resentments flared up into fury when Elizabeth
and James I adopted the practice of creating in large numbers what were in
fact genuine monopolies and, moreover, monopolies that presented, in most

11 One of the best of those performances may be mentioned by way of example:
John Wheeler’s Treatise of Commerce, Wherein are shewed the Commodities arising
from a well ordered and ruled trade, such as that of the Societie of Merchants Ad-
venturers is proved to be. Written principally for the better Information of those who
doubt of the Necessarinesse of the said Societie in the. State of the Realme of England
(1601), and, so we may add, in view of impending hostile legislation.

12 Monopoly in the strict sense denotes the position of a single (individual or cor-
porate) seller, who faces a demand schedule that is given to him independently of his
own action and of the action of sellers of competing goods. The exclusive right to
sell port wine may, in the conditions of sixteenth and seventeenth-century England,
be considered as a good practical approximation to strict or genuine monopoly, although,
in general, a seller of port wine could not expect the demand schedule to stay put
when the prices of similar beverages varied. But the big trading companies such as
the Merchant Adventurers were not monopolies in this sense, for though they regulated
the business of their members they did not in general fix prices. The reason why
economists should confine the term Monopoly to the ‘genuine’ case defined is that
their theory of monopoly price applies to this case only — or, to put it differently,
because specifically monopolistic price policy is possible in this case only — so that
nothing but confusion can result from any wider definition.

CONSULTANT ADMINISTRATORS AND PAMPHLETEERS 155

cases, no redeeming features. In the struggles over these, the word Monopoly
became loaded with emotion, a bugbear for all time to come, that was in the
mind of the average Englishman associated with royal prerogative, favoritism,
and oppression; and Monopolist became a term of opprobrium. But once a
word has acquired an emotional value, positive or negative, that guarantees
automatic reaction from almost anyone who hears or reads it, speakers and
writers will try to exploit this psychic mechanism by applying the word as
extensively as possible. And so monopoly came to denote almost anything
that a man disliked about capitalist practice. This emotional attitude naturally
spread to the United States the more readily because a large percentage of
English emigrants to this country were, for other reasons, strong opponents
of the Tudor-Stuart regime. It has survived, and has powerfully influenced
public opinion, legislation, and even professional analysis to this day, both in
England and the United States. 13

Most of what has been said in this section indicates definite patterns of
behavior that seem to invite sublimation into 'principles/ This has in fact
been done, and the phrases Mercantilism, Mercantile System, Mercantilist
Policy have been coined, first by hostile critics, to denote the result. Never-
theless, I have tried to avoid using them so far. The reason for this will be
explained in Chapter 7, where we shall make Mercantilism — phrase and
reality — our central theme. Meanwhile I wish to ask my readers to forget
all they may know about it and to peruse what follows with an open mind,
that is, with a mind unbiased by unhistoric preconceptions.

[2. The Economic Literature of the Period]

We shall now try to classify the unwieldy material from which we are to
extract more or less significant products of analytic effort. This is a difficult
task. Even in our own day economists are not always of one mind as to which
performances do and which do not measure up to professional standards. But
we are dealing with a formative period in which there were no professional
standards, not, at all events, before the Classical Situation at the end of it.
Moreover, the field itself was undefined and, by virtue of this fact alone,
much wider than it is now: it covered, for instance, technology. However,
in order to reduce our task to manageable proportions, we shall right away
exclude from consideration certain bodies of literature that are also excluded

13 This explanation seems to be more convincing than the usual general references
to a specifically English love of freedom and fair play or to a specifically continental
propensity to accept regimentation and the like. An English example that will illustrate
both the phenomenon to which I wish to draw attention and its persistence is afforded
by the nineteenth-century English champions of free trade in foodstuffs, who loved
to refer to their opponents as 'monopolists’ although neither the English farmers nor
the English landowners were monopolists in any meaningful sense of the term. Even
Sir Robert Peel, who occasionally displayed a sense for demagogical values, used the
phrase in his speech in the Commons delivered on the defeat of his great ministry
in 1846.

156 IT. BEGINNINGS TO ABOUT 1790

by modem practice, though we must not conceal from ourselves that, in so
doing, we may be excluding pieces of analysis that are not inferior to some
we include without question. This operation on our material is performed
in 'the four paragraphs which follow.

[(a) The Material Excluded .] i. In the sixteenth century and even
later, Oeconomia still meant household management. This type of litera-
ture seems to have been extremely popular. The no doubt unreliable
method of browsing among books of this sort did not yield anything
that would qualify for notice in this history. But two samples may be
mentioned: first, the famous Oeconomia ruralis et domestica (1593-1607)
by Johann Colerus, which lived for over a century and contains all sorts
* of advice about housekeeping, including farming, gardening, and do-
mestic medical practice; second, L’Economo prudente (1629) by B.
Frigerio, who defined economia as 'a certain prudence with which to
govern a family 7 (ch. ix, for instance, deals with the governo of one’s
wife) and might conceivably interest some economists because it attempts
to describe national economic behavior — in fact its concept of the
economo is a common-sense forerunner of the concept of the Economic
Man. Similarly, B. Keckermann, Systema disciplinae politicae (1606)
defined Oeconomia as disciplina de domo et familia recte dirigenda.

11. Much more important is the literature on accounting and com-
mercial arithmetic, which shades off into the neighboring literature on
business management, business law, commercial geography, and business
conditions in various countries. A few examples will characterize the
contents of these literatures, which we exclude, although little pieces of
purely economic analysis do occur in them. Fra Luca Paccioli’s Summa
de arithmetica, geometria, proportioni e proportionality (Venice, 1494)
contains, besides the ordinary commercial calculations of interest, bills,
exchanges, and so on, also an exposition of double-entry bookkeeping.
The first German book on double-entry bookkeeping that I have seen is
W. Schweicker’s Z wifach Buchhalten (1549). Such texts became com-
mon in the sixteenth and seventeenth centuries. So did guides to com-
mercial practice in the trading centers of Europe. One of the earliest
and most famous of these which the reader may look up in Cunning-
ham’s Growth of English Industry and Commerce (5th ed., vol. 1, pp.
618 et seq.) was F. B. Pegolotti’s La Pratica della mercatura (about
1315). The seventeenth-century publications of this type often contain
rudimentary economic arguments. See, for example, John Roberts, The
Trades Increase (1615), and Lewes Roberts, The Merchants Mappe of
Commerce (1638). In the seventeenth and eighteenth centuries we find,
on the one hand, a rich crop of monographs, especially on banks, some
of which will have to be noticed later on, and, on the other hand, com-
prehensive compilations. We must mention Jacques Savary’s Le parfait
negociant (1675), which proved its vitality by going through new editions
until 1800 and seems to me to repeat, on a larger scale, the performance

CONSULTANT ADMINISTRATORS AND PAMPHLETEERS 157

of G. D. Peri, II Negotiante (1638-65) and the still earlier one of B.
Cotrugli Raugeo, Della Mercatura e del mercante perfetto (1573); and
Savary’s son’s (Jacques Savary des Bruslons) Dictionnaire universel du
commerce . . . (finished and published by his brother Philemon-Louis,
1723-30). Malachy Postlethwayt’s Universal Dictionary of Trade and
Commerce (1751-5), though based upon the latter, is by no means a
mere translation of it, as has sometimes been asserted (on the differences,
see E. A. J. Johnson, Predecessors of Adam Smith, 1937, Appendix B.
The same author, in the same work, Appendix C, also reduced to its
proper proportions the charge of plagiarism that has been frequently
leveled against Postlethwayt, though the case remains bad enough).
Neither of these dictionaries is, however, primarily concerned with what
we call economics. Both were meant to serve the merchant’s practical
needs and deal with economic problems only incidentally. This is the
difference in principle that, apart from the statistical complement, sep-
arates these ventures from later similar ones, especially from McCulloch’s
Dictionary, Practical, Theoretical, and Historical of Commerce and
Commercial Navigation (1832).

hi. It is with misgivings that I also exclude the literature on husbandry
(farm management, agrarian technology) and forestry; the exclusion of
other technological material need not cause qualms, though some writ-
ers, for instance writers on the technological aspects of mining, also
dealt with economic subjects (see G. Agricola, De re metallica, 1556,
later translated into German, an apparently highly successful treatise).
The development of the literature on husbandry during the period may
be briefly sketched as follows. In the thirteenth century there was a
group of English writers — nobody has so far been able to link them up
with either predecessors or immediate successors — who produced several
remarkable works on estate management and farming (translated from
Norman French and critically edited for the Royal Historical Society
by Miss Elizabeth Lamond, 1890); it suffices to mention a treatise on
Husbandry, written before 1250 and attributed to Walter of Henley.
Disregarding this group, we find active interest in these matters from
the fifteenth century on, when new editions of the Roman agriculturalists
(Scriptores rei rusticae, the earliest edition I have seen is dated 1472),
Columella in particular, seem to have been eagerly demanded. A new
spirit of commercialism in agriculture — associated with the upheavals
in the social structure of the countryside — then produced everywhere a
literature that aimed at teaching those new methods of production, the
introduction of which is usually referred to as the Agrarian Revolution.

In England, there is a continuous development from Fitzherbert’s Boke
of Husbondrye (1523), to Weston’s Discours of Husbandrie used in
Brabant and Flanders (1650), to Worlidge’s Systema agriculturae (1669),
Mortimer’s Whole Art of Husbandry (1707), and Jethro Tull’s Horse-
Houghing Husbandry (1731), which stands at the fountainhead of an
outburst of literary activity that lasted throughout the eighteenth century

8 II: BEGINNINGS TO ABOUT 179O

and, in a sense, culminated in Arthur Young’s copious writings (see,
e.g., his Rural Economy, 1770, and his periodical, the Annals of Agricul-
ture). This literature dealt with a wide range of topics from enclosures
to drainage, drilling, crop rotation, turnips and clover, and cattle breed-
ing. On the Continent, the Dutch led in agricultural practice, but the
Italians in the literature of the subject. Let us notice as a forerunner, as
yet substantially under the influence of the ancients, P. de Grescenzi
(Opus ruralium commodorum, I only know the edition of 1471) and
then A. Gallo ( Died giornate della vera agricoltura, 1566), G. B. della
Porta (1583), and especially the strikingly original Camillo Tarello
(Ricordo di agricoltura , 1567, but I only know an edition of 1772), who
in important points anticipated the development of almost tvfo cen-
turies. Of German contributions, we shall notice Heresbach’s Rei rusticae
libri quatuor (1570, first translated into English, 1577) and the work
of Colerus (see above). Developments were then interrupted, but were
resumed by the end of the seventeenth century to run on steadily to the
writings on rural economy of J. C. Schubart (1734-87), whom Emperor
Joseph II ennobled with the significant title of 'Cloverfield.’ The Span-
iard, G. A. de Herrera ( Libro de agricultura . . . new ed. 1563), arid
the Frenchmen, Charles Estienne (U Agriculture et maison rustique,
1570; Italian trans. 1581; I do not know the original) and Oliver de
Serres ( Thedtre d’ agriculture, 1600) should also be mentioned. This at-
tempt to locate the early landmarks must suffice, although this literature
contributed considerably to the formation of some of the habits of
thought that are most characteristic of modem economics. The same is
true of the literature on forestry, into which I have not been able to go
at all. It is worth noting, however, that forestry remained a recognized
division of German treatises on general economies right into the nine-
teenth century.

iv. Description by travelers of the economic conditions they observed
in foreign and even in their own countries forms an important part of
the economic literature in the period under discussion, owing to the ab-
sence of regular reporting by permanent agencies. This method of re-
porting on facts and interpreting them was done on very different levels
that range from stray observations to careful analyses, occasionally involv-
ing considerable bits of theory. Neglect of this literature is apt to distort
seriously our picture of the economics of those centuries and in particular
to hide the full extent of the fact-finding work that was actually done.
Nevertheless, we have no choice but to exclude this literature. It must
suffice to mention two famous English samples which will repay perusal:
Sir William Temple’s Observations upon the United Provinces (1672;
3rd augmented ed. 1676), which presents conditions in the Netherlands
from the standpoint of a definite philosophy of wealth (that centers on
'frugality and industry’), and Arthur Young’s reports on his various tours
and travels (most important in this connection: Travels . . . with a view
to ascertaining the Cultivation, Wealth Resource, and National Pros-

CONSULTANT ADMINISTRATORS AND PAMPHLETEERS 1 59

perity of the Kingdom of France, 1792), which contain a lot of what

might be termed ‘theory in action/

[J. A. S. intended to have this discussion of the Excluded Material set up in small
type as being of interest only to the specialist. Many of the books mentioned he ex-
amined in the Kress Library (Harvard School of Business Administration), which seemed
both to him and to the Editor to be a kind of scholars’ Paradise.

To Professor Alexander Gerschenkron I owe the information that Georg Agricola’s
De re metallica (mentioned above, hi) was translated into English by Herbert Clark
Hoover and Lou Henry Hoover (1912; new ed. 1950).]

[(b) The Consultant Administrators.) The authors of the remaining ma-
terial we shall divide into two clearly, if only broadly, distinct groups. We
shall call them the Consultant Administrators 1 and the Pamphleteers. Among
the Consultant Administrators, teachers and writers of more or less systematic
treatises form a subgroup that is relatively easy to delimit. In that paradise
of bureaucracy there was, of course, a steady demand for the instruction of
young men who were preparing themselves for the public-service career — or
of older men who wished to improve their equipment — particularly in Ger-
many and Italy. In the course of the eighteenth century, professorial chairs
began to be provided for the teaching of what was described, in Germany, as
Cameral Science or Science of the State (Staats^vissenschaft) and what may
be more accurately described as Principles of Economic Administration and
Policy (in German, Polizeiwissenschaft) 2 Thenceforth those treatises were to

1 This term roughly covers the same type as does the Spanish term politicos. In
the German literature the word in general use is Cameralist or Kameralist (derived
from the territorial treasuries, the camerae). But it carries a misleadingly narrow asso-
ciation and in addition would not serve our purpose, which is to label a group that
includes the German type but is not confined to it. Histories and bibliographies of
German Cameralist literature were published as early as 1758 by J. J. Moser and
1781-2 by K. G. Rossig ( Versuch einer pragmatischen Geschichte der Okonomie,
Polizei und Kameralwissenschaft). Much help has been derived from R. von Mohl,
Geschichte und Literatur der Staatswissenschaften (1855-8) and from the comprehensive
bibliography, Bibliographie der Kameralwissenschaften (1935-7) by Miss Magdalene
Humpert, who lists about 14,000 items, most of which fortunately do not come within
the range of this history. Also see K. Zielenziger, Die alten deutschen Kameralisten
(1914), and Louise Sommer, Die osterreichischen Kameralisten (1920-25). An American
book may be added: A. W. Small, The Cameralists (1909).

2 See especially Wilhelm Stieda, Die Nationalokonomie als Universitatswissenschaft
(1906). We may mention the foundation of the chairs in the Universities of Halle
(1727; which immediately evoked derogatory comment as regards the competence of
the newly appointed professors), of Uppsala (1740), and of Naples (1754, chair of
‘economia e commercio’ founded for Genovesi). We know, of course, that the teach-
ing of economics must not be dated from these. The scholastic and the natural-law
philosophers had taught economics before, both in law and in moral-philosophy courses.
And the training of civil servants also antedates the eighteenth century. In the Uni-
versities of Naples (founded 1224), Oxford, Prague, Cracow, Vienna, Salamanca, and
others its beginnings go back to the thirteenth and fourteenth centuries, and in the
sixteenth it was second in importance to the training of clergymen in Marburg, Konigs-

l6o II : BEGINNINGS TO ABOUT I79O

a large extent simply textbooks and the products of academic lectures. The
same need, however, had asserted itself much earlier, and systematic treatises
of pedagogical interest had been written in all continental countries long before
economics as a distinct field received the official recognition implied in the
foundation of those professorships.

But from the fifteenth century on, first in Italy then elsewhere, public ad-
ministrators of all ranks and types — great noblemen as well as humble drudges
— began to put on paper their ideas about how the government and the
economy of their countries should be run and especially how their finances
should be managed. These administrators were practitioners, familiar with
the business of governing, and most of them were laics. Their books, reports,
and memoranda thus differ characteristically from the works of the schoolmen
and the philosophers of natural law. It is true that they also differ from those
of the teachers.

Tire practitioners lacked the systematic habit and the erudition of the
academic professional, though they made up for these shortcomings by their
command of facts and the freshness of their outlook. Nevertheless we shall
include them with the teachers in our group of Consultant Administrators.
After all, they were mostly public servants writing for other public servants.
We must, however, go still further. We must also include a number of men
who were not public servants but who made, in the same spirit as did these,
the public cares their own or, doing still better, wrote in the genuine spirit
of scientific analysis — businessmen, professors of sciences other than economics,
private individuals of the most varied backgrounds and stations. Thus we get,
alongside of the professional subgroup, another one that forms a unit not in
any sociological sense but by virtue of the nature of its performance. From it
proceeded much of the most important — especially the most original — work
of the period. And this work, though rarely systematic in form, was very often
systematic in substance. In England, such publications became so numerous
in the seventeenth century that they constitute an easily recognizable standard
type; there was also a standard title for them. Discourse of Trade. But they
were not confined to England, though elsewhere there was no standard title
except, perhaps, in the case of the French Elements du Commerce of the
eighteenth century. We shall call these books Quasi-systems. It was in them
that 'general economics’ first took independent shape.

[(c) The Pamphleteers .] The Pamphleteers were a mixed crowd — projectors,
of banks, canals, industrial and colonial ventures; special pleaders for or against
some individual interest, such as the Company of Merchant Adventurers or
the East India Company; advocates or foes of a particular measure or policy;
planners — often cranks — with pet ideas; and men who do not come within

berg, Wurzburg, and Graz. Moreover, there were professorships of ‘statistics’ in the
seventeenth century. It may be of some interest to note that in England and Scotland
no chairs of economics per se were founded in the eighteenth century. Professors of
agriculture were, however, appointed in Edinburgh, 1792 — where the chair of Political
Economy actually dates from 1871 — and in Oxford, 1796 — where it dates from 1825.

CONSULTANT ADMINISTRATORS AND PAMPHLETEERS l6l

any of these categories but simply wished to clear up some issue or to present
a piece of analysis. All of them flourished in all countries owing to the rapid
increase of the opportunities for printing and publishing. Newspapers also,
rare ventures in the sixteenth century, became plentiful in the seventeenth
and, for the eighteenth, 170 papers and periodicals that published economic
material have been listed for Germany alone. 3 But England was the classical
home of the pamphlet, as we should expect. For nowhere else was there so
strong an incentive for anyone with an axe to grind to try to influence public
opinion.

It is with these pamphleteers that the difficulty pointed out at the begin-
ning of this section becomes most serious. So far as their writings simply
reflect the conditions, humors, struggles, and idiosyncrasies of their day, they
are of course very interesting for the economic historian and the historian of
economic thought, but of no interest for us. In a report on the present state
of economics nobody would think of including the 'popular’ or what Marx
termed the ‘vulgar’ economics of our own time. But up to, say, 1750 no such
distinction is possible. All the ‘scientific’ economics there was consisted in
the small nucleus contained in the systems of the philosophers of natural law,
and with this any intelligent businessman who knew his facts was able to
compete successfully without having to acquire any particular technique. More-
over, the Pamphleteers slowly evolved the primitive technique they needed.
Some of them produced tracts of strictly scientific character. And the eco-
nomics of the First Classical Situation owes a considerable debt to them. So
we cannot afford to neglect them. But every one of us must, within his in-
dividual command of the material, 4 rely upon his own fallible judgment of
quality.

3. Sixteenth-Century Systems

Again we take the Wealth of Nations as our point of orientation. In the
preceding chapter we looked upon A. Smith as a philosopher of natural law.
In this one we shall look upon him as a Consultant Administrator. On our
way toward him I shall try to avoid confusing and empty enumerations and
introduce as few names as possible. But a small number of major or particularly
representative performances will, either in this or in the subsequent chapters,

3 This is, of course, a total for the century. Many of these papers and periodicals
were very short-lived. Perhaps not more than 10 per cent of that total existed at any
one time. Nor were they equal to the French in quality. The specifically economic
journal is in fact a French achievement. The first of this type was the Journal
Oeconomique (1751); then followed the Gazette du Commerce (1763), which the
government bought and supplemented by the Journal de V Agriculture, du Commerce
et des Finances (1764), which became for a time the organ of the physiocrats.

4 So far as I know it, and so far as contributions to economic analysis are concerned,
the European pamphlet literature of the sixteenth, seventeenth, and eighteenth cen-
turies can be reduced to less than two dozen items. The reader must not overlook,
however, that we class with the Consultant Administrators several names that other
writers would class with the Pamphleteers.

102 II : BEGINNINGS TO ABOUT 1790

be discussed in sufficient detail to give an idea of their nature and significance.
Taking the period as a whole, I think that first honors should go to Italy. If
there could be any point in such a statement, we might say that economics
was primarily an Italian science until the last quarter of the eighteenth century.
Spain, France, and England divide second honors, though in very different
proportions at different times. The rest of this chapter is devoted chiefly to
the first, or professorial, of the two subgroups into which we have divided the
Consultant Administrators, though it will be necessary to cast some glances
also at authors of quasi-systems. The reason for this arrangement is not that
the works of the former type are of commanding interest or importance. On
the contrary, no other group produced, among more inspiring ones, books
of such unspeakable tedium. Rather we deal with them first in order to get
them out of our way.

[(a) The Work of Carafa.] In the late Middle Ages economic history al-
ready affords ample evidence of what, in view of our own performances, we
are bound to call a high level of insight into the practical problems of eco-
nomic policy. An often-quoted English instance 1 will suffice to show this.
What we should call ‘hearings' on the outflow of money from England and
other currency problems were held in 1382. The reader can easily satisfy him-
self that what the experts examined had .to say makes perfectly good sense
and does not differ substantially from what we should expect to hear from
similar experts under similar conditions, though it would no doubt be couched
in more sophisticated phraseology. If documents such as these reveal the pres-
ence of a certain amount of analytic power, there are also indications of the
presence of interest in the collection of facts: Etienne Boileau’s Livre dies
metiers (about 1268), 2 a compilation of the regulations concerning the trades
of Paris, is a landmark of this type of research which gathered momentum
from the sixteenth century on. Literary effort of the type to be discussed in
this chapter also goes far back — in a sense to St. Thomas’ De regimine prin-
cipum and to the English Speculum regis (ed. by Moisant, 1894) and other
works of the thirteenth and fourteenth centuries, such as Aegidius Colonna's
De regimine principum libri, or Fra Paolino’s Trattato (ed. Mussafia, 1868),
or Petrarch’s De republica optime administranda.

From this literature emerged, in the fifteenth century, a work so superior
to all that had been written before that we may fittingly head our list of Con-
sultant Administrators with its author, though he was primarily a practical
one, the Neapolitan count and duke, Carafa. 3 The range of his ideas may be

1 See ‘Opinions of the Officers of the Mint on the State of English Money, 1381-2’
in English Economic History: Select Documents (compiled and ed. by A. E. Bland,
P. A. Brown, and R. H. Tawney, 1914), pp. 220 et seq.

2 Edited by Depping in Documents inedits sur Thistoire de France (1837).

3 Diomede Carafa (1406-87), De regis et boni principis officio . . . (ed. used, 1668;
I have not seen the original, written in Italian in the seventies of the fifteenth cen-
tury). Carafa’s contemporary, Mattheo Palmieri (1405-75), wrote a treatise entitled
Della vita civile published in 1529 (posthumously) that is much more definite as to
matters of taxation (especially in developing the doctrine that taxes are paid in con-

CONSULTANT ADMINISTRATORS AND PAMPHLETEERS 163

indicated by some of his recommendations. He wanted to see a balanced bud-
get that would have plenty of room for welfare expenditure and avoid the
necessity of resorting to forced loans — which he compared to robbery and
theft — and the like; definite, equitable, and moderate taxes that would not
drive capital from the country or oppress labor, which is the source of wealth;
business left alone, though he added that industry, agriculture, and commerce
alike should be encouraged by loans of money and in other ways; foreign
merchants made comfortable because their presence is most useful to the
country. All this is no doubt excellent sense and remarkably free from any
definite errors and prejudices. But it is equally free from any attempt to
analyze. The normal processes of economic life harbored no problem for
Carafa. The only problem was how to manage and improve them. In par-
ticular we must not suspect a theory of value behind that passage about labor's
being the source of wealth. Such questions exercised the nimble minds of his
scholastic contemporaries. But they never occurred to that soldier-statesman.

Nevertheless his performance holds a prominent place in the history of
economic analysis. His systematic arrangement alone would suffice to show
this. The first part of his book discusses the principles of general policy and
of defense — compare A. Smith’s lectures on arms — the second the adminis-
tration of justice. The third is a little treatise on public finance and within
measurable, though of course long, distance from the Fifth Book of the Wealth
of Nations, 'Of the Revenue of the Sovereign or Commonwealth.’ The fourth
and last part presents Carafa’s views on economic policy proper, and many
an eighteenth-century treatise reads like an expansion of these views. There
is no evidence that later writers took his book as a model and that, in this
sense, he created the systematic form in which an important part of the work
of the Consultant Administrators was to be cast. But as a matter of fact, he
was, so far as I know, the first to deal comprehensively with the economic
problems of the nascent modern state, and during the next three centuries
a host of writers, adopting the same systematic ideas and defining their field
similarly, followed in his wake and wrote in the spirit that he represented at
its best. They no doubt learned to plough more deeply as well as to take
new land under the plough. But they did not alter the general layout. In
particular they not only adhered to, but in time also developed, the funda-
mental idea that Carafa clothed in his conception of the Good Prince (and
which Sir James Steuart was to personify in his Statesman). This anthropo-
morphic entity is the embryo of their concept of a National Economy (in
German, Volkswirtschaft or Staatswirtschaft), which reflects so well the his-
toric process we have tried to visualize in the first section of this chapter. This
National Economy is not simply the sum total of the individual households
and firms or of the groups and classes within the borders of a state. It is
conceived as a sort of sublimated business unit, something that has a distinct

sideration of the help and protection extended by the state to individuals in their
economic activities, from which he deduced the principle of proportionality) but
seemed to me, on the whole, to be inferior to Carafa’s as a representative performance.

164 II: BEGINNINGS TO ABOUT 1790

existence and distinct interests of its own and needs to be managed like a
big farm. This was the way in which that epoch conceptualized the key posi-
tion that governments and bureaucracies actually acquired, and also the way
in which a distinction was drawn between political and business economy that
survived to our own day, although, from a purely analytic standpoint, there
is little to be said for it.

[(b) Representative Performances : Bodin and Botero .] In the sixteenth cen-
tury this type of economics flourished in all continental countries. As repre-
sentative performances — that were also outstanding in their influence on con-
temporary and later writers — we shall choose two works by Bodin and by
Botero . 4 Both works are primarily treatises on 'political science’ — written in
the spirit of Aristotle’s Politics — and as such are important stepping stones
between Machiavelli and Montesquieu. Their economics is, like Carafa’s, the
economics of public policy and administration, taking its place beside all other
branches of political knowledge. The economic analysis in the Sixth Book of
Bodin’s Republique is, however, hardly above the ideas that were current in
its time and indeed does not go far beyond Carafa’s, though his principles
of taxation do mark further progress toward the Fifth Book of the Wealth
of Nations . 5 Botero, who in some other respects may be classed as a follower
of Bodin, made a much more important contribution to economic analysis
that will be noticed in a subsequent chapter on population. Here, another
remark suggests itself. Botero’s treatise, especially if considered in connection
with his other works, displays remarkable fact-mindedness. He was an able
analyst. But the bulk of his labors went toward the collection, co-ordination,
and interpretation of past and contemporaneous fact — economic, social, po-
litical. In this he was no exception. We have seen that the scholastic doctors
of the sixteenth century were eager fact hunters and that they reasoned much

4 Jean Bodin or Baudin (Bodinus, 1530-96), Les six livres de la Republique (1576;
2nd ed. 1577; the one used, 1580). On the author and his works, see Henri Baudrillart,
Jean Bodin et son temps (1853), a book which the lapse of nearly a century has not
deprived of its authoritative position. This is the only one of Bodin’s works that need
be mentioned here; the other that is relevant to our subject will be noticed later
(ch. 6). Lest the reader find that our text fails to do justice to the author, I want
to emphasize that we consider only his contribution to economic analysis, which I
believe to have been but modest, and not his much greater importance in other fields,
the theory of sovereignty in particular.

Giovanni Botero (1544-1617), Della ragion di stato (1589, many editions and trans-
lations; recent ed. with introduction by C. Morandi, 1930, in the series Classici del
Pensiero Politico). In order to appreciate the full significance of the work of this great
man, two other publications must be mentioned: first, his Delle cause della grandezza
delle cittd (1588), suggestive, in some points, of Montesquieu’s Grandeur des Romains
and also of Book in of the Wealth of Nations; and second his universal reports
(Relazioni universali), compiled on his travels, on the power and resources of the states
of Europe and Asia, which were published 1591-6.

5 They would, I think, have to be Exhibit A in any proof of the continental, mainly
French, origins of A. Smith’s ideas on public finance.

CONSULTANT ADMINISTRATORS AND PAMPHLETEERS 165

more from observation and much less from abstract premisses than one might
suppose. This was, however, still more the case with the literature now under
discussion, whose greater part as well as main value may be said to consist
in 'factual’ investigations: then as always, throughout the history of economics,
fact-finding was the chief care of the overwhelming majority of economists.
Besides Botero’s theory of population, Italy produced during the sixteenth
century several other works that are much more important than the systematic
literature we are now surveying, especially in the field of money (Davanzati,
Scaruffi, see below, ch. 6).

[(c) Spain and England .] The very high level of Spanish sixteenth-century
economics 6 was due chiefly to the scholastic contributions. But we may note
what I believe to have been an early 'quasi-system/ the work of Ortiz, 7 mainly
a well-reasoned program for industrial development of a type that was to be
so prolific in the seventeenth century, both in Spain and in England. For
Germany there is little to record. Two quasi-systems that seem to have met
with success are, however, mentioned in the footnote below. 8

At first sight one might conceive the impression that in sixteenth-century
England there was little to correspond to the type of work surveyed so far.
But this is not so. Corresponding work there was, only it took other forms
owing to the different political structure of the people to which it was ad-
dressed. Discussion of the economic problems of the day, encouraged and

6 See E. Castelot, 'Coup d’oeil sur la litterature 6conomique de l’Espagne au XVI e
et au XVIE siecle’ ( Journal des economistes, vol. 45, 1901); Manuel Colmeiro, His-
toria de la economia politica en Espana (1863) and Biblioteca de los economistas
espaholes (1880); another anthology is helpful, Juan Sempere y Guarinos’ Biblioteca
espahola economico-politica (1801-21), the Spanish counterpart of the Italian Custodi
collection; A. V. Castillo, Spanish Mercantilism (1930); E. Hamilton, 'Spanish Mercan-
tilism before 1700’ (Facts and Factors in Economic History by former students of
E. F. Gay); and Jos6 Larraz L6pez, 'La fepoca del Mercantilismo en Castilla, 1500-
1700’ (Real Academia de Ciencias Morales y Politicas, 1943), and the review of this
address in the Economic History Review, 1944, by J. Marquez. Senor Larraz speaks
of a Spanish school — the 'school of Salamanca’ — of sixteenth-century economists. There
is indeed some justification for this. But the core of this school was made up of late
scholastics, many of the most eminent of whom happened to be Spaniards; and there
was nothing specifically Spanish about their teaching; the rest of Spanish sixteenth-
century economists, though most of them were also clerics, do not form a school.

7 Luiz Ortiz, Memorial al Rey para que no salgan dineros de estos reinos de Espana
(1558; see Colmeiro’s Biblioteca). Never mind the title, which might bring the work
under ban on the score of ‘mercantilism.’ It has little to do with the true import of
the argument and was presumably chosen by the author in order to attract the atten-
tion of laymen.

8 Melchior von Osse’s (c. 1506-57) Politisches Testament, written 1556, though
published under the title De prudentia regnativa (1607), was reprinted by Thomasius
for classroom use, as late as 1717. Georg Obrecht’s (1547-1612) tracts on economic
subjects (he is of more importance as a jurist) were posthumously published in 1617
as Fiinff underschiedliche Secreta Politica. Bodin’s influence is much in evidence.

1 66

II : BEGINNINGS TO ABOUT 1

79 °

also disciplined by the ritual of parliamentary and government inquiries,
greatly improved throughout that century and occasionally rose to 'scientific 7
significance. From evidence given before royal commissions — such as the Royal
Commission on Exchange, 1 564 — speeches, petitions, pamphlets on enclosures,
guilds, companies, the staple system, monopolies, taxation, currency, customs,
poor relief, wages, regulation of industry, and so on, a manual of economic
analysis and policy might be compiled that would compare favorably with
contemporaneous systematic efforts on the Continent. 9 Instead of attempting
to do this we shall, however, follow a much easier course that is fortunately
open to us. There are a number of publications that may be considered as
general surveys of the economics of the time. In part, at least, they supply
what we need. We shall confine ourselves to the most widely known of these
treatises. 10

The Discourse of the Common Weal contains three dialogues that deal
with a wide variety of topics. The author regrets That younge stu dentes be
alwayes over hastye in utterynge theire Jugementes, 7 and the 'scysme in matter
of relygyen 7 ; recommends better training all round, going so far as to con-
sider superiority in 'lernynge 7 as one of the reasons for Julius Caesar's victory
over Pompey; condemns enclosures in so far as they turn arable land into
pasture; criticizes the rising business corporations and their monopolistic prac-
tices; disapproves of debased currency and of inflation that hurts people whose

9 The best way for the reader to satisfy himself of this quickly is to glance through
the source book already mentioned. Bland, Brown, and Tawney, English Economic
History: Select Documents (1914), and through the still more useful compilation,
Tawney and Power, Tudor Economic Documents, being select documents illustrating
the economic and social history of Tudor England (3 vols., 1924), the third volume
of which contains 'pamphlets, memoranda, and literary extracts. 7

10 This is a book entitled A Compendious or brief e examination of certayne ordinary
complaints, of divers of our countrymen in these our days: which although they are
in some part iniust dr frivolous, yet are they all by way of dialogues throughly debated
dr discussed. To Miss Elizabeth Lamond we owe an excellent critical edition under the
title A Discourse of the Common Weal of this Realm of England (1893), which
besides the text presents the results of careful researches into the nature and the
origin of the work. She attributed it to John Hales, a public official who also served
in parliament and on the commission on enclosures of 1 548, and assumed that it was
written in 1549. Both statements have been questioned. But for us it is more im-
portant to note that the edition printed in 1581, and from which were made all the
later editions (1751, 1808, 1813, 1876), differs from an earlier one (1565), the most
important difference being the addition of a passage on the causes of the rise in general
prices: whereas the edition of 1565 speaks only of the deterioration of the coinage, the
later one also mentions the increase in the supply of the precious metals. Whoever
made this addition therefore may be entitled to a share in such credit as this 'dis-
covery 7 deserves, though Bodin’s priority ( Response aux paradoxes de Monsieur de
Malestroit, 1568; see below, ch. 6), not only as to publication but also as to the dis-
covery itself, is of course established beyond doubt by the existence of the volume of
1565. On the works of Clement Armstrong or Armeston that would have served our
purpose equally well, see S. T. Bindoff’s paper in the Economic History Review , 1944.

CONSULTANT ADMINISTRATORS AND PAMPHLETEERS 167

incomes do not react promptly, such as the laborers , 11 landlords, and even the
King’s Highness; recommends the fostering of young industries as well as the
accumulation of a monetary fund for emergencies ('sodeyne eventes’) — money
being as it were a 'storehouse of any commodify’ and nervus bellorum; does
not favor the export of raw materials, especially of wool; frowns upon these
‘straungers’ who sell nothing but frivolous stuff that costs them little though
the English pay dearly for it, and buy in return good honest English goods,
if indeed they do buy anything and do not take ‘monye currant’ outright,
which they prefer to do of late; feels that foreign commodities should be taxed
so that domestic producers might be able to compete ; wants to see the na-
tion’s money kept in the country and to recover that which has already left
it. And so on.

From these indications, the reader should be able to draw a picture of our
author’s economics. Of course, it was popular — preanalytic — economics. But
most of it was sound common sense. The 'doctor’ of the dialogues was evi-
dently a thoroughly reasonable man and never said anything that would seem
absurd to the intelligent layman or politician of today. In one respect, however,
he was especially reasonable for his time. He distrusted regulation less than
did the liberals of the nineteenth century but more than we do ourselves. He
did not like compulsion. He wished to work with and not against the profit
motive, which he considered quite essential. Moreover, he sometimes saw be-
low the surface of things. For instance, he saw quite correctly that the en-
croachment of sheep runs upon the arable land had much to do with the
policy that aimed at keeping wheat cheap by means of price fixing and export
prohibitions, and thus defeated its purpose by altering the relative profitability
of wheat and wool production in favor of the latter. This piece of reasoning
(analoga of which are frequently met with in the writings of the Consultant
Administrators) goes beyond the obvious. In its implications, it approaches
the status of analytic work.

4. The Systems, 1600-1776

[(a) Representatives of the Earlier Stages .] The richer developments of the
seventeenth and eighteenth centuries are much more difficult to convey. Keep-
ing in mind our plan of campaign we shall, in this section, provisionally dis-
regard everything else and go through with our survey of the ‘systematic’ lit-
erature of those two centuries until we reach the neighborhood of the Wealth
of Nations. The earlier stages of this type of work will be represented by
Montchretien for France, by Bornitz and Besold for Germany, and by Fer-
nandez Navarrete for Spain.

Antoyne Montchretien, Sieur de Watteville (c. 1575-1621), Traicte de Voeconomie
politique (1615), seems to have been the first to publish a book under the title of

11 The Elizabethan Statute of Apprenticeship, 1562/3 (5 Eliz. c. 4), introduced,
however, what we should call index wages: that is to say, wage rates were to be ad-
justed annually according to the changes in the cost of living.

i68

II : BEGINNINGS TO ABOUT 1790

Political Economy. This was, however, his only merit. The book is a mediocre per-
formance and completely lacking in originality. Though there is a rough common
sense about its recommendations, it abounds in elementary slips of reasoning that in-
dicate a level of competence rather below than above its own time. For a thoroughly
different appraisal, see T. Funck-Brentano’s introduction to his edition of the work
(1889), and also P. Lavalley’s study, UOeuvre economique de Antoine de Montchretien

(1903).

Jacob Bomitz, Tractatus politicos de rerum sufficients in republica et civitate pro-
curanda (1625), an ill-digested compilation of economic facts; Christoph Besold’s
(1577-1638) Collegium politicum (1614), Politicorum libri duo (1618), and, to men-
tion another of his numerous works, Synopsis politicae doctrinae (1623), moved on
the higher level of the polyhistoric learning of this famous teacher, though he was
inferior to Bornitz in factual knowledge; his treatment of interest anticipated that of
Salmasius; Bodin’s influence is unmistakable.

Pedro Fernandez Navarrete, Discursos (first 1621; later edition under the title
Conservacion de monarqutas, 1626). This author, an officer of the Inquisition, dis-
plays a remarkable freedom from the tendency of his (and our own) time to overstress
the importance of the monetary factor and a not less remarkably sound judgment in
maintaining that a normal process of industrialization would have gone far toward
remedying the ills from which Spain was suffering (the value added to raw materials
by human labor being much more important than gold and silver, see the sixteenth
of his fifty Discursos) and that this process was capable of being accelerated by re-
moving obstacles. I feel fairly confident that I am right in preferring Fernandez
Navarrete’s performance to that of the equally well-known Moncada ( Discursos , 1619,
republished as late as 1746 under the title Restauracion politico de Espana ) so far as
ability to analyze is concerned.

Four further names will suffice to characterize what may be considered a
more advanced stage: Martinez de la Mata-, who developed a program of
industrial policy on the lines of Fernandez Navarrete; Seckendorff, who wrote
the first outstanding treatise on the public administration and policy of German
principalities; the great name of Sully, whom we neglect as we must; and
Du Refuge (Philippe de Bethune), who went much beyond either Bodin or
Montchretien.

Francisco Martinez de la Mata is known for his Memorial 6 discursos en razon del
remedio de la despoblacidn, pobreza y esterilidad de Espana (1650; the Epitome de
los discursos ... 1701, is all I know; Sempere y Guarinos, op. cit. vol. m contains
extracts). This work of the self-styled ‘servant of the afflicted poor ( siervo de los pobres
afligidos) must have been a great success. The fundamental soundness of its main thesis
— the same as Navarrete’s — is, in fact, beyond doubt and was to be repeated by a
chorus of later economists.

Veit Ludwig von Seckendorff (1626-92), himself a distinguished administrator, pub-
lished in 1656 the Teutscher Fiirstenstaat, the classic work of its genus. Behind the
descriptive and pedagogic program there is a definite social vision and a definite policy.
The given end being a numerous and well-employed population, protection and in-
ternal freedom of industry and trade — which will of itself eliminate obsolete craft
guilds — compulsory elementary education, and a system of taxation based upon the
excise — which by bearing lightly on the higher incomes will increase employment —
are the principal means envisaged. We shall presently see that this was, and con-

CONSULTANT ADMINISTRATORS AND PAMPHLETEERS 169

tinued to be, the typical program — and, by implication, the typical analysis of the
German and Italian 'cameralists’ throughout their careers, that is, up to the first
decades of the nineteenth century. The man who first formulated it definitely and
correctly, and in doing so anticipated, in some points, the developments of more than
a century to come, was no second-rater. On the contrary, he towers high, as a man
and as an intellect, above many a writer who figures much more prominently in these
pages. But explicit analysis, that is, conscious efforts to state relations of causation or
interdependence, is hard to find in his work. And what there is of it, is not up to much.

Maximilien de B6thune (1560-1641), created Duke de Sully by Henry IV, the latter’s
minister of finance, was a much greater and especially stronger man than was the
most famous of his successors, Colbert. He reformed the fiscal system of France most
successfully and saw much beyond the range of what he actually accomplished. More-
over, he knew — which is the criterion of greatness in a fiscal administrator — how to
make fiscal policy an element and tool of general economic policy. His Economies
royales (first publ. 1638; a selection, which is all I know, has been republished in
Guillaumin’s Petite bibliotheque economique) are substantially memoirs of his ad-
ministration and make, in their quaint form, charming and most instructive reading.
But there is no point in calling him a forerunner of the physiocrats, on the strength
of his preoccupation with the welfare of the agrarian population and of his saying
that husbandry and pasture were the two mamelles of France. Nothing can be more
obvious than that this man was entirely innocent of any theory whatever.

Eustache Du Refuge’s * work, he Conseiller (Testqt ou recueil general de la politique
moderne (1645), descends from that of Bodin. The first forty chapters deal with
the various forms of government, tolerance, the duties of magistrates, conscription, and
so on; Chapters 41 to 44 are to all intents and purposes a treatise on economics and
economic policy in outline; the rest includes, among other things, public finance, es-
pecially taxation, and marks another step toward A. Smith’s Fifth Book. Du Refuge’s
economics is remarkable in several respects. In particular he was the first author I
know of to distinguish and at the same time to co-ordinate the effects of 'parsimonie’
(ch. 44) which conserves wealth and of Vespargne (hoarding, ch. 49) which interferes
with commerce. In this and in other points he made a creditable effort to analyze.

Throughout the rest of the seventeenth and practically the whole of the
eighteenth century the same type of work was turned out by an increasing
number of writers, among whom academic teachers rapidly gained the major-
ity. In some countries, especially in Germany, it was the main domestic source
of economic teaching even in the first decades of the nineteenth century.
Much of it was, however, so distressingly unoriginal and so obviously written
in response to demand rather than to creative impulse that there would be
no point in following its history in any detail. For our purposes, that is to
say, in order to get an idea of its general character and to see how far it had
advanced at the threshold of the Smithian age, it will suffice to introduce two
eighteenth-century authors of international reputation, Uztariz and Justi, and
to take up for discussion one of the works of the latter.

* [This work, Le Conseiller . . . (published anonymously), was attributed to Du
Refuge when J. A. S. used it in the Kress Library; recently it has been attributed to
Phillipe de Bethune, Comte de Selles de Charost. There is an English translation as
early as 1634 which implies an earlier date for the original French publication.]

17° II: BEGINNINGS TO ABOUT 1790

Ger6nimo Uztariz (1670-1732) wrote a treatise entitled Theorica y
prdctica de comercio y de marina (1st ed. 1724, two other editions im-
proved by the author himself), which may be said to be related to
Martinez de la Mata’s as the latter’s treatise is to Fernandez Navarrete’s.
It was translated into English and French and widely read and admired.
The title is misleading in two respects. First, it suggests limitation to
topics of international trade, whereas it deals comprehensively with prac-
tically all the problems of taxation, monopoly, population, and so on
that come within the range of ‘applied’ economics. Second, the title also
suggests theoretical analysis, though none is to be found in the treatise:
what he, like so many later economists, means by theory is criticism and
recommendation as distinguished from the presentation of facts. The
care and space bestowed on the latter (he reprinted or extracted so many
documents as to make his treatise serve the purposes of a source book)
is what strikes the reader first. The recommendations acquire for us addi-
tional historical interest when we remember that Uztariz held public
office of the policy-making kind at the time when Cardinal Alberoni was
at the head of affairs: the latter followed — not without considerable suc-
cess — -exactly the policy of armament and industrialization that Uztariz
recommended in the treatise which appeared five years after the Cardi-
nal’s fall. Whatever this fact may mean — the reader’s guess is as good
as mine — our author must certainly be commended, considering the then
situation of his country and the standpoint from which he viewed it, for
the correctness of such analysis as may have been behind his recom-
mendation.

[(b) Justi: the Welfare State.] Johann Heinrich Gottlob von Justi
(1717-71) was a professor for part of his life and an administrator of
public enterprises for another part. His intellectual equipment covered
all the natural-law philosophy of his and the preceding epoch but was
enriched by practical experience in a way in which the two were rarely
combined. Of course, we must grant the professor a fair ration of ponder-
ous triviality, and also allow for his way of arriving at common-sense
conclusions by a circuitous route that leads through questionable political
philosophies. An example will illustrate the latter point: freedom is abso-
lute by virtue of natural law; only, as the professor has somewhere learn-
edly shown, it consists in freedom to obey the laws and the rulings of
the bureaucracy; but the latter as taught by Justi is so very reasonable
that after all we come out of the woods with the result to be presented
in the text. Of Justi’s numerous works his System des Finanzwesetis
(System of Public Finance, 1766) has been chosen by Professor Monroe
for partial publication in Early Economic Thought (1924). Our sketch
in the text is based upon Die Grundfeste zu der Macht und Gliick-
seeligkeit der Staaten oder ausfuhrliche Vorstellung der gesamten Polizey-
wissenschaft (The Groundwork of the Power and Welfare of States or
Comprehensive Presentation of the Science of Public Policy, 2 vols.,
1760-61). We are concerned with the first volume only. The second con-

CONSULTANT ADMINISTRATORS AND PAMPHLETEERS 171

tains, in the spirit of that science of administration, dissertations on re-
ligion, science, the government of the private household, civic virtues,
fire brigades, insurance — of which Justi was a fervent advocate — regula-
tion of dress, and the like. His Staatswirtschaft (1755) would have served
equally well.

Instead of Justi, I might have chosen Joseph von Sonnenfels (1732-
1817; Grundsdtze der Polizey , Hcmdlung, und Finanzwissenschdft,
1765-7), who was in several respects superior to Justi, though in sub-
stance he moved on the latter’s and Forbonnais’ lines. The son of a Berlin
rabbi, he became, after emigrating to Vienna, one of the lights of that
'age of reason’ and took part, both as an academic teacher (being the
first professor of policy and cameral science in Vienna) and as a civil
servant in' many of the legislative reforms of his time: he was a member
of what may be described as Joseph II’ s brain trust. His book remained
the official textbook within the Austro-Hungarian monarchy until 1848.
The subject of his inaugural lecture (1763) deserves to be noticed. It
was on the Inadequacy of Mere Experience in Economics.

The subject of Justi’s inquiry is what German historians call the Welfare
State ( Wohlfahrtsstaat ) in its historic individuality and in all its aspects. That
is to say, he dealt with economic problems from the standpoint of a govern-
ment that accepts responsibility for the moral and economic conditions of
life — just as modern governments do — in particular for everyone’s employ-
ment and livelihood, for ‘the improvement of the methods and organization
of production, for a sufficient supply of raw materials and foodstuffs, and so
on through a long list of topics that include beautification of cities, fire in-
surance, education, sanitation, and what not. Agriculture, manufactures, com-
merce, money, banking — all come in for discussion from this point of view,
technological and organizational aspects receiving much attention. But having
thus pinned his faith to a principle of comprehensive public planning, he,
like Seckendorff and most of the writers between these two, did not arrive
at the practical conclusions this principle might lead us to expect. On the
contrary, he was by no means blind to the inherent logic of economic phe-
nomena, and did not wish to replace it by government fiat. Price fixing, for
instance, was a measure to which the government had the right and duty to
resort for particular purposes in particular circumstances, but it was to be
avoided as much as possible. He took Mirabeau to task for teaching, among
other 'false, nonsensical, and monstrous doctrines,’ that the lowering of in-
terest depends upon the will of government whereas actually 'nothing is so
little subject to it.’ Nor was he blind to the potentialities of free enterprise,
on which he looked with detachment but without hostility. In fact, notwith-
standing his approval of government regulation, which goes so far as to make
him admit the expediency of enforcing the production of certain things by
government decree, he stated as a general principle that all industry and com-
merce really needed was freedom and security. Though he would not advise
the liquidation of artisans’ guilds ; — because they were there and might just

172 II: BEGINNINGS TO ABOUT I79O

as well be used for filling some administrative functions he considered useful
— he nevertheless looked upon them as a nuisance and advised governments
not to be hard on outsiders. And, though he taught that high protective
duties and even import prohibitions and compulsion to buy domestic products
might 'sometimes’ be in the public interest, he nevertheless declared it to be
his opinion that 'in general’ there should be no impediment to imports beyond
an ad valorem duty of 10 per cent — a condition which none of us would be
able to distinguish from unrestricted free trade.

Many other instances could be adduced for what to nineteenth-century lib-
erals simply spelled discreditable inconsistency, which they were inclined to
attribute to the fact that Justi lived in a transitional age: while still a victim
of exploded error, he could not quite shut his eyes to the new light. But if
we look more closely at the particular cases to which he applied his principle
of planning, a very different explanation suggests itself. He saw the practical
argument for laissez-faire not less clearly than did A. Smith, and his bureauc-
racy, while guiding and helping where necessary, was always ready to efface
itself when no guidance or help seemed needed . 1 Only he saw much more
clearly than did the latter all the obstacles that stood in the way of its working
according to design. Also, he was much more concerned than A. Smith with
the practical problems of government action in the short-run vicissitudes of his
time and country, and with particular difficulties in which private initiative
fails or would have failed under the conditions of the German industry of his
time. His laissez-faire was a laissez-faire plus watchfulness, his private-enterprise
economy a machine that was logically automatic but exposed to breakdowns
and hitches which his government was to stand ready to mend. For instance,
he accepted as a matter of course that the introduction of labor-saving machin-
ery would cause unemployment: but this was no argument against the mechan-
ization of production because, also as a matter of course, his government would
find equally good employment for the unemployed. This, however, is not in-
consistency but sense. And, to us who are apt to agree with him much more
than we do with A. Smith, his vision of economic policy might look like
laissez-faire with the nonsense left out . 2 But two Spanish examples show still
better than does Justi’s how well the best brains of that time knew their
'applied economics’: I am referring to Campomanes and Jovellanos,® who rose

1 This was not merely a dream. It will be pointed out below that the bureaucracy
of the typical German principality actually tried to behave like this.

2 Such views, which were extremely common at the time, naturally assumed an anti-
Smithian garb that exaggerates the difference. This was the case, e.g., with Justus von
Moser (P atriotische Phantasien, 1774-86), whose name I also mention for another rea-
son. His interest in the description of individual historical patterns — a sort of historical
miniature painting — has induced some historians of thought to assign to him the posi-
tion of early romanticist or forerunner of the historical school: an example of those un-
realistic attributions that, once made, keep on distorting our views of groups and de-
velopments. He was an excellent man, no doubt, but he was no economist at all.

3 Pedro Rodriguez, Count Campomanes (1723-1802) was by training a jurist-econo-
mist of the continental type. A man of wide culture and great ability, he tried his

CONSULTANT ADMINISTRATORS AND PAMPHLETEERS 173

to prominence in the reform era of Charles III. They were practical reformers
in the line of economic liberalism, and neither bothered about nor con-
tributed to the progress of analysis. But they understood the economic process
better than did many a theorist. And, in view of the date of Campomanes’
Discurso (1774) it is not without interest to observe how little, if anything, he
stood to learn from the Wealth of Nations.

This covers, and indeed sums up, a large part of continental seventeenth-
and eighteenth-century economics. The reader should realize, however, that
though in practical insight and practical usefulness, it was — at least as it came
to be taught eventually — hardly inferior to the Wealth of Nations, it also was,
with the exception to be noticed presently, completely outdistanced by the
latter as regards analytic achievement. Justi’s work exemplifies this weakness as
clearly as it exemplifies those merits. I have said that he was not blind to the
inherent logic of economic phenomena. But this was mere prescientific intui-
tion. He did nothing to show how they hang together and how they deter-
mine each other, which is where scientific economics begins. He was not alive
to the necessity of proving propositions — for instance, his proposition that
mechanization creates unemployment — or of using any tools not at the lay-
man’s command. His arguments were the arguments of untutored common
sense; it was only when he argued against another author that he attempted any
analysis at all. And when he did so, he occasionally slipped up badly. To quote
an instance, he was not above pulling the following atrocious boner: suppose
that two countries, A and B, are exactly alike in every respect except that A
holds twice as much monetary silver as B; while their states of welfare will be
exactly equal, prices in A will be twice as high as prices in B; but owing to the
double quantity of money, A’s rate of interest will be half of B’s rate of interest
and therefore A, producing more cheaply, will undersell B and keep on drawing
money from it, which will increase employment in A, and so on (Die Grund-
feste, p. 611) — and all that in spite of the facts that his reasoning on interest
was otherwise quite sensible, that in general he did not at all overrate the ad-
vantages that accrue to a country from an abundance of metals, and that he
emphasized the basic importance of consumption not less than did A. Smith.

hand, both in office and out of it, on all the great economic problems of his time and
country. Of his writings, the one most relevant to our purpose is his Discurso sobre el
fomento de la industria popular (1774), which was to move McCulloch to fervent
eulogy. The Respuesta fiscal (1764), concerning the grain trade, should also be men-
tioned.

Gaspar Melchor de Jovellanos (1744-1811), a man of similar type but of a less pros-
perous career, among many other things wrote two reports, one on the liberty of the
industrial arts (1785), and another, on behalf of the Royal Economic Society of Madrid,
on agrarian legislation (1794), in both of which the principles of economic liberalism
are expounded, but judiciously tempered by practical considerations. They were pub-
lished ^ (1859) in the Biblioteca de Autores Espanoles. However, their dates reduce
their importance, as compared with Campomanes’ tracts, for the historian of economic
thought.

174 II: begi NNINGS to about 1790

[(c) France and England .] The French civil servant was educated as an abbe
or else as a lawyer. Economics was not taught, as a distinct subject, until during
and after the revolution. Could it be that this great disadvantage carried some
compensation? In any case, the much less voluminous French literature of the
systematic type rose in the eighteenth century to a level far and away above the
German. Since we reserve such peaks as Boisguillebert, Cantillon, Turgot, and,
of course, the physiocrats for discussion in the next chapter, we may content
ourselves with the five following names — Forbonnais, Melon, Mirabeau,
Graslin, and Condillac. Forbonnais , 4 who might be compared with Justi or
Sonnenfels, is the prototype of the 'useful 7 or 'sound 7 economist of whom the
public approves. No historian will ever sing his praises; for the historian who is
interested only in what policy a man was for or against will not be satisfied
and will put down Forbonnais as an eclectic without originality; and the his-
torian who looks for contributions to our analytic apparatus will also be dis-
satisfied, for he will not find it, and he will notice clumsy and pedestrian be-
havior whenever Forbonnais did venture upon theoretical ice. But few econo-
mists ever said or implied so little that is definitely and provably wrong in
either fact or logic. He is an outstanding example by which to illustrate the
truth that to be an economist or physician is one thing and that to be a theorist
or physiologist is quite another thing.

Markedly inferior to Forbonnais in these respects and but little above him
in analytic proficiency, Melon 5 has fared somewhat better at the hands of later
critics. But his performance, which, so far as 'principles 7 are concerned, partly
anticipated Forbonnais 7 , is of much the same nature. His contribution to mpne-

4 Francois Veron de Forbonnais (1722-1800) was a businessman and civil servant
and, being a Frenchman, addressed a different public and envisaged different conditions,
so that the similarity between his and Justi 7 s performances does not stand out at first
sight. Fundamentally, however, he did — very successfully — the same kind of thing. His
practical grasp of the social and economic situation confronting him was his, as it was
Justi’s, chief merit. He is at his best in his analyses of definite sets of historic facts
such as the finances of France from 1595 to 1721 (1758) or the finances of Spain
(1753). For us the most interesting of his works are: &Umens du commerce {1754 and
1766) and Principes et observations economiques (1767; the latter is available in the
Guillaumin collection, reading recommended: not below the average nineteenth-century
textbook and superior to a good many). His recommendation of an ad valorem import
duty of 15 per cent may be mentioned as one of several instances of parallelism be-
tween his views and those of Justi, whom the first volume of his Memens may have
influenced. That he influenced Sonnenfels as much as did Justi is obvious from ac-
knowledgments.

5 Jean Francois Melon (1675-1738) was a public servant who worked with John Law
during the short career of the latter’s 'system 7 and thus had first-hand knowledge of it.
His E ssai politique sur le commerce (1734, English trans. 1738) was a great success in
France and abroad and exerted considerable influence. The misleading term Neo-Mer-
cantilism is sometimes used to designate the views on foreign trade and finance that
he and other eighteenth-century writers espoused (see below, ch. 7). See G. Dionnet’s
Le Neomercantilisme au XVIII e siecle et au debut du XIX e siecle (1901) and also L.
de Lavergne’s Les Hconomistes franc ais du dix-huitieme siecle (1870).

CONSULTANT ADMINISTRATORS AND PAMPHLETEERS 175

tary theory will be noticed in a subsequent' chapter. The elder Mirabeau 6 is
primarily known as the head, in succession to Quesnay, of the physiocrat group,
but he had independently established himself before that by a work that may
be called a systematic treatise on all the problems of applied economics written
from a very personal standpoint — systematic unity being achieved by making
those problems pivot on Population and Agriculture. Its analytic merit is negli-
gible, but all the greater was its success. Graslin’s 7 reputation never was what it
should have been because he put so much emphasis upon criticism of the
physiocrats — which is in fact the best ever proffered — that his readers were apt
to overlook his positive contribution. Actually, his Essai analytique presents
the outlines of a comprehensive theory of wealth as a theory of total income
rather than of income net of all producers’ expenses including wages — a not
inconsiderable improvement considering the role the latter was to play later on.
Also he was above his contemporaries in insight into the problem of incidence
of taxation. Finally, Condillac’s work 8 does not indeed quite merit the
eulogies of W. S. Jevons, who called it ‘original and profound’ and of H. D.
Macleod, who called it ‘infinitely superior to A. Smith’s.’ The eulogies are
amply accounted for by the enthusiasm of those two authors for what they

6 Victor Riquetti, Marquis de Mirabeau (1715-89), called the elder to distinguish
him from his son, the Mirabeau of the Revolution, was an eccentric aristocrat of ex-
uberant vitality and irrepressible impulses. It is difficult to understand — except on the
hypothesis that force of temperament and glowing phrases will always carry every-
thing before them — how it was that this man, whose unquestioned ability was com-
pletely spoiled by lack of judgment, could have enjoyed, though only for a few years,
an international and national fame much greater than that of any other economist be-
fore or after, not excluding A. Smith or K. Marx. This happened in the first part of
his career, that is, before he had joined the physiocrats, and on the strength of a per-
formance that cannot be called impressive in anything except passionate phraseology.
This performance, anonymously published in three parts under the title L’Ami des
hommes, ou traite de la population (1756), will have to be mentioned again in our
chapter on population. Of all the other works of Mirabeau — he left dozens of volumes
besides a quantity of unpublished material — only the subsequent parts (4-6) of L’Ami
(1758 and 1760), the Philosophic rurde (1763), and the Thdorie de Vimpot (1760)
call for notice in this book. The last two are, however, physiocratic, at least in principle,
and therefore need not detain us here. See L. and C. de Lomenie, Les Mirabeau (1879-
91) and L. Brocard, Les Doctrines economiques et sociales du Marquis de Mirabeau
dans L’Ami des hommes (1902).

7 Jean J. L. Graslin (1727-90), Essai analytique sur la richesse et sur Vimpot (1767;
new ed. by A. Dubois, 1911). See J. Desmars, Un precurseur d’A. Smith en France,
J. J. L. Graslin (1900). His correspondence with Baudeau is of considerable interest
(2 vols., 1777-9).

8 Le Commerce et le gouvemment . . . (1776) by the sensationalist philosopher and
psychologist we have already met above. The relation between his psychology and his
utility theory of value should not be overstressed. As we know already and as we shall
see more fully later on, the latter has a quite independent history of its own that harks
back to the scholastics rather than to Hartley. Condillac’s relation to the physiocrats
should not be overstressed either. Rather he. had learned from Turgot. See, however,
A. Lebeau, Condillac economiste (1903).

176 IX: BEGINNINGS TO ABOUT 179O

believed to be an early formulation of their own theory of value. But there was
nothing original about it and, considering all the predecessors on that path,
we should wonder at Condillac’s inefficient handling of it rather than at his
sponsorship of it. Still, the book is a good if somewhat sketchy treatise on
Economic Theory and Policy and much above the common run of its con-
temporaries.

England was still more immune to ‘systemitis’ than was France. Excepting
the 'Wealth itself, there is but one book of the strictly systematic type to
mention, but this one is of first-rate importance, Steuart’s Principles . 9 It was
intentionally and laboriously systematic: what he wanted was to consolidate
the factual and analytic knowledge of his time into a 'regular science,’ that is to
say, he clearly aimed at the same goal as A. Smith. Comparison with the
Wealth of Nations is rendered difficult by two facts. In the first place, Steuart’s
work did not ride, like Smith’s, on the wave of a single and simple policy that
was rapidly conquering public opinion. On the contrary, he grouped all that
really interests the public around the old-fashioned figure of an imaginary
patriot statesman who in infinite wisdom watches the economic process, ready
to interfere in the national interest — a conception that recalls Justi’s and was
quite out of contact with England’s humor. But this should not weigh with us.
In the second place, when one surveys (as the reader should) the five books
into which the work is divided — Population, Trade and Industry, Money and
Coins, Credit and Debts, and Taxes — one cannot fail to be struck by the
number of points that indicate more originality and deeper thought than does
the Wealth of Nations; but also by the number of definite mistakes and in-
felicitous formulations. In the theories of population, prices, money, and taxa-
tion Steuart went much below the smooth surface on which A. Smith happily
sailed his course. But only in the first of these did he make a significant con-
tribution, which will be discussed below in Chapter 5; in the others it is a hard
job to get the wheat out of unpromising chaff or even, in some instances, to be
quite sure that there is any wheat at all.

[(d) High Level of the Italian Contribution .] But the honors of the field
of pre-Smithian system production should go to the eighteenth-century Italians.
In intent, scope, and plan their works were in the tradition that has been

9 Sir James Steuart (1712-80), the scion of a family that held a prominent position in
the Scottish magistracy, was educated as a lawyer, and, being an adherent of the Stuarts,
lived in exile from 1745 to 1763 — three facts that go some way toward explaining
both the nature and the reception of his performance; on the one hand, there is some-
thing un-English (which is not merely Scottish) about his views and his mode of pres-
entation, the latter being stiff and embarrassed in the bargain; on the other hand, he
was, and even after he had regained the rights of citizenship remained, distinctly under
a cloud. Such things count. In particular, they make it easy for competitors to pass a
man by in silence, which is precisely what A. Smith did. An Inquiry into the Principles
of Political Economy . . . 1767, accordingly was never much of a success in England
even before it was completely overshadowed by the Wealth of Nations. But it received
rather more than its due from some of the Germans. Other writings by Steuart will be
mentioned later. His collected Works were edited by his son (1805).

CONSULTANT ADMINISTRATORS AND PAMPHLETEERS 177

illustrated by the examples of Carafa and Justi; they were systems of Political
Economy in the sense of welfare economics — the old scholastic Public Good
and the specifically utilitarian Happiness meeting in their concept of welfare
( felicita pubblica). But whereas in zeal for fact-finding and in grasp of practical
problems they were not inferior to the Germans, they were superior to most of
their Spanish, English, and French contemporaries in analytic power and
achievement. Most of them were professors and civil servants and wrote from
the standpoint of professors and civil servants. The regionalism of Italian life 10
divides them into groups. But I can discern only two 'schools’ in the strict
sense of the term which implies both personal contact and similarity of doctrine
due to mutual influence: the Neapolitan and the Milanese. Genovesi and
Palmieri represent the former; 11 other members, particularly its brightest star,
Galiani, will be introduced later.

The representative figures of the Milanese school are Verri and Beccaria. We
take, however, this opportunity to introduce a man who stands quite by
himself, Ortes the Venetian.

10 This regionalism accounts for the existence of Italian histories of 'provincial’ eco-
nomics, a phenomenon for which there is no analogy in any other country except
Spain. Two examples may be mentioned: Augusto Graziani’s Le idee economiche degli
scrittori Emiliani e Romagnoli sino al 1848 (1893), and T. Fornari’s Delle teorie eco-
nomiche nelle provincie Napoletane dal secolo XIII al MDCCXXXIV (1882), the
complement of which will be cited in the next footnote.

11 Antonio Genovesi (1712-69), professor, first of ethics and moral philosophy, then
of economics and commerce, in the University of Naples, was first and last a great
teacher whose prodigious success in this capacity even his detractors have been unable
to deny. It was I think F. Ferrara who set the example of speaking of Genovesi in
derogatory terms, possibly because he never could see any merit in anyone who was
not a thoroughgoing free-trader. For a list of prominent economists who were his
pupils see G. Tagliacozzo, Economisti Napoletani (p. xxvi n.). The same author,
moreover, draws a picture of Genovesi’s scientific personality and background (on these
also see A. Cutolo, Antonio Genovesi, 1926) and gives a judicious appraisal of his
performance. Genovesi was a prolific writer. We are concerned, however, only with
his L ezioni di economia civile (1765; republ. in P. Custodi’s Scrittori classici Italiani
di economia politica, 50 vols., 1803-16), which may be described as an unsystematic
system of the whole range of his economic thought. These lectures do indeed display
the influence of contemporaneous and earlier writers and, what is worse, the argument
frequently lacks rigor. But nobody had, when they appeared, published as compre-
hensive a presentation of the utilitarian welfare economics that the epoch was evolving.
The 'mercantilist’ elements in Genovesi’s teaching only prove the realism of his vision.

Giuseppe Palmieri, Marchese di Martignano (1721-94?), was one of that brilliant
band of Neapolitans in which Filangieri (see P. Gentile, L ’Opera di Gaetano Filangieri,
1914) was perhaps the most widely known figure. Palmieri (there is a life by B. De
Rinaldis, 1850; also see T. Fornari, Delle teorie economiche nelle provincie Napoletane,
1735-1830, 1888) was primarily a practical administrator. But the welfare economics
of the eighteenth-century Consultant Administrators can perhaps be best appreciated
by reading his Riflessioni sulla pubblica felicitd relativamente al regno di Napoli (1787)
or his Pensieri economici . . . (1789) or his Della ricchezza nazionale (1792).

i?8

II : BEGINNINGS TO ABOUT 1790

Count Pietro Verxi (1728-97), an officer in the Austrian administration
of Milan — but not a teacher — would have to be included in any list of the
greatest economists. But though it would be easy to survey his various
recommendations as to policy — which for him were the important things;
in the preface to his main work, he exclaimed: potessi io dire qudlche cosa
di utile, potessi io farla (how I wish to say something useful, nay, to do
it!) — it is less easy to convey an idea of his purely scientific achievement;
some aspects of it will be mentioned later. Here we need to mention only
two of his many publications, the Elementi del commercio (1760), which
established him, and the Meditazioni sull’ economia politica (1771;
republ. in the Custodi collection; there are French and German transla-
tions) into which the former was expanded. Besides presenting a power-
ful synthesis, these works contain a number of original contributions
(among them his constant-outlay demand curve). Among other things,
he had a clear if undeveloped conception of economic equilibrium based,
in the last instance, upon the 'calculus of pleasure and pain' (he antici-
pated Jevons’ phrase) and was, as far as this goes, rather above than below
A. Smith. It is important to emphasize his fact-mindedness. Not only did
he do historical research of importance ( Memorie storiche, posthumously
published) but he was a true econometrician — for example, he was one of
the first economists to figure out a balance of payments — that is to say,
he knew how to weave fact-finding and theory into a coherent tissue:
the methodological problem that agitated later generations of economists
he had successfully solved for himself. On the man and his career, see
E. Bouvy, Le Comte Pietro Verri (1889), and M. R. Manfra, Pietro Verri
. . . (1932). The best exposition and appraisal of Verrfs work is, how-
ever, to be found in Professor Einaudi’s masterly introduction to his new
edition of Verri’ s Bilanci del commercio dello stato di Milano (1932).

Giammaria Ortes’ (1713-90) main title to fame is in his contribution
to the 'Malthusian' theory of population (see below, ch. 5). His systematic
venture ( Economia nazionale, 1774; re P u bl- i n the Custodi collection) will
always stand out in the history of the theories that look upon consump-
tion as the limiting factor of total output and derive from this set-up
their economic diagnosis — this is another link between him and Malthus.
In this as in some other respects his performance is certainly original in
the sense that it does not lie on the main road of advance. But little else
can be said for it. Critics and historians have been, on the one hand,
puzzled by it and, on the other hand, reconciled by his attack on the
'mercantilist confusion’ (see below, ch. 6) of money and wealth and his
free-trade views. Thus, a tradition has developed of dealing with him in
an attitude of diffident admiration. It is worth while adding that he
seems to have learned much from Sir James Steuart. From the Ortes
literature it will suffice to mention A. Faure, Giammaria Ortes . . .
(1916), the old book by F. Lampertico, G. Ortes . . . (1865), and C. de
Franchis, G. Ortes, un sistema d’ economia matematica . . . (1930),
though I cannot myself find much mathematics in Ortes.

CONSULTANT ADMINISTRATORS AND PAMPHLETEERS 179

Cesare Bonesana, Marchese di Beccaria (1738-94), was a Milanese and
the product of Jesuit education. His international fame as a penologist,
won at the age of about thirty (the year of his birth is not quite certain),
and the place he incidentally acquired in the history of utilitarianism
have been mentioned already. Mainly on the strength of this success — he
had as yet done little as an economist — the Austrian Government
(Prince Kaunitz) appointed him to a chair of economics in Milan
founded for the purpose (1768). After only two years of tenure, he ex-
changed this chair for employment in the Milanese administration, in
which he continued to serve until his early death, rising by degrees to the
highest rank open to a man not qualifying for governor, taking part in,
and in some instances initiating, the reforms of the period, busily writing
a great many reports and memoranda — on grain storage, monetary policy,
the metric system, population, and what not — and roaming over a wide
realm of intellectual interests at the same time. Among other things, he
was cofounder of, and a contributor to, 11 caffd, a periodical modeled on
the example of the English Spectator. In 1770 he published the first and
only volume of his aesthetics (on Style). Moreover, he seems to have been
a fair mathematician.

The bulk of his economic writings consisted of those government re-
ports. The only piece of economic reasoning that he published himself
(in 11 caffe, 1764) was an essay on smuggling, which presents two features
of interest, first, the algebraic treatment of the problem and, second, the
analytic device embodied in the question he made basic to his pure theory
of smuggling: given the proportion of the goods smuggled that will on the
average be seized by the authorities, what is the total quantity that
smugglers must move in order to be left without either gain or loss?
This spells the discovery of the idea that underlies modern indifference-
variety analysis. Beccaria’s argument was developed by G. Silio, 1792
(see Augusto Montanan's La matematica applicata all * economia politica,
1892). Here, we are concerned with Beccaria’s lectures (written 1769-70).
These he did not publish himself; he left them in his files for nearly a
quarter of a century. They were first published in Custodi’s collection,
under the title; E lementi di economia pubblica (1804).

The sweeping success of his Dei delitti e delle pene, An Essay on
Crimes and Punishments (1st ed. 1764; English trans. 1767) has in a
way obliterated the greatness of the man: ever since he has been con-
sidered primarily as a penologist. The Beccaria literature deals with little
else and is therefore only peripherically interesting for us. Reference
should be made, however, to P. Custodi’s life ( Cesare Beccaria, 1811)
and to P. Villari’s edition of his works ( Opere , 1854).

For the moment, we concentrate upon Beccaria, the Italian A. Smith. The
similarity between the two men and their performances is indeed striking.
There is even some similarity in their social backgrounds and locations. There
is similarity in their lives — and in those attitudes that are conditioned by one’s

l8o II: BEGINNINGS TO ABOUT 1790

pursuits — though Beccaria was much more of a public servant than A. Smith,
who only held a subordinate position without creative possibilities, and
A. Smith was much more of a professor than Beccaria, who taught for only
two years. Both were sovereign lords of a vast intellectual realm that extended
far beyond what, even then, was possible for ordinary mortals to embrace. Bec-
caria presumably knew more mathematics than A. Smith, but A. 'Smith seems
to have known more astronomy and physics than Beccaria. Neither was merely
an economist: A. Smith’s life work contains no match for Dei delitti e delle
pene, but his Moral Sentiments are more than a match for Beccaria’s aesthetics.
Both swam joyfully in the river of their time, but with a difference: whereas
Beccaria not only accepted all utilitarianism stands for but also was a leading
force in shaping it, A. Smith quite clearly showed some critical coolness toward
it; and whereas A. Smith not only accepted (almost) all that free trade and
laissez-faire stand for but also was a leading force in their victory (so far as
economic literature is concerned), Beccaria clearly showed some critical cool-
ness toward them. Splendid figures both of them. But, at least after 1770,
Beccaria, almost certainly more richly endowed by nature, gave to the public
service of the Milanese ‘state’ what A. Smith reserved for mankind.

Beccaria’s E lementi, after defining the subject of economics in the same
normative way as did A. Smith in the introduction to the Fourth Book of
the Wealth of Nations, starts with considerations about the evolution of
technology, division of labor, and population (the increase of which he made a
function of the increase in the means of subsistence). As the principle of
economic action, we know already, he embraced without qualification the
utilitarian doctrine of hedonist egotism, which he himself had done much to
develop, and which later on proved so embarrassing an ally to economics. The
second and third parts of the lectures deal with agriculture and manufactures,
and the fourth, on commerce, is made the repository of the theory of value
and price: barter, money, competition, interest, foreign exchanges, banks,
credit, and public credit follow each other in a sequence that is as suggestive
of nineteenth-century textbook practice as is the framework as a whole. In
detail, Beccaria’s argument — particularly as to the theories of cost and of
capital — is not always faultless or logically rigorous. But all the essential prob-
lems are seen, and seen in co-ordination. Some points will be mentioned in
subsequent chapters. There are several contributions, however — such as the
indeterminateness of isolated barter, the transition from this case to that of a
determinate competitive market and thence to the case of indirect exchange —
which we are in the habit of associating with much later, especially with post-
Smithian, times. Physiocrat influence is in evidence but does not go very deep.
Was the Scottish Beccaria the greater economist of the two? If we judge by
their works as they lie before us, he certainly was. But to do so would not be
fair to the men. It is not only that we must take into account priority and
also that the years between 1770 and 1776 were very significant ones in the
march of economic ideas; much more important is it that the Wealth of
Nations was the mature result of a life’s work whereas the Elementi are
lecture notes and, moreover, lecture notes which the author refused to publish.

CONSULTANT ADMINISTRATORS AND PAMPHLETEERS l8l

So far as subjective performance is concerned, they should not be matched
with the "Wealth of Nations but rather with the economic part of A. Smith’s
Glasgow lectures — where Beccaria would win hands down — or else the "Wealth
of Nations should be compared with what we might conceive Beccaria would
have done with his lectures if he had emigrated to Kirkcaldy and spent another
six years on them instead of immersing himself in the problems of the Milanese
state. That the main cause of the difference we perceive consists in the
amounts of labor invested is, in any case, an important clue to the secret of
A. Smith’s success.

[(e) Adam Smith and the Wealth of Nations.] 12 So often have we men-
tioned Adam Smith, so often shall we have to mention him again, that the
reader might well wonder whether there is need for a comprehensive survey of
his performance in any one place. For our purpose, the references to it that
are scattered all over this history are in fact more important than what will be
said in this section. Nevertheless, it seems proper to stay for a moment in order
to look at the figure of the most famous of all economists — to form an idea
of what stuff he was made — and at the most successful not only of all
books on economics but, with the possible exception of Darwin’s Origin of
Species, of all scientific books that have appeared to this day. Moreover, it
will again be useful to present a brief Reader’s Guide.

Few facts and no details are needed about the man and his sheltered and
uneventful life (1723-90). 13 It will suffice to note: first, that he was a Scotsman
to the core, pure and unadulterated; second, that his immediate family back-
ground was the Scottish civil service — in order to understand his outlook on
social life and economic activity (very different from what has been often im-
puted to him), it is important never to forget the gentility, the intellectuality,
the critical attitude to business activity, the modest yet adequate means that
characterized the environment which produced him; third, that he was a pro-
fessor born and bred, not only while he lectured at Edinburgh (1748-51) and

12 [There is no indication as to where this sketch of Adam Smith followed by a
Reader’s Guide to the "Wealth of Nations belongs, but it seems appropriate to place
it here at the end of the discussion of 'The Systems, 1600-1776.’ This section was
originally written for the History but was withdrawn by J. A. S., possibly at a time
when he was attempting to reduce the length of the book or possibly because he
felt that there was too much duplication in view of 'the references . . . that are
scattered all over this History.’ It is a first draft that was not even typed. Since,
however, similar biographical sketches of other famous economists are presented
throughout the book, it seemed appropriate to restore this account of Adam Smith
and the Wealth. A reference to the Reader’s Guide will be found below in ch. 6,
sec. 3d (Codification of Value and Price Theory in the Wealth of Nations).]

18 Of the many lives of Adam Smith the interested reader is referred to the one
by John Rae (1895). Of all the books containing supplementary material on and
interpretations of Smith the man, by far the most important is Professor W. R.
Scott’s A dam Smith as Student and Professor (1937), which will be referred to in
the text and from which the reader will derive much instruction and, perhaps, some
amusement. The minimum of references concerning the Wealth will be given later.

182 II : BEGINNINGS TO ABOUT 1790

Glasgow (1751-63) but always and by virtue of character indelebilis; fourth—
a fact which I cannot help considering relevant, not for his pure economics
of course, but all the more for his understanding of human nature — that no
woman, excepting his mother, ever played a role in his existence: in this as
in other respects the glamours and passions of life were just literature to him.
In 1764-6 he traveled in France, acting as 'tutor’ to the young Duke of Buc-
cleuch, to whom economics owes the subsequent leisure and independence that
produced the Wealth of Nations. His appointment to a quasi-sinecure (1778)
added ample comfort for the rest of his life. He was conscientious, painstaking
to a degree, methodical, well-poised, honorable. He acknowledged obligation
where honor required it, but not generously. He never uncovered the foot-
prints of predecessors with Darwinian frankness. In criticism he was narrow
and ungenerous. He had the courage and energy that exactly fit the scholar’s
task and go well with a good deal of circumspection.

The day of polyhistoric knowledge was not yet over: a man could then roam
over the whole of science and art and even do work in widely distant fields
without meeting disaster. Not less than Beccaria or Turgot, A. Smith held
sway over a wide domain of which economics was only a part. We have al-
ready had the opportunity to notice his Theory of Moral Sentiments (1759),
to which was appended' (3rd ed. 1767) A Dissertation on the Origin of Lan-
guages — his first great success, which matured, from beginnings in the ma-
terial of the Edinburgh lectures, during the first half of his tenure of the
Glasgow chair, and should be recalled to make the reader immune to the
silly criticism that A. Smith gave inadequate attention to the importance of
ethical forces. Moreover, Smith’s philosophy of riches and of economic ac-
tivity is there and not in the Wealth of Nations. To this and to his work in
natural law, ‘natural theology,’ and belles lettres must, however, be added six
essays, 14 some of which are the crystallized fragments of the grandiose plan of
a 'history of the liberal sciences and elegant arts’ which he abandoned 'as far
too extensive.’ The pearl of the collection is the first essay on the ‘Principles
which lead and direct Philosophical Enquiries; illustrated by the History of
Astronomy.’ Nobody, I venture to say, can have an adequate idea of Smith’s
intellectual stature who does not know these essays. I also venture to say that,
were it not for the undeniable fact, nobody would credit the author of the
Wealth of Nations with the power to write them. '

We know already that the skeleton of Smith’s analysis hails from the scho-
lastics. and the natural-law philosophers: besides lying ready at hand in the
works of Grotius and Pufendorf, it was taught to him by his teacher Hutche-

14 Essays on Philosophical Subjects by the late Adam Smith . . . ed. by his execu-
tors, Black and Hutton, to which was prefixed an Account of the Life and Writings
of the Author by Dugald Stewart . . . (1st ed. 1795). Stewart, by the way, who held
the Edinburgh chair of moral philosophy, 1785-1810, though he can hardly be said
to have made any mark by his published writings, was so strong a personality and
so effective a teacher that a more complete history of our subject could not pass
him by as we must.

CONSULTANT ADMINISTRATORS AND PAMPHLETEERS 183

son . 15 It is true that neither the scholastics nor the natural-law philosophers
ever evolved a completely articulate scheme of distribution, still less the mis-
leading idea, which was to play so great a role in the theory of the nineteenth
century, of a social product or National Dividend distributed among the agents
that take part in its production. But they had worked out all the elements
of such a scheme, and Smith was no doubt equal to the task of co-ordinating
them without further help from anyone. According to Cannan, the Glasgow
Lectures — which show no great advance beyond Hutcheson in any direction —
contain ‘no trace whatever ... of the scheme of distribution which the

15 On Francis Hutcheson, see above, ch. 2, sec. 7b. Also see W. R. Scott, Francis
Hutcheson (1900). The lineage of Smith’s economics has been, as we might expect,
the subject of much research. A great event was the discovery and subsequent pub-
lication by E. Cannan of the Lectures on Justice, Police, Revenue and Arms, delivered
in the University of Glasgow by Adam Smith, reported by a student in 1763 (1896),
to which I shall refer as Glasgow Lectures; another was the discovery, and publication
in Scott’s book mentioned above, of what may be called an early draft of the Wealth
of Nations, which, according to Professor Scott, antedates by but little Smith’s de-
parture for France and thus presumably reflects the general state of Smith’s work
before he came into personal contact with the French economists. It will be referred
to as Draft. To Professor Cannan we owe by far the best of the many editions of the
Wealth of Nations (1904; republished many times, 6th ed. 1950) which contains a
most valuable introduction, which sheds much light on some questions of lineage.
Publication of A Catalogue of the Library of Adam Smith (1st ed. 1894; 2nd ed.
1932) with introduction was one of the many services rendered to ‘Smithology’ by
James Bonar.

Space forbids our dealing with matters of editions, translations, summaries, para-
phrases of, and excerpts from the Wealth of Nations, a fact that I regret the more
because the Vanderblue Memorial Collection of Smithiana in the Kress Library (see
pamphlet published by the Kress Library, containing a special catalogue of this col-
lection by Homer B. Vanderblue, prefaced with an essay by Charles J. Bullock, 1939)
gave me an excellent opportunity for investigating them. Nor is it possible to do
justice to the extensive literature that deals with the Wealth of Nations. The most
valuable comments, expository and critical, are scattered all over the economic treatises
and papers of the nineteenth century: it is they that make up the true monument
to Smith, the scientific economist. Those economists and non-economists who wrote
on Smith and 'Smithianism' per se, particularly the Germans, were usually not, or
not primarily, interested in his analytic performance, but rather in his views on prac-
tical issues, his philosophical backgrounds, his social sympathies. Neglecting the com-
ments that are, of course, to be found in all general histories of economic thought,
we must however notice the analyses of Smith’s work by Marx, in the T heorien iiber
den Mehrwert, and by Cannan, in the History of the Theories of Production and
Distribution. In addition we may mention: J. F. Baert, Adam Smith, en zijn Onderzoek
naar den Rijkdom der Volken (1858); A. Delatour, Adam Smith (1886); W. Hasbach,
Untersuchungen iiber Adam Smith (1891); S. Feilbogen, Smith und Turgot (1892);
G. R. Morrow, The Ethical and Economic Theories of Adam Smith (1923); W.
Bagehot, A dam Smith and Our Modem Economy (Works, ed. by Mrs. Russell Bar-
rington, vol. 7); Edwin Cannan, 'Adam Smith as an Economist,’ Economica, June
1926; and the sesquicentennial Chicago Lectures (1928).

184 II BEGINNINGS TO ABOUT 1790

1 Wealth of Nations sets forth/ It is not necessary to infer from this, however,
that Smith was under heavy (and largely unacknowledged) obligation to ‘the
physiocrats, whom he met (1764-6) and presumably read before he settled
down to work at Kirkcaldy. The Draft discovered by Professor Scott proves
that this may go too far: the Draft clearly foreshadows the scheme of the
'Wealth. On the other hand, however, it must not be forgotten that the herit-
age of the natural-law philosophers and the achievements of A. Smith's French
contemporaries were not all he had to work with. There was the other of the
two streams that meet in the Wealth of Nations, represented by the Con-
sultant Administrators and the Pamphleteers. Smith knew Petty and Locke;
he presumably made acquaintance with Cantillon, at least through Postle-
thwayt's Dictionary, at an early stage of his work; he laid Harris and Decker
under contribution; his friend Hume’s writings and Massie’s must have been
familiar to him; and in the long list of writers whom he affected to despise
because of their ‘mercantilist errors,’ there are some who might have taught
him a lot, for example. Child, Davenant, Pollexfen, not to insist on such
‘anti-mercantilists’ as Barbon and North. 16 But no matter what he actually
learned or failed to learn from predecessors, the fact is that the Wealth of
Nations does not contain a single analytic idea, principle, or method that was
entirely new in 1776.

Those who extolled A. Smith’s work as an epoch-making, original achieve-
ment were, of course, thinking primarily of the policies he advocated — free

16 Two authors should be mentioned, if only because they are mentioned so fre-
quently. Adam Ferguson (1723-1816), professor first of ‘natural’ then of ‘moral’ phi-
losophy in Edinburgh, was primarily a historical sociologist. His Essay on the History
of Civil Society (1st ed. 1767), the only one of his works that need be noticed, hails
from Montesquieu (to whom also Smith was indebted) and met, on a reduced scale,
with the same kind of success as did the Esprit des lois. In Germany, partly under
the influence of Marx, it enjoyed considerable — and, as it seems to me, unmerited —
reputation in the nineteenth century. There is hardly any reason to believe, as did
Marx, that Smith owed any considerable debt to it or, as others have held, that
Ferguson owed much to Smith’s lectures or conversation: the parallelisms that are
adduced in support of either view concern ideas — on division of labor and taxation —
which were common currency at that time and could have been drawn from a num-
ber of older authors.

Bernard de Mandeville published a didactic poem entitled The Grumbling Hive
(1705; better known under the later title, The Fable of the Bees: or. Private Vices,
Publick Benefits, 1714), in which he endeavored to show that the individual motives
that produce socially desirable actions are not unlikely to be morally objectionable.
Adam Smith, like other virtuous people, was hard on this piece of work. It contained
indeed a eulogy on spending and an indictment of saving, as well as certain ‘mer-
cantilist errors’ that must have displeased him. But there was more than that to his
hostility. Smith cannot have failed to perceive ' that Mandeville’s argument was an
argument for Smith’s own pure Natural Liberty couched in a particular form. The
reader will have no difficulty in realizing how this fact must have shocked the re-
spectable professor — particularly if it should be the case that he learned something
from the offending pamphlet.

CONSULTANT ADMINISTRATORS AND PAMPHLETEERS 185

trade, laissez-faire, colonial policy, and so on. But, as should be clear by now
and as will become still clearer as we go along, this aspect would not lead
to a different conclusion even if it were relevant to our subject. Smith him-
self, according to Dugald Stewart, indeed laid claim (in a paper drawn up in
1 755 ) to priority concerning the principle of Natural Liberty on the ground
that he had taught it as early as 1749. By this principle he meant both a
canon of policy — the removal of all restraints except those imposed by 'jus-
tice' — and the analytic proposition that free interaction of individuals pro-
duces not chaos but an orderly pattern that is logically determined: he never
distinguished the two quite clearly. Taken in either sense, however, the prin-
ciple had been quite clearly enunciated before, for example, by Grotius and
Pufendorf. It is precisely for this reason that no charge of plagiarism can be
made either against Smith or on his behalf against others. This does not exclude
the possibility of course that, in stating it with greater force and fullness than
anyone before him. Smith experienced subjectively all the thrill of discovery
or even that, some time before 1749, he actually made the 'discovery' himself.

But though the Wealth of Nations contained no really novel ideas and
though it cannot rank with Newton’s Principia or Darwin’s Origin as an in-
tellectual achievement, it is a great performance all the same and fully de-
served its success. The nature of the one and the causes of the other are not
hard to see. The time had come for precisely that kind of co-ordination. And
this task A. Smith performed extremely well. He was fitted for it by nature:
no one but a methodical professor could have accomplished it. He gave his
best: the Wealth is the product of labor ungrudgingly bestowed during more
than twenty-five years, exclusively concentrated upon it during about ten.
His mental stature was up to mastering the unwieldy material that flowed
from many sources and to subjecting it, with a strong hand, to the rule of
a small number of coherent principles: the builder who built solidly, regard-
less of cost, was also a great architect. His very limitations made for success.
Had he been more brilliant, he would not have been taken so seriously. Had
he dug more, deeply, had he unearthed more recondite truth, had he used
difficult and ingenious methods, he would not have been understood. But he
had no such ambitions; in fact he disliked whatever went beyond plain com-
mon sense. He never moved above the heads of even the dullest readers. He
led them on gently, encouraging them by trivialities and homely observations,
making them feel comfortable all along. While the professional of his time
found enough to command his intellectual respect, the 'educated reader’ was
able to assure himself that, yes, this was so, he too had always thought so;
while Smith taxed the reader’s patience with his masses of historical and sta-
tistical material, he did not tax his reasoning power. He was effective not
only by virtue of what he gave but also by virtue of what he failed to give.
Last but not least, argument and material were enlivened by advocacy which
is after all what attracts a wider public: everywhere, the professor turned his
chair into a seat of judgment and bestowed praise and blame. And it was
Adam Smith’s good fortune that he was thoroughly in sympathy with the
humors of his time. He advocated the things that were in the offing, and he

made his analysis serve them. Needless to insist on what this meant both for
performance and success: where would the Wealth' of Nations be without
free trade and laissez-faire? Also, the ‘unfeeling 7 or ‘slothful 7 landlords who
reap where they have not sown, the employers whose every meeting issues in
conspiracy, the merchants who enjoy themselves and let their clerks and ac-
countants do the work, and the poor laborers who support the rest of society
in luxury — these are all important parts of the show. It has been held that
A. Smith, far ahead of his time, braved unpopularity by giving expression to
his social sympathies. This is not so. His sincerity I do not for a moment
call into question. But those views were not unpopular. They were in fashion.
A judiciously diluted Rousseauism is also evident in the equalitarian tendency
of his economic sociology. Human beings seemed to him to be much alike
by nature, all reacting in tlie same simple ways to very simple stimuli, differ-
ences being due mainly to different training and different environments. This
is very important considering A. Smith’s influence upon nineteenth-century
economics. His work was the channel through which eighteenth-century ideas
about human nature reached economists.

Now for the Reader’s Guide: An Inquiry into the Nature and Causes of
the Wealth of Nations by Adam Smith, LL.D. and F.R.S., formerly Pro-
fessor of Moral Philosophy in the University of Glasgow, in two volumes,
London 1776, defines scientific economics quite well by its title and hardly
less felicitously, though less concisely, in the last paragraph of the Introduc-
tion. But in the introduction to Book iv we read that Political Economy ‘pro-
poses to enrich both the people and the sovereign, 7 and it is this definition
which expresses both what Smith wanted above everything and what inter-
ested his readers more than anything else. It makes economics a collection of
recipes for the ‘statesman/ All the more important is it to remember that
the viewpoint of analysis is not absent and that we, whatever A. Smith him-
self may have thought, can separate the analysis from the recipes without
doing any violence to his text.

There are five Books. The fifth and longest — taking 28.6 per cent of total
space— is a nearly self-contained treatise on Public Finance and was to be-
come and to remain the basis of all the nineteenth-century treatises on the
subject until, mainly in Germany, the ‘social 7 viewpoint — taxation as an in-
strument of reform — asserted itself. The length of the book is due to the
masses of material it contains: its treatment of public expenditure, revenue,
and debts is primarily historical. ,The theory is inadequate, and does not
reach much below the surface. But what there is of it is admirably worked
in with the reports on general developments as well as on individual facts.
Further facts have been amassed and theoretical technique has been improved
but nobody has to this day succeeded in welding the two — plus a little po-
litical sociology — together as did A. Smith. The fourth Book, nearly as long, 17
contains the famous indictment of the ‘commercial or mercantile system 7 —

the patronizingly benevolent criticism of physiocrat doctrine in the ninth and
17 The fourth and fifth Books account for nearly 57 per cent of the total space.

CONSULTANT ADMINISTRATORS AND PAMPHLETEERS 187

last chapter does not call for comment — from the ashes of which rises, phoenix-
like, Smith’s own political system. Again: the reader beholds masses of facts
painstakingly marshalled, very little of very simple theory (no advance what-
ever in this over even distant ‘predecessors’), which is, however, most success-
fully used in lightening up the mosaic of details, in heating the facts till they
glow. The facts overflow and stumble over one another: two monographs are
inserted by way of digressions (on Banks of Deposit and on the Com Trade)
where they do not belong. The great and justly famous chapter ‘Of Colonies’
(which should be compared with the last pages of the work) falls out of line,
but nothing matters: we have a masterpiece before us, a masterpiece not only
of pleading but also of analysis. Book hi, which occupies less than 4.5 per
cent of total space, may be described as a prelude to Book iv, filling in gen-
eral considerations of a primarily historical nature on the ‘natural progress
of opulence,’ the rise and the commerce of towns as distorted — hampered or
propelled — by the policies sponsored by various interests. This third Book did
not attract the attention it seems to merit. In its somewhat dry and unim
spired wisdom, it might have made an excellent starting point of a historical
sociology of economic life that was never written. Books 1 and 11 — respectively
about 25 and 14 per cent of the whole — also overflowing with illustrative
fact, present the essentials of A. Smith’s analytic schema. They can indeed
be perused by themselves. But the reader who, more interested in theory than
in ‘application,’ refuses to go beyond them will miss much that is indispen-
sable for a full understanding of the theory itself.

The first three chapters of Book 1 deal with Division of Labour. 18 We are
in the oldest part of the building, the part already completed in the Draft.
Also, presumably because in his teaching Smith had so often gone over this
subject, it is by far the most polished part of the whole. Though, as we
know, there is nothing original about it, one feature must be mentioned that
has not received the attention it deserves: nobody, either before or after A.
Smith, ever thought of putting such a burden upon division of labor. With
A. Smith it is practically the only factor in economic progress. A lone it ac-
counts ‘for the superior affluence and abundance commonly possessed even
by [the], lowest and most despised member of Civilized society, compared
with what the most respected and active savage can attain to’ in spite of
so much ‘oppressive inequality’ (Draft, see Scott, op. cit. p. 328). Techno-
logical progress, ‘invention of all those machines’ — and even investments —
is induced by it and is, in fact, just an incident of if. We shall consider this
feature of A. Smith’s analytic schema at the end of this Reader’s Guide.

Division of labor itself is attributed to an . inborn propensity to track and
its development to the gradual expansion of markets — the extent of the mar-
ket at any point of time determining how far it can go (ch. 3). It thus ap-

18 The reader will please bear in mind that all the more important points of A.
Smith’s analysis that can be touched upon at all in this history will he dealt with in
their proper places, excepting a few which there is no opportunity to mention else-
where. This is nothing but a jejune and desperately brief Reader’s Guide.

l88 II : BEGINNINGS TO ABOUT I79O

pears and grows as an entirely impersonal force, and since it is the great
motor of progress, this progress too is depersonalized.

In Chapter 4, A. Smith completes the time-honored sequence: division of
labor-barter-money and, falling far below the level reached by many older
authors and particularly by Galiani, severs ‘value in exchange’ completely from
Value in use.’ In Chapter 5 (which starts with Cantillon’s definition of rich -
esse) he undertakes to find a measure of the former that is more reliable than
is price expressed in terms of money. Equating value in exchange to price
and observing that ‘price in money’ fluctuates in response to purely monetary
changes, Smith replaces for purposes of interlocal and intertemporal com-
parisons this monetary or ‘nominal price’ of each commodity by a real price
in the same sense in which we speak, for example, of real wages as distin-
guished from money wages, 19 that is, by price in terms of all other com-
modities. And these real prices he in turn replaces, in ignorance of the index-
number method already invented in his time, by prices expressed in terms
of labor (after having considered corn for the role) : in other words, he chooses
the commodity labor instead of the commodity silver or the commodity gold
as numeraire — to use the phrase brought into general use by L. Walras. This
may or may not be helpful, but there is no logical objection to it. But Smith
flounders so badly in conveying the idea and, moreover, confuses it with phi-
losophies concerning the nature of value and real price in a different sense —
see the famous doctrines about ‘toil and trouble’ as the real price of every-
thing (paragraph 2 of ch. 5) and about labor alone ‘never varying in its own
value’ (paragraph 7) — that his fundamentally simple idea was misunderstood
even by Ricardo. Accordingly, he was credited with a labor theory of value —
or rather with three incompatible labor theories 20 — whereas it is quite clear
from Chapter 6 that he meant to explain commodity prices by cost of pro-

19 See, e.g., the 9th paragraph of ch. 5.

20 Though it will be necessary to return to A. Smith’s view on value both in ch. 6
of this Part and in the third Part, a brief clarification of. the matter in this place
may prove helpful. In itself, the choice of hours or days of labor as units by which
to express commodity values or prices— on the (invalid) ground that labor never varies
in its own value or on any other ground — no more implies any particular theory of
exchange value or price than the choice of oxen as units by which to express com-
modity values or prices implies an ox theory of exchange value or price. But Smith
(just as R. Owen and other sponsors of the plan to make labor notes the medium of
circulation) does not seem to have seen this clearly and undoubtedly argued in sev-
eral places as if his use of labor as numeraire did imply a theory of value. Moreover,
he repeatedly seems to confuse the quantity of labor a commodity will exchange for
with the quantity of labor this commodity costs to produce — which is what Ricardo
criticized. The quantity a commodity costs to produce then comes to the front in
the famous beaver-deer example at the beginning of ch. 6, though it is but just to
add that Smith confines the proposition that this quantity ‘regulates’ price expressly
to that ‘early and rude state of society’ in which there are no other distributive shares
to take into account. Finally, there is the ‘toil and trouble’ which is the ‘real price
of everything’ and which, at least if interpreted as equivalent to the later concept,
disutility of labor, agrees with neither of the two other measures. These, then, are

^jpjj

CONSULTANT ADMINISTRATORS AND PAMPHLETEERS I09

duction, which in this chapter he divides up into wages, profit, and rent —
the ‘original sources of all revenue as well as of all exchangeable value/ This
is no doubt very unsatisfactory as an explanation of value but serves well as
an avenue both to a theory of equilibrium price and to the theory of dis-
tribution.

The rudimentary equilibrium theory of Chapter 7, by far the best piece
of economic theory turned out by A. Smith, in fact points toward Say and,
through the latter’s work, to Walras. The purely theoretical developments of
the nineteenth century consist to a considerable degree in improvements upon
it. Market price, defined in terms of short-run demand and supply, is treated
as fluctuating around a ‘natural’ price — J. S. Mill’s ‘necessary’ price, A. Mar-
shall’s ‘normal’ price — which is the price that is sufficient and not more than
sufficient to cover ‘the whole value of the rent, wages, and profit, which must
be paid in order to bring’ to market that quantity of every commodity ‘which
will supply the effectual demand/ that is, the demand effective at that price.
There is no theory of monopoly price beyond the meaningless (or even false)
sentence that the ‘price of monopoly is upon every occasion the highest which
can be got/ whereas ‘the price of free competition ... is the lowest which
can be taken’ in the long run — an important theorem though Smith does not
seem to have had any notion of the difficulties of a satisfactory proof. Chapters
8 to 11 complete the self-contained argument of the first Book, whose con-
tour lines, though hidden by the luxuriant foliage of illustrative fact that
often degenerates into digression, are not without beauty. They deal with
‘the circumstances which naturally determine’ the rate of wages and the rate
of profit and ‘regulate’ the rent of land (p. 56). 21 These chapters, summing
up and co-ordinating, handed down the theory of distribution of the eighteenth
century to the economists of the nineteenth, who found it all the easier to
start from them because the very looseness of Adam Smith’s doctrines in-
vited development on many different lines: Smith’s very weaknesses con-
spired to qualify him for his type of leadership. It must suffice to draw the
reader’s attention to the following points.

the three labor theories of value or price which A. Smith is supposed to have held.
However, since the first is logically incapable of serving as an explanation of the
phenomenon of value — the reader will perceive that, considered as such, it spells cir-
cular reasoning— and since we may neglect the third, because A. Smith made no
effort to develop the theme of disutility, we are really left with the second or labor-
quantity theory of value. And, finally, since A. Smith — unlike Ricardo and Marx —
claimed no validity at all for this except in a special case, we come to the conclusion
that, in spite of his emphasis on the labor factor, his theory of value is no labor
theory at all. The fact that the first sentence of the introduction makes the whole of the
National Dividend a ‘produce of labor/ does not affect this conclusion as a little
reflection should show.

21 [The page references in this Reader’s Guide are to the Everyman’s Library Edi-
tion published by J. M. Dent, London, and E. P. Dutton & Co.., New York (1910),
of which there was a copy in the library in Taconic. Elsewhere J. A. S. used the
Cannan edition referred to in note 15.]

190 II : BEGINNINGS TO ABOUT 179O

Chapter 8 on wages contains not only the rudiments of both the wage fund
(p. 6i) and the minimum-of-existence (pp. 71, 76) theories, which might have
been derived from Turgot and the physiocrats and which have been made
the most of by A. Smith’s English successors, but also another element, the
full importance of which these successors failed to see. This is enshrined in
his pithy sentence that the ‘liberal reward of labour’ is both ‘the necessary
effect’ and ‘the natural symptom of increasing [J. A. S.’s italics] national wealth’
(p. 65) which, though inadequately motivated, sheds a light on the problem
of wages quite different from that in which Ricardo saw it. Chapter 9 on
profit offers many points about the factors that determine the rate of profit
(for instance on p. 83), especially relatively to wages, but fails to face the
fundamental problem. So far as Smith can be credited with having had a
theory of ‘profit’ at all, it must be pieced together from indications, mostly
vague and even contradictory, that are scattered over the first two Books.
First, he definitively sanctioned and helped to victory the doctrinal tendency
that was to prevail in nineteenth-century economics, particularly in England:
profit, treated as the basic income of the capitalist class, is (substantially) the
return from the use in business of physical goods (labor’s means of subsistence
included) which that class supplies; and interest on loans is simply a derivate
from it. Excepting the case of the mere lenders (‘monied men’), there is no
distinctive function of the entrepreneurs — though Smith does speak of the
‘undertaker’ — or industrialists, who, ‘inspection and direction’ being brushed
aside, are fundamentally capitalists or masters ‘setting to work industrious
people' and appropriating part of the product of ‘their work’ (ch. 6). The
Marxist implications of this, which moreover Smith goes out of his way to
underline, are obvious. Nevertheless, it cannot be said that Adam Smith held
an exploitation theory of profit, though it can be said that he suggested it.
For he also emphasized the element of risk and spoke of employers' advanc-
ing ‘the whole stock of materials and wages’ (p. 42), which points in an en-
tirely different direction. Moreover, nobody who thought as highly of the
social importance of saving as did A. Smith can complain if he be associated
with abstinence-theory ideas.

In treating of the differences ‘Of Wages and Profits in the different Em-
ployments of Labour and Stock’ (ch. 10), Smith, reveling in facts and argu-
ments of a somewhat trite sort, improved upon Cantillon and succeeded in
creating a standard chapter of the nineteenth-century textbook. Chapter 11,
‘Of the Rent of Land’ — Smith, and following him, practically all the Eng-
lish economists to Marshall’s epoch, confined the concept of rent to land
and mines — is swollen by a gigantic digression (or a cluster of digressions or
monographs) that makes up about 7.6 per cent of the whole work. If the vast
materials and the almost innumerable disquisitions on particular points be
boiled down, a mosaic of ideas emerges of which these are the outstanding
elements. First, reasoning from his cost theory of value, Smith not unnatu-
rally — though wrongly — arrives at the conclusion that the phenomenon of
rent can be due only to a ‘monopoly’ in land (p. 131), thus starting on its
career an idea that was to find sponsors again and again and has not even

CONSULTANT ADMINISTRATORS AND PAMPHLETEERS 191

yet died out. But second, we find (p. 132) the statement that, whereas ‘high
or low wages and profit are the causes of high or low price; high or low rent
is the effect of it/ which fits but ill with the monopoly theory and points
in the Ricardian direction: the so-called Ricardian theory of rent might have
emerged from an effort to put logical order into the Smithian jumble. And,
third, there is even a suggestion that might have induced a disciple to
straighten out that jumble by means of a productivity theory (see, e.g., p. 133).
All this is intermingled with other ideas, good and bad — for example, the
old idea which was as persistent as it was useless and which we encounter
again in Malthus, that the production of foodstuffs holds a unique position
in that it creates its own demand because people will multiply as it expands
— that enter and leave the stage much as does the Falstaff crowd in Henry IV.
Even before the reader gets to the digressions on the value of silver and on
the relation between the values of silver and gold, the chapter contributes
much to Smith’s theory of money, which cannot however be fully mastered
without reading the whole work (see especially ch. 2 of the second Book and
the important Digression Concerning Banks of Deposit in ch. 3 of the fourth).
Two more points should be added: at the end of the digression on silver
Smith tries to show why, at least on the whole, the price — the real prices —
of agrarian products will rise in consequence of the Progress of Improvement
(pp. 198 et seq.) and, in an additional digression (pp. 224 et seq.), that the
real price of manufactures will fall. In a sense, this foreshadows the nineteenth-
century doctrine of decreasing returns in agriculture and increasing returns
in industry toward which he may be said to have cautiously felt his way and
which might have been distilled from his pages. Furthermore, he arrived at
the Ricardian conclusion (p. 229), though it does not follow cogently from
his muddled argument, that landowners benefit in the process directly, both
because the real value of the products of the land rises and because they re-
ceive a larger relative share of these products; and in addition indirectly,
owing to the fall of the real price of manufactures. Laborers also benefit (p.

230) because their wages rise and the prices of part of the commodities they
buy fall. But the third class, the 'merchants and master manufacturers’ (p.

231) , suffer, because, as A. Smith said, the rate of interest tends to be low in
rich countries and high in poor countries, so that the interest of this class
conflicts both with the interests of the other two and with the ‘general in-
terest of the society.’ This was evidently intended for a schema of economic
class interests such as many later economists tried to construct, possibly in-
spired by A. Smith’s example and by a desire to correct his mistakes.

The second Book presents the theory of capital, saving, and investment
that, however much transformed by development and criticism, remained the
basis of practically all later work until, and partly even beyond, Bohm-Bawerk.
It certainly looks like a new wing added to an old structure. In spite of the
weak attempt made in the introduction to link it to the first Book by means
of another and quite unconvincing appeal to ‘division of labour,’ there is no
reason to believe that any essential part of it was either written or planned
before A. Smith’s stay in France. Specifically physiocrat influence is much

19 2 II : BEGINNINGS TO ABOUT 1790

more definitely recognizable than it is in any part of the first Book, both in
many details and in the conception as a whole. This statement must not
be misunderstood, however. A. Smith was not in the habit of accepting pas-
sively what he read or heard: he read and listened judicially, criticized vig-
orously, and in so doing arrived at a conception of his own. This is why I
have spoken of physiocrat influence only, and not also of his being influenced
by Turgot. Turgot holds priority in essential points, but it does not follow
that Smith derived his views from him. For these views are such as would
naturally emerge in Smith’s mind from a creative criticism of Quesnay’s teach-
ing so that, in the absence of cogent evidence to the contrary, it seems more
just to speak of parallelism than of dependence. Space forbids our presenting
more than a single illustration. The Scotsman’s common sense took offense
at Quesnay’s statement that only agricultural (and extractive) labor was pro-
ductive. From Turgot he might have learned how to shrug his shoulders at
this vagary and to pass on with a graceful bow. This, however, was not his
way. He took things not only seriously but also literally. He had to embark
upon ponderous refutation. But in his meditations on the subject it may have
occurred to him that there was something to the distinction between pro-
ductive and unproductive labor. 22 And so he worked out his own interpreta-
tion of it and substituted it for Quesnay’s. In a sense it was suggested to
him by Quesnay — this is indicated by the fact that there is no hint of it
in the first Book though it would naturally belong there — but in another
sense it was his own.

Chapter 1 of the second Book distinguishes that part of a man’s — and
society’s — total stock of goods that is to be called capital (not only physical
goods, since ‘the acquired and useful abilities of all the inhabitants’ are
capital) from the rest; introduces the concepts of fixed and circulating capital;
and classifies the goods that are to come under both headings, including in
circulating capital money but not the means of subsistence of productive
laborers, although Smith’s argument calls for and actually implies inclusion
of the latter. The long Chapter 2, one of the most important of the work,

22 It may be just as well to state at once what that something was, because both
A. Smith’s clumsy and inconsistent handling of it and the nineteenth-century con-
troversy on this distinction have needlessly obscured its meaning. Productive laborers
reproduce the value of the capital that employs them with a profit; unproductively
employed laborers either sell their services or else produce something that does not
yield profit. This may be considered as the embryo of Marx’s theory of surplus value.
Interpreted in this sense, this distinction is not irrelevant. But Smith himself has to
take the blame if this meaning of it, which is quite clear from the first paragraph
of ch. 3, did not stand out from all the irrelevancies with which he associated it.
From another but cognate standpoint the distinction is between labor that does and
labor that does not produce something that must be sold in order to complete the
transaction: when a personal servant has sold his services to his employer and has
received payment out of the latter’s income, there is no further step in the process;
if the same man secures employment in a shoe factory, he is paid out of capital and
the process in which his work is an element is not completed until the shoes have
found a buyer.

CONSULTANT ADMINISTRATORS AND PAMPHLETEERS 193

contains the bulk of A. Smith’s theory of money. It is much above Chapter 4
of the first Book and certainly the result of a late stage of A. Smith’s labors.
But it displays no physiocrat influence — all recognizable influence is English.
Chapter 3 (which introduces the distinction between productive and unpro-
ductive labor), with its tremendous emphasis on the propensity to save as
the true creator of physical capital (‘Parsimony, and not industry, is the im-
mediate cause of the increase of capital/ p. 301; ‘every prodigal appears to
be a public enemy, and every frugal man a public benefactor/ p. 304), marks
the victory for more than 150 years to come of a pro-saving theory. ‘What
is annually saved is as regularly consumed as what is annually spent, and
nearly in the same time too; but it is consumed by a different set of people’
(p. 302), namely, productive laborers whose wages and employment are thus
positively related to the rate of saving which is identified or at least equated
to the rate of increase of capital, that is, investment. In this chapter, revenue
means profit plus rent, exactly as it does with Marx. Chapter 4 tackles the
problem of interest. Since, as indicated above, profit is treated as the funda-
mental phenomenon and this is taken for granted here, interest simply fol-
lows from the fact that money — but, as Smith holds, really the producers’
goods and services that can be bought for it — always meets with demand at
a premium motivated by the expectation of profits. Smith as well as all his
successors until recent times simply saw no difficulty in explaining interest
per se: the difference between him and his nineteenth-century successors was
only that he did not see much of a problem in business profit either, whereas,
as time went on, an increasing number of the latter began to worry about
it. There are thus but three points to mention: first, his unconvincing ex-
planation of the tendency of the rate of interest to fall by the increasing
competition between increasing capitals; second, his vigorous, and for 150
years successful, argument against the monetary theories of interest that at-
tempt to explain that tendency by the increase in the quantity of monetary
metals; third, his moderate and judicious argument about legal maxima which
called forth an entirely unjustified attack from Bentham.

[The Reader’s Guide was not completed. There is, for example, no discussion of
ch. 5 (Of the different Employment of Capitals), the concluding chapter of the sec-
ond Book. The final paragraph was on a separate sheet with no indication as to its
intended position.]

Before the century was out the Wealth of Nations had run to nine English
editions, not counting the ones that appeared in Ireland and the United
States, and had been translated (so far as I know) into Danish, Dutch, French,
German, Italian, and Spanish (italics indicate more than one translation; the
first Russian translation appeared 1802-6). This may be taken to measure the
extent of its success in the first stage of its career. For a work of its type
and calibre — which entirely lacked the graces of the Esprit des lois — it can,
I think, be called spectacular. But this was as nothing compared with the
really significant success that is not so easy to measure: from about 1790 on.
Smith became the teacher not of the beginner or the public but of the pro-

194 11 ; beginnings to about 1790

fessionals, especially the professors. The thought of most of them, including
Ricardo, started from him and most of them again never got beyond him.
For half a century or more, roughly until J. S. Mill’s Principles (1848) started
on its career, Adam Smith supplied the bulk of the ideas of the average
economist. In England, Ricardo’s Principles (1817) meant a serious check.
But outside of England, most economists were not quite up to Ricardo, and
Smith continued to hold sway. It was then that he was invested with the
insignia of ‘founder’ — which none of his contemporaries would have thought
of bestowing on him — and that earlier economists moved into the role of
‘precursors’ in whom it was just wonderful to discover what nevertheless re-
mained Smith’s ideas.

5. Quasi-Systems

Lest the reader should conceive an entirely wrong impression — which if it be
allowed to settle in his mind the subsequent chapters might be powerless to
dispel — it is necessary to supplement without delay the story told in the pre-
ceding section by at least some account of the parallel stream of quasi-systems.
Most of them, as we know, were programs of industrial and commercial de-
velopment. Their authors recommended or fought policies appropriate or
inimical to those programs, and reasoned in terms of individual problems.
But their ideas were not unsystematic in the sense of lacking coherence. They
knew how to relate one. problem to another and to reduce them to unifying
principles — analytic principles, not merely principles of policy. If these analytic
principles were not always stated explicitly, they were nevertheless often worked
out effectively in a way that suggests the development of English law. In this
section, we shall confine ourselves to a selection of seventeenth-century writ-
ers, all of whom will have to be mentioned again as we go along. Many more
will be introduced in the next and later chapters.

The honors of this literature — for the seventeenth century — belong to Eng-
lish businessmen and civil servants but the list is headed by an Italian, Serra. 1

1 Antonio Serra, Breve trattato delle cause che possono far abbondare li regni d’oro
e argento dove non sono miniere (1613; republ. in the Custodi collection and in A.
Graziani’s E conomisti del cinque e seicento, 1913; by extract also in G.. Tagliacozzo’s
E conomisti Napoletani dei secoli XVII e XVIII, 1937, with summary and appraisal,
English trans. in A. E. Monroe’s Early Economic Thought). Nothing is known of the
author except that he wrote the treatise in a Neapolitan prison, perhaps in the hope
of regaining his freedom thereby, for it is dedicated to the Spanish Viceroy. Again —
as in the case of L. Ortiz, who might be claimed as a predecessor of Serra as might also
another Spaniard, Gonzales de Cellorigo ( Memoriales . De la politica necesaria ... a
la republica de E spaha, 1600), both of whom, however, lacked Serra’s grasp of principle
— the reader is asked to forget the title, which evidently was chosen in order to interest
the Viceroy and does not express the gist and importance of the argument at all well.
However, there was some justification for it: the author argued at length against the
exchange-control policy advocated by De Santis — not entirely successfully — so that the
treatise has also a place in the history of the ‘mercantilist’ controversies (see below,
ch. 7). On Serra and his work, see R. Benini, ‘Sulle dottrine economiche di Antonio
Serra, 7 Giornale degli Economists 1892. Further references in Tagliacozzo’s edition.

CONSULTANT ADMINISTRATORS AND PAMPHLETEERS I95

This man must, I think, be credited with having been the first to compose
a scientific treatise, though an unsystematic one, on Economic Principles and
Policy. Its chief merit does not consist in his having explained the outflow
of gold and silver from- the Neapolitan Kingdom by the state of the balance
of payments but in the fact that he did not stop there but went on to explain
the latter by a general analysis of the conditions that determine the state of
an economic organism. Essentially, the treatise is about the factors on which
depend the abundance not of money but of commodities — natural resources,
quality of the people, the development of industry and trade, the efficiency of
government — the implication being that if the economic process as a whole
functions properly, the monetary element will take care of itself and not re-
quire any specific therapy. And this argument contains several contributions
to the nascent stock of theoretical tools that will be noticed later . 2

For several decades, there was nothing like this anywhere. But in the second
half of the century we behold a rich crop of works of a similar type in England,
the standard title of which was, as mentioned already, Discourse of Trade.
Gradually their authors discovered for themselves pieces of the logic inherent
in the economic process: the things which they could have learned from the
scholastics and their successors and which, under different circumstances and,
accordingly, from the standpoint of different political aims, were to become
the rationale of the doctrines of laissez-faire liberalism. A landmark on this
way was Child’s Discoursed This outstanding performance was and is usually
disposed of as one of the many ‘mercantilist’ writings — which was and (to
some extent) still is sufficient to prevent many historians from seeing any

2 Almost immeasurably inferior to Serra in grasp of economic principle and analytic
power, but not dissimilar from him in views on the issues of practical policy, was B. de
Laffemas, who wrote around 1600 (for a list of his writings see F. Hayem, Un Tailleur
d’ Henri IV, Barthelemy de Laffemas, 1905; also see H. Hauser, ‘La liberty du com-
merce et la liberte du travail sous Henry IV/ Revue historique, 1902).

3 Sir Josiah Child (1630-99). That work eventually appeared in its final form under
the title New Discourse of Trade (1693), but to do justice to its historical merit we
must take into account the fact that it took decades to mature into that form. The
first draft. Brief Observations concerning Trade and Interest of Money and also A
Short Addition were published in 1668. Ten chapters were added, 1669-70. Those years
are the relevant ones for questions of priority, because the Discourse about Trade that
was published in 1690 did not add or alter very much. The New Discourse of 1693
contains still fewer alterations and adds nothing except a new introduction. A minor
publication written in defense of the trade of the East India Company also merits
notice. Child’s reputation as an economist, besides suffering from the general prejudice
against ‘mercantilist’ writings, also suffered from a fact that is of great interest to the
sociologist of science. Child was a leading businessman, in fact the very incarnation of
the most hated big business of that age: he was chairman and for some years the
undisputed leader of the East India Company, besides being personally very wealthy.
Accordingly, he was unpopular in his time, and so he has remained for over 250 years,
historians being careful to clear their skirts of the ‘monopolist’ and ‘special pleader’
(scilicet for his personal interest).

196 II: BEGINNINGS TO ABOUT 1790

merit in it- But quite independently of whether or not that label fits, it
should be recognized that this Discourse deals with the practical problems of
its time — employment, wages, money, exchanges, exports and imports, and so
on — in the light of clearly adumbrated 'laws 7 of the mechanism of capitalist
markets; though not explicitly worked out, the tool that we call equilibrium
theory is, as it were, present behind the scene. This performance was matched
and in many individual points surpassed by such men as Barbon, Davenant,
North, Pollexfen, and others. 4 In every one of these cases we- see more or less
awareness of the existence of an analytic apparatus that runs on in essentially
the same manner, whatever the practical problem for the sake of which it is
set working, and more or less willingness and ability to use it. For us this is
what matters: whether we like or dislike the practical recommendations that
are supposed by the authors to follow from their analysis is entirely immaterial.

I take this opportunity to mention a remarkable though little-known treatise on
foreign trade which Professor Foxwell (see Kress Library of Business and Economics,
Harvard Graduate School of Business Administration, Catalogue) described as 'one
of the earliest formal systems of political economy, and stating one of the most
forcible practical arguments for free trade, 7 though the latter part of Foxwell's state-
ment seems to me more true than the former: Isaac Gervaise, The System or Theory
of the Trade of the World (1720). Professor Viner (see below, ch. 7) has done full
justice to this remarkable contribution to the theory of international trade whose
author outlined in addition — all in the space of 34 pages — the topics of general theory
germane to his particular subject, though of course not in any 'formal 7 layout.

The common run of these discourses was, however, far below that level.
Most of them were merely motivated programs for the industrial and commer-
cial development of England. Since foreign trade occupied the place of honor
and most of the space in those programs, a selection of works of this type will
be noticed in the last chapter of this Part. For the moment it will suffice to men-
tion by way of example the tracts of the overrated Mun (his title was, however,
not Discourse of Trade but England’s Treasure by Forraign Trade , 1664), of

4 References will be given in subsequent chapters. However, Charles Davenant's con-
tribution must not be appraised from his Discourses on the Publick Revenues, and on
the Trade of England (1698), but rather from all his many publications taken together:
they sum up to a comprehensive quasi-system. And Pollexfen will be commented on
at once. John Pollexfen was a merchant and M.P., who also served on the Board of
Trade. In addition to his principal work, A Discourse of Trade, Coyn, and Paper Credit
(1697, reprinted 1700), he also wrote England and East India Inconsistent in their
Manufactures (1697), a tract that, besides attacking his bete noire, the East India Com-
pany, in reply to Davenant’s Essay on the East-India-Trade (1696), complements part of
the argument of the Discourse. The latter is an excellent piece of work, precisely as
regards analytic ability. It is therefore a question of some interest to ask why he has
received so little recognition and especially why such recognition as he received has been
tempered in most cases by derogatory comments upon his supposed lack of originality
and upon his various ‘mercantilist errors. 7 The latter indictment seems without founda-
tion, and concerning the former it is sufficient to ask: if we define eminence in an
economist solely by the presence in his writings of entirely new results, where will
A. Smith be, or Ricardo, or J. S. Mill?

CONSULTANT ADMINISTRATORS AND PAMPHLETEERS 197

Cary 7 and of Petyt. 5 There was no lack of unity about them as to political
vision. And this vision was quite comprehensive, embracing all the economic
problems of the nation. But there was no analytic work, and faults of reasoning
abound. Cary, for instance, besides discussing carefully the conditions and
possibilities of English trade with each foreign country, with Ireland, and with
the colonies (the most valuable part of the tract) also concerns himself with
monopolies (that is, the monopolies of the great trading companies), the
causes of and remedies for unemployment, coinage, credit, and many other
subjects down to the problem — or was this Mrs. Cary's contribution? — of
how to make maid servants 'more orderly and governable than now they are’
(p. 162). But every attempt he makes to carry analysis beyond the obvious is a
failure. High rents, for instance, are made responsible for England’s being
undersold in foreign markets. High interest is held to be another cause of this
but without recourse to any argument that might raise this theory above the
status of a popular observation. In spite of the emphasis on export surpluses,
high prices and high wages are commended on grounds that tax the reader’s
capacity for generous interpretation. And so on. Yet there is plenty of shrewd
sense about it all — shrewd, narrowly nationalistic, and naively brutal (compare,
for example, his enthusiasm for the slave trade, England’s 'silver mine,’ p. 76,
or his views about the treatment to be dealt out to Ireland, passim).

Once we have learned to discern 'quasi-systems’ in or behind writings that
profess to deal only with particular problems, we find the genus everywhere.
In the Netherlands, for instance, Graswinckel’s and de la Court’s 6 writings
belong to it, although the former dealt only with the grain trade. Many his-
torians will place them above their English contemporaries on account of their
'liberal’ views on national and international trade — though de la Court lapsed
from grace as to the latter — government interference, medieval corporations,
and so on. But we shall arrive at a substantially similar estimate because of
those authors’ clear perception of causes and effects in all matters of the price
mechanism. A man who in 1651 recognized the economic function of 'fore-
stalling’ and speculation, as did Graswinckel, knew something that could have

6 John Cary, merchant in Bristol, An Essay on the State of England in Relation to
its Trade, its Poor, and its Taxes . . . , 1695, the edition used. There were several
others — the one of 1745 hearing the title Discourse on Trade — which points to con-
siderable success. For Locke’s praise of the performance I can only account by the fact
that Cary favored recoinage of the currency at the old standard of weight and fineness
and that, in 1695, Locke would have welcomed any writer who did so (see below,
ch. 6). Perhaps, however, he was also attracted by Cary’s careful discussion of Eng-
land's trade with various countries. The other work, Britannia Languens, or a Discourse
of Trade . . . (1680), appeared under the pseudonym Philanglus and is attributed to
William Petyt on Professor Foxwell’s authority (see Catalogue of the Kress Library).

6 Dirck Graswinckel (1600-1666), a lawyer and public servant, wrote a treatise on
the economics of the food trade under the unpromising title: Placaethook op het stuk
van de Leeftocht (Compilation of regulations concerning food, 1651). Pieter de la
Court (1618-85) was a manufacturer. Of his works it is only necessary to mention the
Interest van Holland . . . (1662; 2nd ed. under the title Aanwysing . . . 1669).

198 II : BEGINNINGS TO ABOUT I79O

been presented as a discovery in 1751 — not that it would really have been
one — though it was a commonplace in 1851 and will sound altogether wrong
now.

German seventeenth-century writings of this genus, besides talcing, of course,
a different view as to policy, were not on this level but there were many of
the Cary type or better. We shall be content with an Austrian representative,
the well-known Hornigk, 7 who, like the much more important Becher and
some others, figures in every history of economics. His book is another program
for a policy of fostering economic development, written this time for a poor
country, perennially threatened by Turkish invasions and lacking both the re-
sources and the possibilities of England. If, however, we take due account of
this fact, the family likeness of the recommendations with those of Hornigk’ s
English contemporaries — or even with those of the doctor in the Discourse
of the Common Weal — is striking: waste lands and other unused resources
are to be exploited; the efficiency of labor is to be increased by better training;
domestic industry should be helped, among other things, by directing con-
sumers’ demand toward its products; exports of manufactures and imports of
necessary raw materials should be favored, exports of the latter and imports of
the former restricted; trade should be balanced bilaterally with every individual
foreign country (see last chapter of this Part); and so forth — sound sense all or
most of it and very interesting as a monument of the intelligent bureaucrat’s
thought, but sound sense that did not even suspect that it might be usefully
reinforced by analysis.

As regards the United States, there is nothing to record in the way of
systematic endeavor before the nineteenth century. This is as we should ex-
pect from environmental conditions that were unlikely to produce either a de-
mand for or supply of general treatises. But discussion of current practical
problems was active even in colonial times, and for the eighteenth century, re-
ports, pamphlets, and tracts abound, especially on questions of paper money,
coinage, credit, trade, and fiscal policy. 8 And some of these performances

7 Oesterreich iiber Alles wann es nur will (1684). Philipp W. von Hornigk (1638-
1712) was a civil servant. Extracts from the book are included in A. E. Monroe’s
Early Economic Thought.

8 The late Professor Seligman’s essay, ‘Economics in the United States,’ reprinted as
ch. 4 of his Essays in Economics (1925), gives a selection of titles (unfortunately little
more than titles) on which I cannot hope to improve. Such reading as I have done
was primarily guided by this selection. Also see C. F. Dunbar, ‘Economic Science in
America, 1776-1876,’ in the North American Review , 1876, and the reprints of a
number of the more important pamphlets by the Prince Society, 1911 (ed. McFarland
Davis). American economists seem on the whole to have been too ready to discount
the importance of that early literature from a scientific standpoint, and most of the at-
tention it has received is confined to the policies or particular measures advocated or
attacked. The critical historian then commends or blames according to his personal
views on those policies and measures. The specifically analytic contribution of a writer
as a rule goes by the board, especially in those cases where, as often happens in the
field of money, ‘unsound’ practice goes with sound theory and vice versa. However,

CONSULTANT ADMINISTRATORS AND PAMPHLETEERS 199

answer to our idea of ‘quasi-systems.’ Here are three examples which the
American reader is advised to look up for himself. First, Hamilton’s famous
Report on Manufactures (1791), 9 though no doubt intended as a description
with a program, is really ‘applied economics’ at its best and reveals quite clearly
essentials of the analytic framework that was to be made explicit by D. Ray-
mond and F. List and in turn points back to the work of such men as Child
and Davenant. Second, Coxe’s work comes near to actually being a systematic
treatise. 10 Third, Benjamin Franklin’s (1706-90) various tracts on economic
subjects 11 present material enough to enable us to reconstruct his system —
on the practical side, substantially of a laissez-faire type — though there is little
to commend for purely analytic virtues.

6 . Public Finance Once More

In the first section of this chapter, the fact was emphasized that in the .
rising national states public finance acquired not only paramount importance
but also a new significance. There would be little exaggeration in saying that,

within the plan of this book, very little can be done to remedy this state of things.
[J. A. S. wrote this chapter before the publication of Joseph H. Dorfman’s work, The
Economic Mind in American Civilization , the first two volumes of which cover the
period 1606-1865. J. A. S. read the first volume and made notes which he intended
to use in revising the chapter.]

s Alexander Hamilton’s (1757-1804) brilliant figure is so familiar to the reader that
it would be absurd to tell him who and what Hamilton was. Nor is there any need
to refer to the Hamilton literature. All that needs to be said from the standpoint of
our purpose is that he was one of those rare practitioners of economic policy who
think it worth while to acquire more analytic economics than that smattering that
does such good service in addressing audiences of a certain type. He knew Smithian
economics well — not only A. Smith himself — so well in fact as to be able to mold it
to his own visions of practical possibilities or necessities and to perceive its limitations.
All his reports — not only the one mentioned in the text but also the ones on the im-
port duty (1782), public credit (1790 and 1795), the establishment of a national bank
(1790) and of a mint (1791) — are much more than untutored common sense. Perusal
of the volumes of the Federalist, the periodical in which he co-operated with Madison
and Jay, is strongly recommended: the American reader will get much more out of it
than mere economics. For guidance in starting a study of Hamilton’s writings, see
P. L. Ford, Bibliotheca Hamiltoniana (1886), and the life by H. C. Lodge (1882).

10 Tench Coxe (1755-1824), Commissioner of Revenue, A View of the United States
. . . (1794), in form a collection of essays and addresses.

11 Particularly, Modest inquiry into the Nature and Necessity of Paper Currency
(1729); Observations concerning the Increase of Mankind . . . (1751); Positions to be
Examined concerning National Wealth (1769; the work responsible for the opinion
that this great realist was a physiocrat). But though these are, with the possible ex-
ception of his Reflections on the Augmentation of Wages, his only works that come at
all within the category of economic research, other essays and much material that he
contributed in a popular form to popular publications (such as Poor Richard’s Al-
manack) help to round off our knowledge of his opinions and analytic efforts (Works,
ed. by John Bigelow, 1887-8). Of course, it would be still more absurd than it would

200

II : BEGINNINGS TO ABOUT I79O

at least for the continental branches of the literature that have been Surveyed,
it was the central topic around which revolved most of the rest. Let us there-
fore retrace our steps and look more closely at the financial problem of these
centuries.

Public finance in our sense, and especially modern taxation, first developed
in the course of the fifteenth century in the Italian city-republics, Florence in
particular, and in the German free towns (Reichsstddte) . More important for
us is, however, the development of the fiscal systems of the national states and
the Italian and German principalities. For the sake of both brevity and con-
creteness we shall think primarily of the case of the latter or, still more pre-
cisely, of the development of public finance in a typical temporal principality
of Germany. Of course, people always recognized the existence of some inter-
ests that were common to all members of a political unit — recognition of the
res publica was fostered, among other factors, by scholastic teaching. Neverthe-
less, public affairs were in legal principle the affairs of the territorial ruler.
Wars in particular were his personal quarrels (compare the English official
phrase that still survives, 'the King’s enemies’). Hence, so far as the military
service that his vassals owed to him proved inadequate — and this resource
petered out in the course of the sixteenth century — he had to finance them
from his own means. These consisted, first, of the feudal income from his own
lands and, second, of a number of customary fiscal rights that went with the
lordship of a principality, such as seigniorage, tolls, and customs, the right of
charging for safe conduct of travelers and caravans of merchants, the right to
levy taxes from Jewish communities for the protection extended to them, and
rights to a wide variety of fees of all sorts {regalia).

The rise in prices, the cost of mercenaries and later on of standing armies,
profuse expenditure on court nobilities and bureaucracies, and other causes, all
related to the political ambitions of those princes or else to the social structure
of their territories, rendered these customary sources of revenue inadequate
and led to a rapidly mounting burden of debt. In the untenable situations that
ensued the princes appealed to their Estates on the plea that, for instance, a
Turkish invasion was after all not only the private affair of the prince. The
Estates thereupon granted subsidies which, apart from the contributions of the
towns, they levied upon their own feudal income, that is, upon the dues their
peasantries owed to them — land in their own management remaining free. At
first they insisted each time that they were making the grant of their own free
will in response to a humble request and only for the particular emergency
in question; but they actually bore the burden. Very soon, however, regular
recurrence of these direct taxes had to be recognized. But, while accepting the
fact, the Estates, on the one hand, set up their own administrations for levy-
ing them and expending the proceeds and, on the other hand, no longer bore
them themselves but collected them in turn from their dependent peasantries.

have been in the case of Hamilton to dilate on the life and achievements of this
household figure, particularly in view of the recent publication of a masterly life by
Carl Van Doren.

CONSULTANT ADMINISTRATORS AND PAMPHLETEERS 201

This arrangement, besides being inadequate, was of course not at all to the
taste of the princes and their bureaucracies. A tug of war between them and the
Estates ensued for the control of this new fiscal apparatus that had grown up
alongside of their own. The reader knows that the English parliament suc-
ceeded in keeping its hold on these purse strings which eventually in the seven-
teenth century throttled the power of the king. In most other countries, how-
ever, kings and princes, or rather their bureaucracies, won out in the course of
the eighteenth, though the French ancien regime broke down in the attempt
to secure fiscal reform.

Meanwhile, that is to say, until the bureaucracies had conquered the fiscal
stronghold of the Estates, the growing Leviathan had to feed on the old
sources of revenue. Accordingly, development of these, especially of all the
fiscal rights, became a major task of governments and their henchmen. This
meant eventually the disproportionate growth of indirect taxation, especially
in the forms of the General Excise on the one hand, and of the. General
Turnover Tax — the Spanish alcavala is the outstanding instance — on the other.
For though the introduction or increase of indirect taxes, too, was in principle
a dependent upon the consent of the Estates, it proved, nearly everywhere ex-
cept in England, easier to get round this requirement in the case of indirect
than it was in the case of direct taxation. Princes and bureaucracies had also
another motive for preferring the former. We are accustomed to looking upon
indirect taxation as contrary to the interests of the relatively poor. But in the
seventeenth and eighteenth centuries the ‘social’ argument told in favor of in-
direct taxation: for indirect taxes were at least also borne by the nobility and
the clergy whereas these classes contributed hardly anything at all to the pro-
ceeds of direct taxation. However, since it was not easy to introduce or reform
indirect taxes either — which, by the way, shows how far those monarchies were
from being ‘absolute’ — revenue from this source had to be increased according
to opportunity rather than to any rational plan. And since, furthermore, gov-
ernments were rarely in a position to abandon revenue from old fiscal rights
however irrational, burdensome, or vexatious, the result Was an almost un-
believable — the only word is ‘mess,’ the mere straightening out of which was
an extremely difficult task which, when taken in hand in the seventeenth and
eighteenth centuries, exercised the ingenuity of administrators and writers alike.
The literature that blossomed forth in response to these conditions contains
some analysis on such problems as incidence of taxes, which will be briefly
noticed later on, and also analysis of a kind that had better be noticed right
now, along with those much larger parts of that literature which are not
relevant to a history of analytic economics and have to be mentioned only to
be dismissed.

First, the tug of war referred to produced innumerable books and pamphlets
on the right to tax, the ‘justice’ of taxation, and the constitutional questions
germane to taxation. We have already remarked on the important prelude to
this that is contained in the scholastic writings. The laical literature of this
type displays a characteristic difference in tendency between its English branch
and its continental branches: most of the continental writers sided with the

202

n: BEGINNINGS TO ABOUT 1790

bureaucracies and often saw benighted and antisocial resistance of class in-
terest where the vast majority of English writers — particularly in the struggle
j over the ship money of Charles I — saw a meritorious stand for liberty. All

| this was, however, either simple politics or 'political philosophy’ and is of no

interest to us. Second, pure description of sources of public revenue and ad-
ministrative practice dates far back. There is an English instance for the twelfth
j century . 1 This literature developed greatly from the sixteenth century on, es-

! pecially on the Continent, but needs no further attention for our purposes . 2

j Third, the necessity of making the most of existing fiscal rights produced in

] the public service a special type of lawyer whose task it was to safeguard, ex-

j tend, and systematize those rights by appropriate interpretation and who natu-

l rally also taught and wrote, creating what is known as Fiscal Jurisprudence . 3

I A fourth category consisted of the fiscal planners — the numerous writers who

i advocated schemes of fiscal reform: every financial emergency or controversy

since the fifteenth century naturally produced clusters of them. In the light
I of their ideas it would be possible to write not only a history of public finance

1 but also a history of political society, for everything that happens in the po-

litical sphere reflects itself more truly in the prevailing ideas about fiscal policy
than it does in anything else. Most of the planners did no analytic work, how-
ever. This is especially true of some of the most eminent ones among them,
such as Cardinal Cusanus, who proposed a scheme that would in fact have
rescued the German Empire from the decay into which it was falling in the
fifteenth and sixteenth centuries. But some did analyze. They analyzed the
nature of taxation — an early example, Mattheo Palmieri’s theory, has been
mentioned already; its economic effects; the severity of pressure exerted by
different systems; the effects of public expenditure; the relative merits of direct
and indirect taxation and of financing of wars by taxation, borrowing, and
inflation; and so on. Spanish discussion of the seventeenth and eighteenth

1 Richard Fitzneale Dialogus de scaccario (exchequer), ed. by Hughes, Crump, and
Johnson (1902).

2 By way of example we may mention Anon., Traicte des finances de France (1580);
N. Froumenteau, Le Secret des -finances de France (1581), more interesting for the
finances of the temporal and spiritual magnates than for the finances of the king; Jean
Combes, Traicte des tallies et autres charges . . . (1586); Jean Hennequin, Le Guidon
general des finances (1585, re-edited repeatedly, even as late as 1644); J. Matthias,
Tractatio methodica . . . de contributionibus (1632); H. Corning (whom we shall
meet again), De vectigalibus et aerario (1663). The last two are not merely descriptive,

i however, though all their interest lies in the description.

3 This branch of public-finance literature, which in the nineteenth century swelled to

1 dimensions beyond the range of anyone but the full-time specialist, should really not

be dismissed so cavalierly. But we have- no choice. In my — very likely erroneous —
opinion, the classic of the genus is Caspar Flock’ s Tractatus juridico-politico-polemico-
historicus de aerario (1651). Its quaint title has the merit of expressing exactly what it
is. C. Besold’s (see above, sec. 4) earlier De aerario publico discursus (1615) should,
however, not go unmentioned. It contains, as does Klock’s, quite a lot of sound wisdom
on tax policy that is as trite as, alas and alack, sound wisdom mostly is.

CONSULTANT ADMINISTRATORS AND PAMPHLETEERS 203

centuries would be particularly interesting to follow, 4 English discussion on
seventeenth and eighteenth-century war finance or on Sir Robert Walpole's
excise scheme is no less so. But from the mass of this literature we shall select
only two works of first-rate importance. Petty’s treatise on taxes and con-
tributions (discussed in the following chapter) is not one of them because the
interest it presents, though great, belongs in the field of general economics
rather than in that of fiscal policy.

The first is one of the works that were called forth by the economic situa-
tion of France during the last twenty years of the reign of Louis XIV. The
War of the Spanish Succession following upon the War of the Grand Alliance
was turning impoverishment into nationwide misery when one of the great
figures of the state and the army, the soldier-engineer Vauban, committed the
indiscretion of publishing an old idea of his, the Projet d’une dixme royale
(1707). 5 This is one of the outstanding performances in the field of public

4 It turned mainly on the remedy to be applied to the grievances concerning the
alcavala, the cientios, and the millones. Bautista Davila . ( Resumen de los medios prac-
ticos para el general alivio de la monarquia, date of writing unknown, publ. 1651; see
Colmeiro’s Biblioteca ) seems to have been one of the earliest economists — ignorance
prevents me from being more precise — to look upon a single tax as the wand by which
to conjure up the benign spirits of fiscal order. In any case his Resumen is a milestone
on the road to single-tax ideas. In his case, it was to be a graduated capitation tax,
evidently meant to be a rough approximation to a proportional income tax. Similar
ideas were discussed during the subsequent hundred years. The minister Ensenada
(A. Rodriguez Villa, Don Cenon de Somodevilla, Marques de Ensenada, 1878) made a
modified version of this program his own and carried an income and property tax in
1729 (for Catalonia). But elsewhere and particularly in Germany, seventeenth-century
discussion favored the general excise against direct taxes, precisely on the ground that
it would relieve the pressure of taxation. An interesting symptom of this trend of opinion
was the success of a book by an author who styled himself Christianus Teutophilus:
E ntdeckte Gold-Grube in der Accise (a gold mine discovered in the excise, 1685, of
which the 5th ed. came out in 1719). Among English advocates of the excise Davenant
was first in eminence. But he thought that the burden would fall on the land. For a
similar reason, F. Fauquier (An Essay on the Ways and Means . . . 1756) later on
advocated a house tax, namely on the ground that, since indirect taxes so far as they
are paid by the poor will be transferred to the rich by means of a rise in money
wages, taxes should be laid on where they will rest without giving rise to the losses
incident to the process of transference. Observe that this anticipates much of what A.
Smith and Ricardo had to say on the subject. In appraising attitudes toward the taxa-
tion of land it must not be forgotten that, before the eighteenth century, no efficient
methods of surveying were available. Taxation of agricultural land entered a new phase
of its history when these were improved. The Censimento Milanese, at the beginning
of the eighteenth century was one of the first results.

5 S£bastien le Prestre, Seigneur de Vauban (1633-1707), Marshal de France and a
favorite with Louis XIV (until that publication), had previously written a tremendous
number of memoirs on fortifications, war, naval matters, public finance, religion, money,
agriculture, and colonization that fill an imposing series of manuscript volumes. In
1698 he had instigated orders for a census of the population, and in 1695 he had
first suggested the project that he published in 1707. Somewhat like Rtienne Boileau

204 II: BEGINNINGS to ABOUT 1790

finance, unsurpassed, before or after, in the neatness and cogency of the argu-
ment. The recommendation itself does not greatly matter here. Essentially it
was that the unwieldy and irrational welter of taxes that had grown up in an
entirely unsystematic way should be scrapped — excepting a rationalized salt
tax, certain excises, and export and import duties — and replaced by a general
income tax that was to apply to all kinds of income, though at varying rates,
of which the highest was to be 10 per cent (hence the word dixme); similar
ideas had occurred before. The features that do matter are these. First, Vauban
rose fully to those heights, trodden by so few, from which fiscal policy is seen
to be a tool of economic therapeutics, the ultimate result of a comprehensive
survey of the economic process. With Gladstonian vision he realized that fiscal
measures affect the economic organism right to its cells and that the method
of raising a given amount of revenue may make all the difference between
paralysis and prosperity. Second, he based his conclusions in every detail on
numerical fact. His engineer’s mind did not guess. It figured out. Purposeful
marshalling of all the available data was the essence of his analysis. Nobody
ever understood better the true relation between facts and argument. It is this
that makes him an economic classic in the eulogistic sense of the word, and
a forerunner of modern tendencies, though he contributed nothing to the
theoretical apparatus of economics. 6 His case affords another illustration of

four centuries and a half before him, he had a passion for collecting and arranging
economic facts and figures. Accordingly, he has had his partisans, who claimed for
him the title of Createur de la Statistique (E. Daire in his edition of the Dixme
royale , in Economistes- financiers du XV IHe siecle , 1843, which is the edition used).
The Dixme has been translated into English. There is a bibliography of Vauban by
F. Gazin (1933). Also see D. Hal6vy, Vauban (1923); J. B. M. Vignes, Histoire des
doctrines sur Vimpot en France (1909); and F. K. Mann, Der Marschall Vauban . . .
( 1 9 1 4 )-

In his effort to secure fiscal reform Vauban had two allies whose relation to him
however is not clear. The one was Boisguillebert, who was much more of an economist
than was Vauban and whose performance will be considered in chs. 4 and 6 of this
Part. Here we need only record, first, that his proposal, ^though differing from Vauban’s,
was yet conceived in the same spirit and expressed the same economic and fiscal vision;
and, second, that Boisguillebert’ s outspokenness or rather bitterness — witness the sub-
title of his first book, Le Detail de la France. La France ruinee sous le regne de Louis
XIV — and his inability to appreciate practical difficulties — witness another subtitle,
Moyens tres-faciles [!] de faire recevoir au Roy 80 millions par-dessus la capitation,
practicable par deux heures de travail des Messieurs les Ministres [!!] — naturally annoyed
the poor slaves whose bad luck it was to serve at that time as ministers of finance
(Pontchartrain, Chamillart, Desmarets). The other ally therefore found it easier to get
on terms with them. This was the Abbe de Saint-Pierre (1658-1743), famous as moral-
ist, all-round reformer, sponsor of the League-of-Nations idea, whose considerable per-
formance as a practical economist is gradually emerging into the light of day ( Ouvmjes ,
1733-41). See P. Harsin, ‘L’Abbe de Saint-Pierre, economiste,’ Revue d’ histoire eco-
nomique et sociale (1932).

6 He has been called a forerunner of the physiocrats. There is not the slightest foun-
dation for this. As has been pointed out before, concern with agricultural conditions
does not make a writer a physiocrat.

CONSULTANT ADMINISTRATORS AND PAMPHLETEERS 20 5

the truth that a man can be an excellent economist without being a good
theorist. The reverse also holds true, unfortunately.

The second work to be mentioned, Broggia’s 7 treatise on taxation, is of an
entirely different nature and has been selected for entirely different reasons.
It also outlines an ‘ideal’ system of taxation that might have been derived by
critically developing that of Vauban: the main practical ideas, barring one, are
roughly similar. But Italian sources, both earlier and contemporaneous ones,
can be indicated for every particular, among others for the ‘canons of taxation’
(ch. 1) that, further expanded in Verri’s Meditazioni (1771), essentially an-
ticipate those of A. Smith. Thus the freshness — the ‘subjective’ originality —
that makes Vauban’s Projet such delightful reading is lacking here. Nor is
there anything to correspond to the chief merit of Vauban’s work, the facts
and figures. Instead, however, we find systematic completeness and more
searching analysis: the result is — at least — a digest of all that was best, not
only in the public-finance literature of the eighteenth century but also in most
of that of the nineteenth. There is the fifteenth-century rationalization of
taxes as payments /or security and as equivalents for the services rendered by
the government. There is the principle that direct and indirect taxation are
necessary complements of each other, the two hands of finance (Gladstone
might have said that: actually, he spoke of two sisters so nearly alike that one
hesitates in deciding which one to court). A proportional tax (10 per cent) on
certain incomes ( entrate certe , mainly from land, houses, including owner-
inhabited ones, and public funds; compare A. Smith’s predilection for land
and house taxes) that will not be transferred, is combined with a system of
indirect taxes (gabelle) that are supposed to be transferred to buyers, whereas
all uncertain incomes (profits, wages, and so on) are to be left free. The in-
teresting thing about this is the underlying diagnosis of the economic situa-
tion: Broggia’s finance was to foster the increase of wealth through industrial
and commercial activity; for this purpose, acquired wealth was to be taxed
to force people into business pursuits, whereas bofh wealth in the making

7 Carlo Antonio Broggia’s (1683-1763) Trattato de’ tributi, delle monete e del
govemo politico della sanith (treatise on taxes, money, and the policy of public health,
1743) was planned as a comprehensive textbook-like treatment of the three topics indi-
cated in the title. The edition in the Custodi collection separated them and we are
interested only in the first which forms a self-contained unit (though there was consider-
able merit also in Broggia’s ideas on money and public health). We know almost noth-
ing about the man — he seems to have been a businessman, or a retired businessman,
of considerable acquirements. As a Neapolitan, he may be included in what we have
called the Neapolitan school. The most interesting parts of the treatise on taxes are
reprinted in the Economisti Napoletani of Tagliacozzo, who also presents us with a
summary and appraisal of the work that contains references to immediate Italian prede-
cessors of Broggia, especially Pascoli and Bandini — important links in the evolution
of fiscal doctrine and analysis that must be neglected, to the fatal injury of the result-
ing picture, in a sketch like this. A fuller though, perhaps, not quite satisfactory picture
both of Broggia’s work and of the development in which it was an element may be
found in G. Ricca-Salemo, Storia delle dottrine finanziarie in Italia (1881).

200 II: BEGINNINGS TO ABOUT 1790

and labor were to be touched gently. This is why he recommended that money
loans to business or monetary business funds (money impiegato a negozio )
be left untaxed, and why even his direct taxes were not on personal incomes
but on ‘real 7 or ‘objective 7 returns — he did give weight to considerations of
administrative convenience in this, as Bodin and Botero had done already,
but the essential point was to avoid fettering business activity and oppressing
‘struggling poverty. 7 There are three aspects to this: first, a scheme of aims
and valuations with which we are not more concerned than we are with all
his talk about ‘justice’; second, a vision of social and economic conditions and
their possibilities which went far below the surface; and, third, analysis, though
not made entirely explicit, of economic causes and effects. It is this third point
that constitutes the scientific merit of the work. 8

7. Note on Utopias

A few words will be inserted here on sixteenth- and seventeenth-century
state novels ( Staatsrorrutne ) 1 which derive their name — Utopias — from the
title of the peak success of the genus, the Utopia of Thomas More. This mean-
ing of the term Utopia must be distinguished from the meaning that the
Marxist phrase Utopian Socialism is intended to convey. F. Engels (1892)
defined ‘utopian 7 in contrast to ‘scientific 7 socialism to denote socialist ideas
that are (a) unconnected with an actual mass movement and (b) not based
upon any proof of the existence of observable economic forces that tend to
realize those ideas. In this sense, Morelly’s Code de la Nature (1755) is
certainly utopian socialism. We have not called it a Utopia, however, not only
because this would have restricted the concept to socialist utopias but also
because in this book we wish to use the term, except when notice to the
contrary is given, for something entirely different — for a distinctive literary
type — for artistic creations of a nature that the term state novel suggests and
Plato’s Republic exemplifies. In this sense, description of the blueprint of a
socialist or any other kind of society, even though it does not exist, like the
one drawn by Morelly, is not a utopia. This type, which, no doubt under
Greek influence, was fairly popular in the epoch under review, 2 is difficult to
interpret. A literary form may enshrine anything — from a day dream cast into
a prose poem to the most realistic analysis. Fortunately it is always possible

8 Professor Luigi Einaudi credits the physiocrats with having ‘created 7 the pure
theory of taxation (A tti, Reale Accademia delle Scienze di Torino, 1931-2). But with
due deference to Professor Einaudi’s authority, I am inclined to think that in Broggia
and the literature behind him there seem to be much more valuable elements of such
a theory if, indeed, on the strength of the fact that neither he nor any other eighteenth-
century writer produced a satisfactory analysis of incidence, we refuse to find in him
that theory itself.

1 [See explanation of Staatsromane in ch. 1, sec. 2 of this Part.]

2 The reader presumably knows, however, that it has never died out, witness the
great success of Bellamy’s Looking Backward, 2000-1887 (1888). But we shall have
no occasion to mention any of these more modern Utopias in this book.

CONSULTANT ADMINISTRATORS AND PAMPHLETEERS 207

to recognize the presence and especially the absence of the latter element,
though it is not always possible to say whether what presents itself as a state-
ment of fact or as an imperative is to be understood as ‘poetry or as truth/
Only four instances need be mentioned, the works of Francis Bacon, Harring-
ton, Campanella, and More. And the first three may be dismissed at once
as irrelevant to our purpose: Bacon’s New Atlantis (1627), a fragment — a
singular deviation from the creed of ‘inductive science’ preached by its author
— and Harrington’s Oceana (1656) are of no interest at all; to Campanella’s
Civitas solis (City of the Sun, 1623) Platonic rays playing around rather com-
monplace matter do lend a glamour not its own; 3 but the case of More’s
Utopia is different. 4

This rich book is full of mature wisdom and has naturally been the object
of many different interpretations which, since we are concerned only with
one of the many aspects it presents, and with a very minor one at that, we
need not stay to discuss. Nor need we enter into More’s social criticisms or
the general features of his communist scheme of life that facilitates the solu-
tion of most economic problems by the postulate of simple and invariant tastes
in a population that is kept stationary or almost stationary by regulated or
rather enforced emigration — one of the many points of similarity with* Plato’s
Politeia. Two things have relevance to analysis, however. First, the general
plan of production and distribution of goods: tastes being given, the quantities
currently produced, according to government regulations, by all adults except
a privileged class of ‘learned’ men — not quite Plato’s guardians, because there
is an elected king — are distributed so as to put all districts on a footing of
equality on the basis of statistics of current production and by means of a
system of public storage. This, whatever else it may mean, is not a bad method
to put into evidence the essentials of the functioning of any economic or-
ganism. In particular, a serviceable theory of money may be derived from this
conception, and More hints at this theory by pouring out the vials of humor-
ous wrath on the fetishism of gold and silver, which, unless required for paying
for excess imports, Utopia uses only for purposes indicative of More’s con-
tempt. Criticism of the popular economics of his day may well have been

3 Tomaso Campanella (1568-1639); in his preface to Plato’s Politeia, Jowett presents
an abstract. There is also a translation (in H. Morley’s Universal Library). All works
on state novels and most histories of socialist and communist ideas, as well as several
monographs, deal with Campanella more or less fully.

4 Sir Thomas More (1478-1535), the English Lord Chancellor who was beheaded by
Henry VIII and canonized 400 years later, was a man of penetrating intelligence, com-
prehensive (classic) learning, and wide experience, none of which ever killed his good-
natured humor; and all of these four qualities went into the making of his Utopia,
published in Latin in 1516, translated into English (after German, Italian, and French
translations had appeared) in 1551. The considerable literature on More, so far as a
perfunctory examination permits me to judge, is for the most part not relevant to our
purpose. Bonar’s Philosophy and Political Economy will tell the interested reader all
that has any bearing upon economics as such. Reference may, however, be made also
to E. Dermenghem, Thomas Morus et les utopistes de la renaissance (1927).

200

II t BEGINNINGS TO ABOUT I79O

one of the major aims of this construction. Second, his criticism of economic
conditions, though most weighty in legal and especially penological matters,
were interspersed with diagnoses and formulations some of which may be
ranked as contributions to analysis. The tracing of unemployment to enclo-
sures, though always a half truth, was not, in 1516, the commonplace it be-
came soon afterwards. And he introduced the word and concept of oligopoly
in exactly the same sense in which we use it now.

CHAPTER 4

The Econometricians and Turgot 1

1. Political Arithmetick 209

2. Boisguillebert and Cantillon 215

3. The Physiocrats 223

[(a) Quesnay and the Disciples ] 223

[(b) Natural Law, Agriculture, Laissez-Faire, and VImpot Unique] 228

[(c) Quesnay’ s Economic Analysis ] 232

(d) The Tableau Lconomique 239

4. Turgot 243

The individuals and groups to be discussed in this chapter were also Con-
sultant Administrators, though not of the academic type, and some of them
qualify in addition as philosophers of natural law. Nevertheless, it was not
only to relieve a chapter already overloaded with names that they have been
reserved for separate treatment. Except for the great figure of Turgot, which
is to come in at the end of the chapter, they have something in common
that makes it desirable to marshal them into a connected array — the spirit
of numerical analysis. They were Econometricians. In fact their works illus-
trate to perfection what Econometrics is and what Econometricians are trying
to do. 2

1. Political Arithmetics

Repeatedly we have had occasion to observe that, with economists of all
types but especially with the Consultant Administrators, factual investigation
was the primary task that absorbed most of the available manpower and
progressed more satisfactorily than did such ‘theory' as there was. This was
so from the first, as such representative examples as Botero and Ortiz suffice
to show. However, in the seventeenth and eighteenth centuries, a type of
teaching developed, especially at the German universities, that specialized in
purely descriptive presentation of the facts relevant to public administration.
A German professor, Hermann Coming (1606-81), is usually credited with
having been the first to give lectures of this kind. Another, Gottfried Achenwall
(1719-72), who did the same, introduced the term Statistics. These ‘statistics’

1 [J. A. S. had originally entitled this chapter ‘The Econometricians’; on the type-
script he added ‘and Turgot?’ in pencil.]

2 The word Econometrics is, I think. Professor Frisch’s, and it has been coined by
analogy with Biometrics, statistical biology. A distinctive name, embodying a program,
is perfectly justified in this case (see the first number of Econometrica, January 1933.
on the foundation and aims of the Econometric Society). And so we may leave it
at that, though the term is exposed to objection on philological grounds: it ought to be
either Ecometrics or Economometrics.

209

210 IX : BEGINNINGS TO ABOUT 1790

did not present figures primarily but rather non-numerical facts, and therefore
had nothing to do, in the hands of those professors, with what we now call
statistical method. But the purpose of this information was much the same
as that which our figures, treated by somewhat more refined methods, are
calculated to serve. The definition of statistics adopted as late as 1838 by the
Royal Statistical Society — to give it its present title — still turned upon 'illus-
tration of the conditions and prospects of society,’ and thus covered the work
of Corning and Achenwall quite well. 1 But — alas for the academic profession!
— the really interesting development did not start from it.

The decisive impulse came from a small English group led and inspired by
Sir William Petty. 2 The nature both of what he called Political Arithmetick
and of his personal contribution to it has been formulated with unsurpassable
fairness by one of his ablest followers, Davenant 3 (Of the Use of Political
Arithmetick , Works, 1, p. 128): 'By Political Arithmetick we mean the art of
reasoning by figures upon things relating to government. . . The art itself is

1 Since statistics came to mean sometimes various bodies of facts, and sometimes
various types of methods, there is nothing surprising in the number of different defini-
tions that have been proposed by different workers from their different standpoints.
The German statistician Engel, whom we shall meet again on a more important occa-
sion, once put that number as high as 180. See G. Loyo, Evolution de la definition de
estadistica, Publication 44 of the Instituto Panamerico de Geografia e Historfa (1939).

2 Petty (1623-87) was a self-made man — physician, surgeon, mathematician, theoret-
ical engineer, member of parliament, public servant, and businessman — one of those
vital people who make a success of almost everything they touch, even of their failures.
Though he paid the price of his versatility, his is one of the great names in the history
of economics. But as regards his posthumous fame, luck lent its aid to merit. Marx’s
decree to the effect that Petty was the founder of economics added socialist applause to
bourgeois eulogies initiated by Roscher in 1857. Thus, economists whom no other
topic could unite, among them many who were complete strangers to the real meaning
of Petty’s message, have ever since joined forces in extolling him, Germans even more
than Englishmen. Perusal of Lord E. Fitzmaurice’s Life (1895) is recommended. Of
Petty’s writings the following are of prime importance for' us: A Treatise of Taxes and
Contributions (1662); Verbum Sapienti (written 1665, publ. 1691); Political Anatomy
of Ireland (1672); Political Arithmetick (written 1676, publ. 1690); Quantulum-
cunque concerning Money (written 1682); Essays on Political Arithmetick (written
1671-87); all republished in The Economic Writings of Sir William Petty, by C. H.
Hull (1899). This edition also contains the celebrated Natural and Political Observa-
tions . . . upon the Bills of Mortality, originally published (1662) by John Graunt.
A long and inconclusive controversy has been waged on the question of Petty’s share
in this performance, which may be looked upon as the fountainhead of modem demog-
raphy, though Graunt should not, on this account, be called the ‘founder’ of statistics.
Lord E. Fitzmaurice’s Life has been supplemented by the Marquis of Lansdowne’s edi-
tions of the Petty Papers (1927) and of the Petty-Southwell Correspondence, 1676-87
(1928).

3 The name of Charles Davenant (1656-1714) moves slowly into the front-rank posi-
tion that belongs to him but it has not quite arrived there as yet. He was a public
servant but also a politician, thrice elected M.P., and, as such, a violent enemy of the
Whigs rather than a violent Tory: perhaps it is this and. the effects of this on some

THE ECONOMETRICIANS AND TURGOT

211

undoubtedly very ancient. . . [But Petty] first gave it that name and brought
it into rules and methods/ It will be seen that the ‘methods’ — which of course
he did not invent either but, as it were, helped into consciousness — do not
consist in replacing reasoning by the assembling of facts. Petty was no victim
of the slogan: let facts speak for themselves. Petty was first and last a theorist.
But he was one of those theorists for whom science is indeed measurement;
who forge analytic tools that will work with numerical facts and heartily despise
any others; whose generalizations are the joint products of figures and reason-
ing that are never allowed to part company. The relation of this procedure to
that of the physical sciences — and to Newtonian principles, in particular — is
so obvious as to make it necessary to emphasize that Petty displayed no pro-
pensity to borrow from them or even to strengthen his case by doubtful
analogies with them. He simply proposed ‘instead of using only comparative
and superlative words and intellectual arguments ... to express [himself] in
terms of number, weight and measure.’ No less obvious is it that he was acutely
aware of the polemical aspects of his methodological creed. He was quite ready
to fight for' it and to start what would have been the first controversy on
‘method.’ But nobody attacked. A few followed. Many admired. And the vast
majority very quickly forgot. That is to say, economists did not forget the
name; they even remembered individual views of Petty’s on various practical
issues and some of his theories — precisely those that were couched in mere

of his writings that interfered with his recognition. There also was something else.
Those historians who ask ‘What does a man stand for?’ did not quite know what to
make of him. On the one hand, the ‘liberals’ among them were delighted when they
hit upon such phrases as that trade is by nature free, that it finds its own channels,
that laws which limit or regulate it are seldom advantageous to the public (though they
may serve individual interests), and that money was a mere counter. On the other
hand, they were grieved to find in him so much about regulative policy that they had
to class him as an adherent of a (nonexisting) ‘mercantilist theory.’ Some accounted for
what they took to be a self-contradictory attitude by the hypothesis that in those earlier
writings in which the ‘liberal’ passages occur, Davenant spoke his mind freely whereas,
later on, in office especially, he turned opportunist. We shall see later (below, ch. 7)
that there is another explanation, viz., that he was a good economist. His Works have
been (incompletely) edited by Sir Charles Whitworth (1771). Additional ones have
since emerged, the latest find being published under the title Two Manuscripts by
Charles Davenant, 1942 (A Reprint of Economic Tracts, ed. by Professor G. Heberton
Evans, Jr., with an instructive introduction by Professor Usher). Also see Y. Balli&re,
L’Oeuvre economique de Charles Davenant (1913). His contributions to economic
analysis amount to an impressive total and may be classified as follows: (1) there is,
implicit but clear, behind all his writings the awareness of the logic of the relations
by which things economic hang together, a merit that is somewhat, but not necessarily
much, reduced by the priority of Child, Barbon, and also others; (2) he substantially
improved, though only by what may be called a case method, his epoch’s acquirements
in the theories of money and of international trade and finance; (3) he was one of the
first authorities of his time on public finance — taxes, debts, and so on; (4) he was one
of the few who understood, and co-operated in, the work of Political Arithmetick. Indi-
vidual points will be noticed in subsequent chapters.

212 II: BEGINNINGS TO ABOUT 1-790

slogans. It was the inspiring message, the suggestive program, which wilted
in the wooden hands of the Scottish professor and was practically lost to most
economists for 250 years: A. Smith took the safe side that was so congenial
to him when he declared (Wealth, Book iv, ch. 5) that he placed not much
faith in Political Arithmetick.

Not lost, however, was the impulse given to vital statistics and thus indirectly
to statistics in general. In this, the chief or even sole merit is now usually
attributed to Graunt (see footnote 2 above).

In the next chapter we shall touch upon the controversies of that period on the
subject of the growth (or decline!) of population which until the census of 1801 was,
in England at least, a matter of conjecture. This, however, was only one of. the prob-
lems that Graunt’s or Petty’s achievement put into a more promising shape by means
of the ‘bills of mortality' drawn from parish registers. Computations of the chance of
survival with application to insurance, of the influence of inoculation on longevity, of
the relation of the sexes at birth, and of the average duration of marriage in relation
to the ages of husband and wife are examples taken at random from a large field
of research that was to be taken into cultivation within the subsequent hundred years
on the lines chalked out by Graunt’s book. Nor is his merit adequately characterized
by calling him the ‘Columbus of the mortality bills.’ It is perhaps still more to his
credit that he displayed a sense of the methodological nature of those mass phenomena
that may be described by ‘laws' although the individual elements of them are fortuitous.
It must suffice to mention the main stepping stones of further progress. The first to
inquire with exactness into the problem of chances of survival was E. Halley (An
Estimate of the Degrees of the Mortality of Mankind, 1693). J. P. Siissmilch ( Die
gottliche Ordnung in den Veranderungen des menschlichen Geschlechts . . . , 1740)
may be said to have put vital statistics definitely on its feet by developing and sys-
tematizing the work of his English predecessors. The theory of probability, the basis
of statistical method, was developed by Jacques Bernoulli (1654-1705; Ars conjectandi,
1713) and still further by his nephews Nicholas (1687-1759) and Daniel Bernoulli
(1700-1782), who also worked out further applications. In view of the close alliance
between modem economics and hot only the material but also the methods of statis-
tics, it is highly regrettable that we cannot follow this line of advance any further.
The reader may, however, glean most of what is wanting here from a study of H. L.
Westergaard’s excellent Contributions to the History of Statistics (1932).

More important for economics proper was another performance that illus-
trates the curious obtuseness (just lamented) of economists: Gregory King’s
(1648-1712) law of demand for wheat.* It refers to deviations from an assumed

4 Natural and Political Observations and Conclusions upon the State and Condition
of England in 1696 (sec. vn). This work, a pioneer of quantitative economics and one
of the best examples of what Political Arithmetick stood for, was not published by the
author. Davenant incorporated some parts of it in his Essay upon the Probable Meth-
ods of Making a People Gainers in the Ballance of Trade (1699), but the whole was
not presented to the public before 1804, when George Chalmers published it with a
life of the author. The first five sections deal with the number of inhabitants, ingen-
iously inferred from hearth-tax returns, age distribution, marital status, mortality in
cities and the country, and cognate matters. Sections viii-xm are devoted to matters

THE ECONOMETRICIANS AND TURGOT

21 3

normal and states that if the harvest falls short of this normal by 1, 2, 3, 4,
or 5-tenths, the price will rise above what we should call its trend value —
which King, however, assumed to be constant, at least, for many years to-
gether — by 3, 8, 16, 28, or 45-tenths. From this an equation, explicitly giving
the law of demand implied, can easily be derived. 5 The remarkable thing is
that King, though he did not attempt any further refinements, evidently
understood the problem perfectly; that he worked with deviations from a
normal is a particularly interesting touch. Still more remarkable is it that,
in spite of the general notoriety that ‘King’s law’ was to gain, it did not
occur to economists either to improve upon it — though all that was required
was to proceed further on a line unmistakably chalked out — or to apply the
same method to other commodities until the work of H. L. Moore, 1914
(see below, Part iv, chs. 5 and 7) released the avalanche of statistical demand
curves of our own time — a lag of over 200 years. Do not let us forget, how-
ever, the econometric work done elsewhere, for example, in Italy, by- such
men as Verri or Carli.

To return to Petty. All or most of his writings were prompted by the prac-
tical problems of his time and country — problems of taxation, of money, of.
the policy of international trade particularly with a view to getting the better
of the Dutch, and so on. The superior quality of his mind shows in all his
comments and suggestions, but there is nothing very striking or very original
or very distinctive about them: they represented the views that were then
current, or rapidly becoming current, among the best English economists.
Not is there anything distinctive in the fact itself that Petty no doubt rea-
soned from a more or less clearly perceived set of principles or theoretical
schema; several of his contemporaries did that, and his schema was no more
articulate than were theirs. There was something, however, that was specifically
his own and in which his mental energy and theoretical talent asserted them-
selves conspicuously: as already observed, he hammered out concepts from,
and in connection with, statistical investigations, and in doing so he got fur-
ther at some points than did any of his contemporaries. His concept of velocity
of money is — rightly — the most famous example and will be mentioned again
in Chapter 6. Another example is his work on national income: he did not
bother about its definition, but he recognized its analytic importance and he
tried to figure it out. Modern income analysis may be said, in this sense, to
start with him, though it seems on the whole better to trace it to Quesnay
(see below, sec. 3). A third example is this: everyone knows the phrase that
has been repeated ad nauseam, ‘labor is the father ... of wealth, as lands are

of public finance. From our standpoint, sections vi and vii are the most important.
Besides the famous demand schedule, they contain other noteworthy contributions,
such as his estimates of the income and expenditure of the nation in 1688, of meat
consumption, and of the quantity of gold and silver in England and other countries.

5 It has been calculated by G. U. Yule (‘Crop Production and Prices: A Note on
Gregory King’s Law,’ Journal of the Royal Statistical Society, 19x5, p. 296 et seq.) at
y — — 2.33X -f 0.05X 2 — 0.00167X 3 .

214 II : BEGINNINGS TO ABOUT 179O

the mother.’ This means that he put on their feet the two 'original factors of
production’’ of later theorists. Illogically dropping the mother, he declared
elsewhere that capital (the ‘wealth, stock, or provision of the nation’) is the
product of past labor — which brings to mind James Mill’s blundering reformu-
lation of Ricardo . 6 But it cannot be repeated too often that in themselves, and
without the developments that make them valuable, such suggestions amount
to very little. What does amount to something is his research on a ‘natural
par’ between land and labor, that is to stay, his attempt, foreshadowing the
much more thorough-going one of Cantillon, to relate the values of land and
labor by equating a piece of land that will produce a ‘day’s food of an adult
man’ (with certain corrections) to the day’s labor of such a man. If technolog-
ical and all other conditions of production and consumption remained severely
the same, this procedure might give us the economic philosopher’s stone — the
unit of measurement by which to reduce the available quantities of the two
‘original factors,’ land and labor, to a homogeneous quantity of ‘productive
power’ that could be expressed by one figure, and the unit of which might
serve as a land-labor standard of value. As it is, this interesting venture, like
all similar ones, proved to be a blind alley.

Of course, this was no explanation of the phenomenon of value, still less a
labor theory of value — if anything, it was a land theory of value. On division
of labor, however, we find all the essentials of what Adam Smith was to, say
about it, including its dependence upon the size of markets. Pricing is dealt
with sketchily. Contrary to Marxist opinion, there is no theory of wages (unless
we choose to dignify by this name the proposition that laborers ‘should’ never
get more than a subsistence minimum because if they got double as much
they would reduce their work to half!) and no exploitation theory of surplus
value or of rent (unless we choose to dignify by these names the trivial proposi-
tions that there would be no surplus if the laborers claimed the whole product,
that the rent of land is what is left after costs of production have been de-
frayed, and that it increases as, with increasing demand, corn must be brought
from greater distances ). 7 There is, however, at least In a particular instance that
is not too well framed, a perception of the tendency toward equalization of
returns as between industries . 8 Although it lacks the reference to margins,

6 See below. Part hi, ch. 6.

7 Treatise of Taxes, ch. 5. This ‘discovery’ of the rent of location zealous admirers
may easily construe so as to imply decreasing returns and, in the end, the whole
of the Ricardian theory. Only, this would be quite unhistorical.

8 Tire argument, a rather interesting illustration of the ways of primitive analysis, is
simply this: if, by the same amount of labor, one man produces corn and another man
produces silver, then both will in general be left with some corn or silver after the usual
deductions have been made (he also deducts the necessary consumption of the pro-
ducers or, alternatively, assumes that the silver producer, besides producing silver, has
also supplied himself with the means for that necessary consumption). Now Petty holds
that the values of these two net returns must necessarily be equal and, since silver is
the monetary metal, this equality determines the money price of corn, hence the mon-
etary value of the corn ‘rent.’ As a useful exercise, the reader should work out precisely

THE ECONOMETRICIANS AND TURGOT 21 5

which would be necessary to make the theorem tenable, we have here in fact
a contribution toward the explanation of the business mechanism.

Finally, Petty’s theory of interest, so far as he can be said to have had one,
points back to the scholastics. Direct influence is not quite impossible, since
he received part of his education at the Jesuit college at Caen. There is, on
the one hand, his statement that, foreign exchange is "local interest,’ which sug-
gests, though he does not say so quite explicitly, that he would have agreed
to the phrasing that interest is ‘exchange over time’ — the scholastic doctors
considered, though they did not accept, an explanation on this line. And there
is, on the other hand, Petty’s explicit statement to the effect that interest is
a compensation ‘for forbearing the use of your own money for a term of time
agreed upon whatsoever need you may have of it meanwhile.” This, especially
if considered in the light of his disapproval of interest on money that the
lender may claim at any time, is simply late scholastic doctrine. His various
and not always felicitous considerations about the relation between interest
and the rent of land — where he conspicuously failed to make an obvious con-
tribution, namely, to derive the value of land by means of discounting its net
return by the prevailing rate of interest — also recall scholastic arguments, al-
though no outside influence need be invoked in order to understand why this
problem should obtrude itself to any analyst.

2 . Boisguillebert and Cantillon

Though, as a leader in the field of public finance, we have met Boisguille-
bert already and though, as a leader in the field of money, we shall meet him
again before long, it is desirable not to miss him in the scenery we are trying
to visualize now 1 as an importaht figure in the field of ‘general theory.’ He

why this argument is unsatisfactory and especially why it does not explain anything
about the rent of land. This argument has sometimes been used in support of an at-
tempt to credit Petty with a labor theory of value — the values of corn and silver being
compared by means of the labor hours they embody. Our opinion on this matter will
depend on the weight we are prepared to attribute to incidental use of such a stand-
ard of comparison. Petty’s father-and-mother slogan does not point in this direction.

1 Pierre le Pesant, Sieur de Boisguillebert (1646-1714), was a public-spirited member
of the semi-hereditary civil-service gentry of prerevolutionary France ( noblesse de robe)
and lived mostly in Normandy removed from all the Paris influences that might have
interfered with the originality of his ideas. Though, as we know, chiefly preoccupied
with the problems of French fiscal policy and nearly as fact-minded as was Vauban,
he differed from the latter not only in the much wider scope of his interests but also
in the fact that he was theoretically articulate — perhaps more so than any writer before ,
Cantillon. His chief works (Le Detail de la France ; Le Factum de la France; Traite de
la nature, culture , commerce et interet des grains; Causes de la rarete de Vargent; Dis-
sertation sur la nature des richesses, de Vargent et des tributs ) were re-edited, by Eugene
Daire, in Fconomistes financiers du XVIII e siecle ( Collection des principaux econo-
mistes, publ. by Guillaumin, 1843). Daire’s prefatory note to this edition, so far as I
know, is the first document of that Boisguillebert cult, the manifestations of which
contrast so curiously with (and are in fact only explainable by) the persistent neglect

2 l6

II: BEGINNINGS TO ABOUT I79O

has been called a precursor of the physiocrats, and it is easy to see why: on
the one hand, he was an energetic sponsor of the agricultural interest; on the
other hand, we find in his pages such phrases as: all that is necessary is laissez
faire'la nature et la liberte. But though these facts do suffice to put him into
line with the political thought of the physiocrats, they do not suffice to make
him the ancestor of specifically physiocrat analysis. There is analytic affinity
between his and Quesnay’s views on money (see below, ch. 6) but on the
whole, it seems better not to stress the relation too much. He was one more
of those authors who saw the economic organism as an equilibrium system of
interdependent economic magnitudes and who constructed this system from
the angle of consumption — getting further, perhaps, than anyone before Can-
tillon. His economic sociology turned, in an almost Marxist spirit, upon two
social classes, rich and poor, the existence of which he explained in a way
that was to become quite common as the eighteenth century wore on. The
stronger individuals, by crime et violence, get hold of the means of production
and then do not want to work any more; also — a very modem touch that the
reader will not fail to appreciate — these strong robbers, who have become rich,
tend to stock money rather than goods ( hoarded money, the 'moloch of the
world’!), and thereby depreciate real wealth and disturb the current of eco-
nomic life. The economic principle of order he found in competition quite as
clearly as did A. Smith more than half a century later. From the standpoint
of analysis, this is decisive. That, on the strength of this, he did not (as did
A. Smith) espouse unconditional free trade is immaterial,' for into this prac-
tical conclusion enter so many other considerations and, in addition, so many
personal preferences that its acceptance or rejection per se proves nothing for
or against a man’s analysis. But though his conception of competitive ‘propor-
tionate equilibrium' was as definite as A. Smith’s, it was not more so: it did
not occur to him to define it or to investigate its properties. Defining richesse,
as Cantillon was to do, as the jouissance of everything that can give satisfac-
tion ( plaisir ), he declared, as had Petty, that this Wealth had no other sources

of Boisguillebert’s performance by the vast majority of economists. Daire . considered
him to be the first in the 'learned chain,' the further links of which are Quesnay,
Smith, Ricardo, and Rossi (!); Boisguillebert was the Columbus du monde economique,
and so on and so forth. In a more reasonable manner, this cult was revived by Professor
H. W. C. Bordewijk in his excellent Theoretisch-historische Inleidingtot de Economie
(1931). But Miss Roberts, in an otherwise very meritorious book (Boisguilbert: Econo-
mist of the Reign of Louis XIV, 1935), displays a bad case of what Lord Macaulay
called the illness of biographers or lues Boswelliana. It was, however, a rebuke admin-
istered to me by Professor A. Gray in a review of Miss Roberts’ book ( Economic His-
tory, 1937) for not having, in an old essay of mine, paid due respect to Boisguillebert
that sent me back to Boisguillebert’s writings and in fact changed my own opinion
of him. Also, see F. Cadet, Pierre de Boisguilbert, precurseur des economistes [i.e. of
the physiocrats] (1870); A. Talbot, Les Theories de Boisguilbert et leur place dans
Vhistoire des doctrines economiques (1903); R. D,urand, Essai sur les theories mone-
taires de Pierre de Boisguilbert [which is, perhaps, the more correct spelling] (1922).

THE ECONOMETRICIANS AND TURGOT

21 7

but land and labor , 2 and then simply went on to say that the process of in-
cessant transformation of land and labor into consumers’ goods will normally
function without hitches if all commodities and services are produced on the
unfettered initiative of competing producers — as if this did not require any
proof. The first to attempt a (primitive) mathematical definition of equilibrium
and a (also primitive) mathematical proof of that proposition was Isnard, who
has as yet to conquer the position in the history of economic theory that is
due him 3 as a precursor of Leon Walras.

Cantillon’s great work 4 fared better both because of its well-rounded sys-

2 Petty, nevertheless, considered capital as accumulated labor. Boisguillebert’s set-up,
however, is an early case of the ‘resolution’ of produced means of production into serv-
ices of natural agents and labor that was to be a central feature of Bohm-Bawerk’s
theoretical scheme (see below. Part iv, ch. 6), but Boisguillebert did not try to exploit
this conception analytically.

3 Achille Nicolas Isnard, an engineer about whom practically nothing is known, not
even the exact dates of his birth and death, and who does not rate an article in the
Encyclopaedia of the Social Sciences , wrote, besides another work that does not con-
cern us, a Traite des richesse (1781) that seems to have been rescued from oblivion
by a lucky chance: Jevons included it in his list of writings on mathematical economics
that he appended to his Theory of Political Economy. The (almost) complete neglect
of Isnard’s work is understandable, however, because the historic performance men-
tioned in the text is embedded in a conventional argument against physiocrat doctrines
and other neither very original nor very interesting matter. Owing to the weakness in
our field of the specifically scientific interest, progress on this fundamental line was
almost unbelievably slow.

4 Richard Cantillon (the date of his birth is uncertain, but is usually given as 1680;
he died, presumably murdered, in 1734) was a Paris banker of Irish extraction. He in-
fluenced French economists much more than English ones. He was indeed plagiarized
by some Englishmen and recognized by others, among the latter being A. Smith. But
he had to be practically rediscovered by W. S. Jevons (‘Richard Cantillon and the Na-
tionality of Political Economy,’ Contemporary Review , 1881), whereas in France he
was never quite lost sight of. Thus, his influence is obvious in Canard’s Principes
d'economie politique (1801), which, with apologies to the iAcademie that ‘crowned’ it —
the same A cademie that ignored Cournot and Walras — we shall only briefly mention
again. On these grounds I class him as French, but I admit that anyone interested in such
questions as the ‘nationality’ of a science can make out a strong case for claiming this
Irish Frenchman as an English economist because of his descent from Petty. The
Essai sur la nature du commerce en general is supposed to have been written about
1730 and was, though in a very unconventional sense, ‘published’ soon after; that is
to say, the manuscript circulated and exerted influence soon after. (This meant a lot
in a small and highly concentrated professional circle.) The date of its actual (post-
humous) publication, 1755, therefore has not the usual significance; there is a Harvard
University reprint (1892) and an English trans. under the auspices of the Royal Eco-
nomic Society (1932). See H. Higgs, ‘Richard Cantillon,’ Economic Journal, June 1891.
I do not know of any other good study on our author unless it be the very useful
article in Palgrave’s Dictionary. Jevons’ estimate fails by overstatement. In particular
nothing could be more infelicitous than to call the Essai the ‘cradle’ of Economics:
this is precisely what it was not. There is a brief ‘Biographical Note on Richard Can-
tillon’ in the Economic Journal, April 1944, by Joseph Hone.

210 II: BEGINNINGS TO ABOUT 179 O

tematic or even didactic form and because it had the good fortune to gain,
long before its actual publication (see footnote 4), the enthusiastic approval
and the effective support of two very influential men, Gournay and Mirabeau.
What Petty failed to accomplish — but for what he had offered almost all the
essential ideas — lies accomplished before us in Cantillon’s Essai. True, it was
not accomplished in the style of a pupil who at every step looks back over his
shoulder for the master’s guidance, but in the style of an intellectual peer
who strides along confidently according to his own lights. Likewise, Quesnay
strode on according to his own lights and was no more a mere pupil of Cantillon
than Cantillon was of Petty. Nevertheless, few sequences in the history of
economic analysis are so important for us to see, to understand, and to fix in
our minds, as is the sequence: Petty-Cantillon-Quesnay. Cantillon’s economet-
ric zeal derived its direction from Petty. The supplement to his Essai which
contained his computations has unfortunately been lost. But, as we shall pres-
ently see, the results presented in its text suffice to show that it was Petty’s
problems — mainly the ‘par’ between land and labor — and Petty’s methods
which inspired them. Moreover, dependence or possible dependence — there
can be no certainty about it — extends beyond such important individual points
as the theory of velocity of circulation or the theory of population to the fun-
damental features of the general theoretical set-up. Exactly the same conclu-
sion will be seen to apply to the relation of Quesnay’s work to Cantillon’s.
Affinity is obvious, differences being not less revelatory of it than are agree-
ments: for a man may learn from another by criticizing him just as well as
by accepting his teaching, and some of Quesnay’s views look indeed as if they
had been derived from Cantillon by the former method. And, again, it is pre-
cisely the fundamental features of Quesnay’s analytic set-up that are unmis-
takably foreshadowed in Cantillon’s work. An analogy may be helpful: Cantil-
lon was to Quesnay, and Petty was to Cantillon, what Ricardo was to Marx.
This leaves out Boisguillebert, though there are important affinities between
him and Cantillon and, as regards money, between him and Quesnay. But
just now it seems important to focus the reader’s attention on one strong and
simple line of development. The only way to raise all this above vague generali-
ties is to take a bird’s-eye view of Cantillon’s work or, to phrase it differently,
to present a Readers’ Guide. This is what I proceed to do.

The First Part contains the fundamentals of the analytic structure. In
the first chapter we get the general layout by means of the key concepts —
land, labor, and wealth. Exactly as with Petty, and just as misleadingly,
land, the source of material, and labor, the form-giving or productive
agent, enter on equal terms to turn out wealth which n'est autre chose
que la nourriture, les commodites et les agremens de la vie (Boisguille-
bert’s definition). Chapters 2-6 present what to all intents and purposes is
an economic sociology. We get first a theory of social classes: ownership
of land — itself based upon conquest and violence as with Boisguillebert —
creates the three fundamental ‘natural’ classes of landlords, farmers, and
laborers (traders and entrepreneurs do come in, along with artists, robbers,

THE ECONOMETRICIANS AND TURGOT

219

lawyers, beggars; but they are added to this schema, not really fitted into
it). Then we get a very interesting theory of the origin of villages, the
emergence of townships (Cantillon adopted a ‘market theory’ of towns,
the theory that makes them develop first from periodical, then from per-
manent markets), cities, and capital cities. Besides creating the form in
which many a nineteenth-century textbook was cast (in a sense even
Alfred Marshall’s treatise), Cantillon thus clearly proved his awareness of
the fact, which smaller minds so often failed to grasp, namely, that the
problems of any analytic social science necessarily divide up into two
methodologically different groups: the group that centers in the question
how the actual behavior of people produces the social phenomena we ob-
serve, and the group that centers in the question how that behavior came
to be what it is. In Chapter 3 we also learn something about location —
this is perhaps the first attempt (if we neglect embryonic considerations
in the agricultural literature) at making some headway in this field.

Transition to pure economics— the economics that deals with behavior
within the social framework described — is effected in Chapters 7-9 where
Cantillon, for future reference, settles a number of preliminary questions
concerning (a) differences in remuneration as between laborers and arti-
sans and as between artisans in different employments, and (b) popula-
tion. The former subject was to be a favorite with later writers, particu-
larly A. Smith, and became a standard topic in the standard text of the
nineteenth century. The latter subject will have to be dealt with in the
chapter on population, wages and employment which follows. But it is
just as well to record here, by anticipation, that Cantillon (clearly devel-
oping views of Petty) lets population, on the one hand, adapt itself to
the demand for labor and r on the other hand, be regulated by a law of
minimum-of-existence wages, so that his authority might be claimed for a
Malthusian view were it not for the fact that he also (in this still more
like Petty) looked upon labor as the ‘natural riches’ of a nation (ch. 16).
This last points in a different direction, though there is really no contra-
diction between the two ideas. Both had become common doctrine in
the seventeenth century.

Having thus prepared the ground, our author presents (ch. 10) a cost
theory of normal price or value ( valeur intrinseque: never mind the ob-
jectionable word, it is quite harmless). This, if anything, falls short of
the theory of the scholastics except that Cantillon, going through with
Petty’s theory, defined his cost in terms of the quantities of land and
labor which enter into the production of each commodity. The obvious
problem thus raised — we might call it Petty’s problem — which Ricardo
tried to dodge by eliminating land (see below. Part hi, ch. 6) so as to be
left with one factor only, Cantillon tackles in Chapter 11 by the alterna-
tive expedient: labor is reduced to land by the consideration that the
labor du plus vil Esclave adulte vaut au moins ... la quantite de terre
that must be employed to provide for his needs. Or, rather, since accord-

o II: BEGINNINGS TO ABOUT 1 790

ing to Halley’s tables about half the children died before reaching the
age of 17 (and also for other reasons) it was roughly double that quantity.
Other laborers get more than the plus vil Esclave, but this is either be-
cause their labor costs more land to produce or because their remunera-
tion is subject to risk. The figures on workmen’s budgets that Cantillon
held to justify this estimate were in the lost supplement, but we must in
any case credit Cantillon with having made the first important step in this
particular field of research that was to develop considerably before the
century was over. For the rest, it is not necessary to enter here into criti-
cism either of the land-labor theory of value itself (if such it may be
called) or of the particular attempt to make it numerically operative. As
far as this goes, it must suffice to say that the latter is not what it seems
to be, that is, complete nonsense, and that success on this line is not out
of the question at some distant future. Let us repeat, however, first, that
the really important thing is the message of econometric research that
comes to us from this attempt — the message that numerical calculations
must be at the basis of any science, however 'theoretical/ that is quanti-
tative by nature; and, second, that the arpents of land per year (1 ar-
pent = 330 sq. ft.) played exactly the same role in Cantillon’s analysis
that days of labor played in Ricardo’s. And let us add that we have here
the positive kernel of Quesnay’s theory of normal value: his philosophies
about the value-creating powers of nature added as little to the operative
content of the Petty-Cantillon theory as Marx’s philosophies about the
value-creating power of labor added to the operative content of the
Ricardo theory.

With the deviations of actual prices from this norm — that he reduced
from cost in terms of land and labor to cost in terms of land alone —
Cantillon dealt very carefully. There is nothing in the Essai that could
rank as a theory of monopoly, which is the more serious because, as will
be evident from the rest of our narrative, Cantillon reasoned on the
hypothesis of the most perfect of perfect competitions so that any im-
perfections in it naturally acquire particular importance. But there is a
lot about temporary deviations because of other reasons, that is, Cantillon
paid much attention to the problem of market price as distinguished
from normal price — exactly as did A. Smith later on. One feature of his
treatment is worth noting because it persisted practically to J. S. Mill.
Like all 'classics’ of the nineteenth century, Ricardo especially, Cantillon
never asked the question how market price is related to normal price and
precisely how the latter emerges — if indeed it does emerge — from the
supply and demand mechanism that produces the former. Taking this re-
lation for granted, he was led to treat market price as a separate phe-
nomenon and to restrict the supply and demand explanation to it. Thus
emerged the superficial and, as the later development of the theory of
value was to show, misleading formula — normal price is determined by
cost, market price is determined by supply and demand — of which we
shall see more in Part m.

THE ECONOMETRICIANS AND TURGOT

221

Going on, we see Quesnay’s figure still more clearly looming in the
future, and Boisguillebert’s no less clearly looming in the past. All the
classes ( ordres ) of society and all the men in a state subsist or enrich
themselves at the expense of the landowners (ch. 12). In the light of
Chapter 14, this will be seen to mean no more than that, whereas every
other income item is being balanced by a cost item, including in costs
the necessary living expenses of the receiver, the landowners’ rent is the
only one that is not so balanced because, to use a later phrase, it is a re-
turn to a ‘costless,’ that is, non-produced, natural factor. Therefore, in-
come from land, not being bound to certain more or less predetermined
uses, can be spent in any, way that the whims of the landowners may
suggest. Its expenditure is the undetermined and, precisely because of
this, the determining and active factor in the total of national consump-
tion — hence also in the total of national production, so that everyone’s
economic fate depends upon les humeurs, les modes et les fagons de vivre
of the prince and the landowning aristocracy. These humeurs determine
les usages auxquels on emploie les terres, and, in particular, how many
people will be employed and able to make a living in a country (ch. 15),
and how its balance of trade will look if both sides of it are measured in
terms of land — which is the criterion he applied for judging the advan-
tage or disadvantage a country derives from foreign trade. Not all of this
reappears in physiocrat writings, not, for example, the last-mentioned
point. But most of it does, and it is therefore desirable to make it quite
clear what we are to think of it. Several aspects must be distinguished.
First there is the theorem that pure rent is a net return that is explained
by the productivity of scarce natural agents: this is a true and valuable
proposition to which, after many wanderings, theory returned about
1870. Second, there is the statement that this net return is the only one,
and that it is therefore agriculture which produces the whole net income
of society, no other economic activity producing any of it. This, on the
face of it, is wrong but — like the labor theory of .value — it can be made
true by the introduction of a sufficient number of auxiliary assumptions
or postulates — such as absolutely perfect competition, stationary state,
absence of urban rent, minimum-of -existence wages so that labor becomes
a product of what the laborer consumes, and others 5 — which, however,
destroy the statement’s practical value. Third, there is the emphasis
upon the importance of this net income’s being promptly spent in order
to keep the economic process going. This point played a small role with
Cantillon but more with Boisguillebert before him and with Quesnay
after him. And fourth, there is the emphasis — that is specifically Cantil-
lon’s— upon the way in which the net income is spent. A common-sense
case can obviously be made out for this, especially for the society that
stood before Cantillon’s eyes.

Now, the produit de la terre is, so Cantillon asserted, divided into
5 The reader will derive benefit from working them out fully.

222

II : BEGINNINGS TO ABOUT 1790

three approximately equal parts ( les trois rentes), one- third replacing the
farmer’s outlays, including his own necessary keep, another third going
to him as ‘profits,’ and the last third to the seigneurs. These landlords
spend the equivalent of their third of the product of land in the towns
where approximately half of the total population is supposed to live.
The farmers also spend something on the manufactures produced in the
towns, namely, one-fourth of their two-thirds. Thus, the equivalent of
one-half (Vs + %) of the total product of agriculture finds its way to the
towns, into the hands of the marchands et entrepreneurs, who expend it
in turn on foodstuffs and raw materials and so on. Interpretation of this
schema, for which Cantillon himself claims no more than the' value of a
very rough thumb-nail sketch, presents various difficulties into which we
cannot enter. But it also presents many points of interest, of which we
shall mention two.

First, Cantillon had a clear conception of the function of the entre-
preneur (ch. 13). It was quite general, but he analyzed it with particular
care for the case of the farmer. The farmer pays out contractual incomes,
which are therefore ‘certain,’ to landlords and laborers; he sells at prices
that are ‘uncertain.’ So do drapers and other ‘merchants’: they all com-
mit themselves to certain payments in expectation of uncertain receipts
and are therefore essentially risk-bearing directors of production and
' trade, competition tending to reduce their remuneration to the normal
value of their services. This, of course, is scholastic doctrine. But nobody
before Cantillon had formulated it so fully. And it may be due to him
that French economists, unlike the English, never lost sight of the entre-
preneurial function and its central importance. Though presumably Can-
tillon had never heard of Molina and though there is nothing to show
that he actually influenced J. B. Say, it is none the less true that ‘ob-
jectively’ his performance^ on this point — and this was not suggested
by Petty nor developed by Quesnay — is the link between those two.
Second, if we look once more at Cantillon’s sequence of payments and
deliveries, which starts from the tripartite division of the gross product
or revenue of farming — the trois rentes — and, through a number of defi-
nite stations, takes us back again to its starting point, the farmers, we
immediately feel that we are beholding something that is novel, some-
thing that is not explicitly present in the schemes of Cantillon’s prede-
cessors or contemporaries — not even in Petty’s — or in fact in the schemes
of most theorists of any time. From them, we get indeed statements of
general principles that govern the economic process. But they leave it to
us to visualize this process itself as it runs its course between social groups
or classes. Cantillon was the first to make this circular flow concrete and
explicit, to give us a bird’s-eye view of economic life. In other words, he
was the first to draw a tableau economique. And, barring differences that
hardly affect essentials, this tableau is the same as Quesnay’s, though
Cantillon did not actually condense it into a table. Cantillon’s priority is
thus beyond question as regards the ‘invention’ that Mirabeau, indulging

THE ECONOMETRICIANS AND TURGOT - 223

as usual his generous ardors, compared in importance to the ‘invention’
of writing. But since Quesnay’s formulation is so much more famous we
shall add what there is to add in connection with his work.

It stands to reason that the tableau method offers special opportunities
for investigating monetary phenomena, especially velocity of circulation —
this is one of its chief advantages. In fact, Cantillon is at his best in this
field. Chapter 17 of Part 1, which presents the fundamentals of monetary
theory, is not particularly original: we get pretty much the old stuff, in-
cluding the divisibility, portability, et cetera, of gold and silver that recom-
mend them for the monetary function. But the whole of Part 11 (which,
however, also includes the theories of barter, market price, and so on) is
devoted to money, credit, and interest, and so is much of Part in (mainly
on foreign trade), where we find Cantillon’s analysis of banks, bank
credit, and coinage. Consideration of the main items of this brilliant
performance, which in most respects stood unsurpassed for about a cen-
tury — the automatic mechanism that distributes the monetary metals in-
ternationally is, for example, almost faultlessly described, an achievement
usually credited to Hume — will however be reserved for subsequent
chapters. 6

3. The Physiocrats

[(a) Quesnay and the Disciples .] The small group of French economists and
political philosophers who were known in their own day as Les economistes
and are known to the history of economics as Physiocrats presents strongly
characteristic features to even the most perfunctory backward glance. But,
when seen from our standpoint, the group really reduces to one man, Quesnay,
to whom all economists look up as one of the greatest figures of their science.
I know of no exception, though there are no doubt some differences in the
reasons which different people would proffer in motivation of their individual
agreement with the unanimous vote. Of the other members of the group we
need to notice only Mirabeau, Mercier de la Riviere/ Le Trosne, Baudeau, and
Dupont. They were all of them disciples, nay, pupils of Quesnay in the strictest
and most meaningful sense these terms will bear— disciples who absorbed and ac-
cepted the master’s teaching with a fidelity for which there are but two ana-
logues in the whole history of economics: the fidelity of the orthodox Marxists
to the message of Marx and the fidelity of the orthodox Keynesians to the
message of Keynes. They were a school by virtue of doctrinal and personal
bonds, and always acted as a group, praising one another, fighting one an-
other’s fights, each member taking his share in group propaganda. They would
in fact illustrate the nature of that sociological phenomenon to perfection had

6 A. Marshall ( Principles , p. 55, n. 1) states that Cantillon was in important respects
anticipated by Barbon (see below, ch. 7). Unless this refers to a certain (but not at all
close) similarity between Cantillon’s and Barbon ’s views on foreign trade — which both
of them had in common with many other writers — I fail to see what Marshall can
have meant.

224 IIr BEGINNINGS to about 1790

they not been something more than a scientific school: they formed a group
united by what amounted to a creed; they were indeed what they had been
called so often, a Sect. This fact naturally impaired their influence upon every
economist, French or foreign, who was not prepared to take the vows to One
Master and One Doctrine: moreover, it invited wholesale rejection of their
teaching even by people who agreed with them on many points of theory as
well as of policy or even by people who were under obligation to them. Some
serious foreign scholars, particularly the leading Italians — among them Geno-
vesi, Beccaria, and Verri — were indeed friendly. But so far as analysis and not
policy is concerned, this friendliness meant little more than occasional lip
service to specifically physiocrat tenets and should not mislead us into calling
them physiocrats. Enthusiastic adherents of any importance are to be found
in Germany only: it will suffice to mention the Margrave of Baden, Schlett-
wein, Mauvillon, and the Swiss, Herrenschwand. The necessary minimum of
facts about the men so far mentioned is assembled below.

Frangois Quesnay (1694-1774), the son of a moderately successful
lawyer, was above all else a surgeon-physician. His distinguished profes-
sional career absorbed the bulk of his energy and never left more of it
for economics than a man may be able to reserve for a passionately be-
loved hobby. He mote a medical treatise on bleeding, became General
Secretary of the Academy of Surgery and editor of its journal, surgeon
and eventually first physician to the king. Actually, he was medical ad-
viser to Mme de Pompadour, in whom he found a protectress who was
not only extremely kind but also intelligently understanding, a fact that
assured to him a strategic position in the intellectual life of Versailles and
Paris and should assure to the lady the lasting gratitude of economists.
He was pedantic and doctrinaire to a degree and must have been an
awful bore. But he had all the force of character that often goes with
pedantry. It is pleasant to add that he was also thoroughly upright and
honest. His loyalty to his protectress and his imperviousness to the typ-
ical temptations of his environment are amply established by an anec-
dote related by Marmontel that is more amusing than proper. The fact
that he was the only creative force in his circle is somewhat obscured by
his inability or unwillingness to work out his ideas fully and systemat-
ically. We will notice of his economic writings (his only voluminous
work was the E ssai physique sur V economic animale, 1736) the Encyclo-
pedic articles ‘Fermiers’ (1756), 'Grains’ (1757), 'Homines’ (1757); the
Tableau economique (1758; see below, sub d); the article 'Droit naturel’
(1765) and the dialogue 'Du Commerce’ (1766), both in the Journal de
V agriculture, du commerce et des finances ; also the article 'Despotisme de
la Chine’ ( Ephemerides , 1767), which has given rise to speculations on the
subject of Chinese influence upon the physiocrats. (See, e.g., the article
under this title by L. A. Maverick, Economic History , Supplement to the
Economic Journal, February 1938.) Finally, there are Quesnay’s Maximes,
a highly revealing supplement to, or political commentary on, the Tableau

THE ECONOMETRICIANS AND TURGOT

22 5

(1758), and the Oeuvres economiques et philosophiques edited by Au-
gust Oncken with an interesting introduction (1888). All histories of
economics deal with Quesnay, of course, the treatment in Gide and Rist
calling for special notice. See H. Higgs, The Physiocrats (1897); G.
Schelle, Le Docteur Quesnay (1907); G. Weulersse, Le Mouvement
physioeratique en France de 1756 & 1770 (1910), and Les Physiocrates
(1931); M. Beer’s Inquiry into Physiocracy (1939) is, quite rightly, al-
most entirely devoted to Quesnay himself.

Mirabeau we have met already (see above, ch. 3). After his conversion
by Quesnay he devoted himself wholeheartedly to the cause of physi-
ocracy, without however completely surrendering independent judgment.
Two of his works already mentioned, the Theorie de Vimpot and the
Philosophie rurale, may have been written in collaboration or consulta-
tion with Quesnay but are certainly not pure Quesnayism and contain
things of which Quesnay cannot have approved. Nevertheless, the
Philosophie (1763) was generally accepted as the first of the four text-
books of physiocrat orthodoxy. The sixth Part of L’Ami presented among
other things Mirabeau’s explanation of the Tableau.

Pierre-Paul Mercier de la Riviere (also known as Lemercier; 1720-93),
whose impulsiveness or bad manners made him more conspicuous than
he deserved to be, was responsible for the second of those textbooks,
namely, L’Ordre naturel et essentiel des societes politiques (1767, re-
print with useful introduction by E. Depitre, 1909), which Dupont de
Nemours republished, in abstract, with a title that is revelatory of the
group’s frame of mind: it read De Vorigine et des progres d’une science
nouvelle (1768). The first thirty-five chapters of Mercier’s work are de-
voted to topics of political theory, which was what primarily interested
him — Quesnay's scheme of despotisme legal that was really no despotism
at all. The economics that occupies the remaining nine chapters is negli- ,
gible. Both Diderot and A. Smith, however, thought highly of the book.

G. F. Le Trosne (1728-80) was a much abler man. But he was a lawyer
and mainly interested in the natural-law aspects of the physiocrat system.

In the field of economics he embraced physiocrat orthodoxy with some
reservations. His Liberte du commerce des grains (1765) and his De Vin-
terSt social . . . , second volume of De Vordre social (1777), are meri-
torious performances, though they are not more than that.

The Abbe Nicolas Baudeau (1730-92) began as an enemy but had his
day of Damascus in 1766 and from then on proved a most useful popu-
larizer and controversialist as well as an efficient editor. His Premiere
introduction . . . (1771; reprint with instructive introduction by A.
Dubois, 1910) is the third of the group’s textbooks, perhaps the weakest
of all.

The fourth and best of these textbooks was the short Abrege des prin-
cipes de Veconomie politique (publ. first in vol. 1 of the Fphemerides,
for 1772) by Karl Friedrich von Baden-Durlach.

Pierre S. Dupont de Nemours (1739-1817), who entered adult life as an

226

II : BEGINNINGS TO ABOUT I79O

all-round literary free lance, was by far the ablest of- the lot. Napoleon I
once described Marshal Villars as a 'fanfaron d’honneur.’ Similarly we
can describe Dupont as a 'go-getter’ who never forgot honor and prin-
ciple and who, in particular, retained both a genuine interest in purely
scientific questions and loyalty to the physiocrat creed throughout a
career that offered every excuse for dropping them. He was won over to
the cause of physiocracy by shrewd old Quesnay himself, who knew per-
fectly with whom he was dealing and never pulled the curb too sharply.
Dupont immediately began to write copiously and effectively, publish-
ing, among other things, a free-trade tract on grain exports and imports,
1764. On the strength of his success as a writer and editor, he secured
various important employments under Turgot and later on under the
last great minister of the ancien regime, Vergennes. We need not follow
him through the ups and downs of life which, through the Constituante
and the Directoire finally landed him — a Roman would say, with the
loss of his shield — in the United States. Nor need we record his numer-
ous publications, all of which bear witness to the brilliance of his talents,
though these talents were those of the pianist and not those of the com-
poser. The interested reader finds all except his letters in G. Schelle’s
Dupont de Nemours et Vecole physiocratique (1888); also see Weulersse’s
work previously quoted.

As already mentioned, the school was thoroughly alive to the impor-
tance of propaganda and some of its members, Baudeau and Dupont
especially, were very good at it. They founded discussion groups, worked
upon individuals and agencies in key positions (the parlements espe-
cially), and produced a large quantity of popular and controversial litera-
ture. Their exploits in economic journalism, however interesting in them-
selves, would not have to be mentioned here were it not for the fact that,
rising above it, they also produced the bulk of the material that went into
the pages of the first scientific periodicals in the history of economics.
The Journal Oeconomique (1751-72) had from the first kept a highly
creditable level, rendering such services to s6ientific economics as the
publication of translations of Hume (an important fact to keep in mind)
and Josiah Tucker. The Journal d’ agriculture, du commerce et des
finances (1764-83) was intended from the first to supplement the
Gazette by taking care of 'heavier’ articles. The physiocrats partly con-
trolled, partly had ready access to, this journal in 1765-6 and 1774-83.
In 1765, however, Baudeau founded the famous Ephemerides du citoyen
('the citizen’s daily records’ would render this title, though it was a
weekly), which, after Baudeau’s conversion (from protectionism) in 1766
became identified with physiocracy. In 1768 Dupont took over. It was
suppressed, owing to its strong hostility to the policy of the Aiguillon-
Maupeou-Terray government, but recalled to life by Turgot (1774),
whose policies it of course supported and some of whose enemies it at-
tacked. The Nouvelles ephemerides died in 1776, and several efforts at
resuming publication ended speedily in failure. But in a sense the short-

THE ECONOMETRICIANS AND TURGOT

227

lived Journal d’economie publique, de morale et de politique (founded
1796), though neither physiocrat nor the equal of the physiocrat journal,
was the same kind of thing — as was in fact the later Journal des econo -
mistes. In more than one respect, therefore, the Ephemerides should be
remembered by the student of the history of economics as one of the
major achievements of Quesnay and his group. The reader will find an
excellent sketch of this journal's career, giving all the essential facts in a
short compass, in Palgrave’s Dictionary of Political Economy, article
Tphemer ides’ by Professor S. Bauer. I. Iselin founded a German replica,
not equal to the prototype ( Ephemeriden der Menschheit , 1776-82).

The impressions a reader gets as he wades through the volumes of the
Ephemerides (I have been able to do so only to 1772) will of course vary
from one reader to another. Personally, I have been greatly struck by a
certain similarity they display to the scientific journals of late nineteenth-
century Marxist orthodoxy, especially the Neue Zeit: the same fervor of
conviction, similar controversial talent, quite the same inability to take
any other but the orthodox view of anything, comparable capacity for
bitter resentment, and equal absence of self-criticism. This shows par-
ticularly in the review articles. But solid merit all but obliterates these
blemishes. Even apart from Turgot’s Reflexions, which are, of course, in a
class by themselves, and the explanations of the Tableau, there is a lot of
thoroughly good stuff. Dupont, for example, contributed what is to my
knowledge the first genuine history of economics. Masses of historical ma-
terial are presented. Contemporaneous events from qll comers of the
globe are currently reviewed, though always from a narrowly sectarian
point of view. All in all, the first of the long series of scientific journals of
economics set a high standard for a long time to come. Its international
success was well deserved.

The three Germans mentioned above need not detain us long. As re-
gards the Margrave of Baden-Durlach (later Grand Duke of Baden,
1728-1811), who politically was one of the ablest public men of his time,
we need add only a reference to his correspondence with Mirabeau and
Dupont (edited, with introduction by K. Knies, 1892), which will repay
perusal. J. A. Schlettwein (1731-1802) was the Margrave’s executive
collaborator in the experiment on the practical application of the physio-
crat recipe to the village of Dietling which he reported in Les moyens
(Tarreter la misere publique . . . (1772). Neglecting his later and fuller
account of this experiment, we shall be content to mention his Qrund-
feste der Staaten oder die politische Oekonomie (1778). His almost turbu-
lent activity in the service of physiocracy, considered as a practical
scheme of agrarian reform, made a stir wherever he went and secured
him one of those traditional positions in the history of scientific econom-
ics for which no analysis of published performance can unearth a justi-
fication. In one respect only can this man interest us, excellent though he
no doubt was in his way. He illustrates to perfection the type of econo-
mist who will, I fear, never die out and who will forever discredit eco-

228

II : BEGINNINGS TO ABOUT I79O

nomics in the eyes of men whose approval is worth having. This is the
type that says: here is the patent medicine that will cure all ills, ‘the
most important thing for the public’ (these words are the title of one of
his publications); in fact, the only thing that is important for humanity,
is to swallow it. Jakob Mauvillon (1743-94) was a still more excellent man
in many respects, but still weaker as an economist. His essay on luxury
included in his Sammlung yon Aufsatzen . . . (1776-7) is negligible.

His Physiokratische Brief e an den Herrn Professor Dohm (1780) is in or
near the center of a German controversy on physiocracy, for the sake of
which alone this publication deserves to be mentioned. But this contro-
versy itself needs to be mentioned only because some interest attaches
to the fact that the physiocrat doctrine, though very little understood in
its true scientific importance and mainly discussed in its practical aspects,
could raise a full-dress debate around 1780. However we use the oppor-
tunity to refer to the best performance on behalf of physiocracy, K. G.
Fiirstenau’s Apologie des physiokratischen Systems (1779). Of opponents
it will suffice to mention C. K. W. von Dohm (Kurze Yorstellung des
physiokratischen Systems, 1778) and J. F. von Pfeiffer (A ntiphysiokrat,
1780). The latter’s voluminous systematic works of the Justi type, no
doubt marked by strong practical sense, have earned for him high praise
from several historians. Jean (Johann) Herrenschwand (1728-1811), was a
late physiocrat. Perhaps he should not be called a physiocrat at all, for
he was not orthodox. But he was an able economist. His chief works
were De V economic politique moderne (1786); De V economic politique
et morale de Vespece humaine (1796); Du vrai principe actif de Vecono-
mie politique (1797). There is a German monograph: A. Johr, Jean
Herrenschwand (1901).

A sect with a creed and a political program naturally presents many aspects
and calls for interpretative analysis from many standpoints other than ours:
we shall first glance at some of these, then consider the bare bones of Ques-
nay’s economic analysis, and especially the Tableau economique.

[(b) Natural Law, Agriculture, Laissez-Faire, and ITmpot Unique .] Physi-
ocracy 1 was nonexistent in 1750. Tout Paris and still more Versailles talked
about it from 1760 to 1770. Practically everybody (excluding professed econo-
mists) had forgotten it by 1780. This meteoric career will be readily understood
as soon as we realize the nature and extent of this success, that is to say, as
soon as we realize precisely what it was that, for about two decades, succeeded
so conspicuously, how it succeeded, and why.

Above (in Chapter 2) we have interpreted Quesnay as a philosopher of nat-
ural law. In fact, Quesnay’s theories of state and society were nothing but
reformulations of scholastic doctrine. The motto, Ex natura jus, ordo, et leges
might have been, though it presumably was not, taken from St. Thomas. The

1 The term means Rule of Nature and was used by Dupont as a book title in 1767.
But according to Oncken it^was used earlier by Baudeau and is perhaps due to Quesnay
himself. The question is of no importance.

THE ECONOMETRICIANS AND TURGOT

229

physiocrat ordre naturel (to which there corresponds in the world of real phe-
nomena an ordre positif ) is the ideal dictate of human nature as revealed by
human reason. What difference there is between Quesnay and the scholastics
is not to the former’s credit. We have seen that St. Thomas and still more
the late scholastics, such as Lessius, were perfectly aware of the historical rela-
tivity of social states and institutions and that they always refused to commit
themselves, in mundane affairs, to an invariable order of things. But Quesnay’s
ideal order is invariable. Moreover, in his paper on Droit naturel , he defined
Physical Law as the ‘regulated {regie) course of all physical events which is
evidently the most advantageous to mankind,’ and Moral Law as ‘the rule
(r&gle) of every human action conforming to the physical order evidently most
advantageous to mankind’: these ‘laws’ form together what is called ‘natural
law,’ and they are all immutable and the ‘best possible ones’ ( les meilleures
lois possibles). In the case of the scholastic doctors, such principles were con-
fined to the realm of metaphysics and not directly applied to historically con-
ditioned patterns. In the case of Quesnay they were directly applied to par-
ticular institutions, such as property. And Quesnay’s political theory — both
analytically and normatively — turned upon a monarchical absolutism in an
uncritical and unhistoric manner that, as we have seen, was also quite for-
eign to the scholastics . 2 Now, we know how well the old natural-law system
fared in the eighteenth century and how acceptable it proved to be, in its es-
sential features, to la raison. Therefore, Quesnay’s particular form of it, some
non-essential frills excepted, fell in with the intellectual fashion of the hour:
everybody readily understood this part of his teaching, sympathized with it
from the start, and felt at home when discussing it. And, unlike other votaries
of la raison , Quesnay harbored no hostility either to the Catholic Church or
to the monarchy. Here, then, was la raison, with all its uncritical belief in
progress, but without its irreligious and political fangs. Need I say that this
delighted court and society?

Again, agriculture held a central position in Quesnay’s program of economic
policy as well as in his analytic scheme. And this feature of his teaching, too,
fell in with the fashion of the hour. Just then everybody was raving about agri-
culture. This enthusiasm had two different sources that reinforced each other,
though they were really quite independent. First, the revolution of agrarian
technique gave a novel actuality to agricultural problems. It amounted to less
in France than it did in England, but it produced just as much drawing-room
talk in Paris as it did in London. Second, the illogical association of the nat-
ural rights of men with a glorified primitive state of society and the not less
illogical association of the latter with agrarian pursuits gave to agriculture a
drawing-room popularity that had, to be sure, no relation to Quesnay’s serious

2 It should be observed, however, that in Quesnay’s time and country there was per-
haps much practical wisdom in this. For in the actual situation of eighteenth-century
France, the reforms advocated by the physiocrats could have been carried (without revo-
lution) only by the strong hand of a despotic monarch. The hostility of the physio-
crats against ‘privilege’ of any kind was therefore not, as one might think, in contradic-
tion to their allegiance to monarchy but on the contrary the very reason for it.

23O II : BEGINNINGS TO ABOUT 1790

teaching but nevertheless blew wind into his sails. We have the picture if we
add one more touch. The dogmatizing doctor's apartment in the entresol of
the palace of Versailles was not far from the well of all preferment, Mme de
Pompadour’s suite. The ambitious on the lower rungs of the ladder could
hardly fail to perceive this fact, and some of them may have thought 1 that
an hour’s boredom in the former was a cheap price to pay for a good word
dropped in the latter. Marmontel was quite frank about this, and it is safe
to assume that he was not the. only one to make the discovery.

Such things do matter at all, times though different environments have dif-
ferent methods of favoring doctrines without absorbing, or caring for, their
real scientific import, if any. Expressed in terms of that particular environ-
ment, Quesnay’s success was primarily a succes de salon. Polite society talked
physiocracy for a time but very few people outside took much notice of it
except by way of sneering at it. There was thus a physiocrat fashion but there
was no physiocrat movement in the sense in which there was (and is) a Marxist
movement, especially not one rooted in agrarian class interests. But what about
the political influence of the physiocrats of which we read so much? What
about their historic role in combating privilege, abuses, and all the horrors
of protection? The reader would completely misunderstand the drift of the
argument presented, as well as the reasons why it was thought necessary to
present it, if he concluded from what has been said so far that this influence
should be equated to zero. No group so well disciplined and so bent upon
propaganda as the physiocrats were can fail to exert some influence. For in-
stance, such a group as our own League of Women Voters is a cog in our
political engine that no realistic analysis of our time can afford to neglect
entirely. The point is that the physiocrat group exerted this kind of influence
and no other, and that their importance as a motive power of politics was
small. A brief examination of Quesnay’s recommendations will establish this.

These recommendations may for our purposes be reduced to two: laissez-
faire, including free trade, and the single tax on the net income from land.
In order to arrive at a true estimate of Quesnay’s competence as a ‘practical’
economist, it is necessary with regard to both to distinguish doctrinal frills
from underlying common sense. Thus, Quesnay taught laissez-faire aiid free
trade as absolute norms of political wisdom. But these imperatives must be
viewed in the light of the physiocrats’ hostility to all kinds of privileges and
to a great many things that seemed to them to be abuses, monopoly positions
among others. Since these could not have been abolished without a good deal
of governmental ‘interference,’ Quesnay urged upon government what really
was an activist policy, and not at all one of doing nothing. Moreover, in spite
of his wholesale condemnation of government regulation or control, it is rele-
vant to observe that what he actually faced were regulations that were in-
herited from the past and no longer fitted current conditions: the absolute
norm of laissez-faire acquires in such a case a relative significance that differs
greatly from what its absolutism suggests. Finally, we must not forget that

THE ECONOMETRICIANS AND TURGOT

2 3 !

French agriculture in 1760 was not interested in protection: there was no
‘danger’ of large wheat imports as a normal phenomenon; and free trade in
agricultural products would have, if anything, increased their prices. We shall
presently discover reasons for doubting whether Quesnay would have been a
thorough-going free trader if he had written in 1890. Similarly, as regards his
single tax, we must distinguish the common-sense idea from the trappings
that made it an object of ridicule. To simplify and rationalize the French
system of taxation by basing it upon a tax on net income was evidently a
sensible idea. To base it exclusively on such a tax was a doctrinaire’s way of
putting this idea. To base it exclusively on a tax on the net rent of land was
Quesnay’s way of applying his theory that the net rent of land was the only
kind of net income in existence and that any tax must ultimately fall upon
it in any case. This theory may be untenable. Even if it were tenable as an
abstract proposition, its application to the practical question of taxation would
be indefensible because the mere presence of friction in the system would be
enough to produce net returns other than the rent of land. But the value of
the fundamental idea is not entirely destroyed by this particular twist. More-
over, the suggestion to tax the pure rent of land, in view of the fact that it
was then not directly taxed at all, carried sense whatever the frills in which
it was presented — sense that cannot be claimed for later proposals of a similar
nature, such as Henry George’s. The physiocrat contribution to public finance
in fact stands out well in the group’s textbook on it, Mirabeau’s T heorie de
Vimpot (1760). This work — Dupont called it ‘sublime’ — relieved the stress
upon the single-tax panacea by properly emphasizing the importance of ad-
ministrative reforms, of revenue from the domaine, the mint, the post office,
a special tax on tobacco production, and a salt tax: all of this helps to remove
the stigma of freakishness that has been put upon the impot unique.

But observe that there was nothing in the physiocrat general program that
was substantially new. The traditional assertion to the contrary may be traced
(1) to the understandable desire of historians of the group to protect its pri-
orities against A. Smith, in which they were, of course, quite right; (2) to the
optical illusion that will victimize any historian of doctrine who concentrates
his vision upon a particular group and pays inadequate attention to what lies
around and, historically, before it; (3) to Quesnay’s way of quaint and dis-
tinctive formulation, which separates his views from similar ones by over-
accentuated but all the same artificial dividing lines. Thus, the single-tax idea
was as we know an old one; if Quesnay can be said at all to have done some-
thing novel with it, then his contribution consists in his having given it that
particular twist which few of us will hail as an improvement. In matters of
free trade it may indeed be held that the physiocrats were the first group to
advocate unconditional free trade though they had been anticipated by in-
dividuals such as Sir Dudley North. But for us this is not important. Much
more important is it that as regards grasp of the scientific principles involved,
many of their contemporaries, including their professed enemies such as For-
bonnais, were their equals. It cannot be too often repeated that sponsorship

232 II: BEGINNINGS TO ABOUT I79O

of a particular practical conclusion proves nothing for or against a man’s in-
sight into economic causes and effects. In fact, if equality of insight be doubted
at all, the doubt should be raised against Quesnay. For ‘whole-hog’ positions,
though there are many other explanations for them, usually point to some
defect in insight rather than to the contrary.

Nevertheless, Quesnay’s views about the economic process and his policies
being what they were, it is of course possible to trace to him practically the
whole arsenal of nineteenth-century liberal argument. But all those ideas floated
toward nineteenth-century writers and politicians in a much broader stream,
in which the physiocrat element was but a small part. This also applies to the
politicians of the Constituante and of the Revolution in general. Nor is there
more justification for the claim that physiocrat influence was responsible either
for Turgot’s appointment or for his policy (see below, sec. 4). The only in-
stances of practical influence were the experiments with the impot unique
made by Karl Friedrich of Baden-Durlach and by Peter Leopold, Grand Duke
of Tuscany. However, it has been remarked already that Quesnay, if he got
rather more than his due as a patron saint of economic liberalism, has to this
day been receiving less than his due as a scientific economist, if we neglect
the glowing eulogies of his immediate disciples. Especially that kind of recog-
nition — the only serious one— that consists in the acknowledgment by com-
petent workers of obligation, or at least of priority, in definite points, has been
dealt out to him rather sparingly. One reason for this was that his analytic
work was little understood and that in consequence later economists actually
did not owe as much to him as one might think. Another was the presence
in his teaching of what people felt to be an element of oddity. In the case of
A. Smith both reasons seem to have been operative: almost certainly he did
not fully grasp the importance of the tableau economique ; quite certainly he
was overanxious to avoid associating himself with anything that was in any
way odd. Karl Marx was the only first-rank economist to give Quesnay his due.

[(c) Quesnay s Economic Analysis .] Recall Quesnay’s definition of Natural
Law. As soon as we realize all its implications we shall understand what those
historians mean who, pointing to a theological bent in Quesnay’s thought,
either deny the analytic character of his work or, if they go not quite as far
as that, at least hold that Quesnay’s religious beliefs must have been a factor
in shaping his economics. 3 There may be some truth in this as far as Quesnay’s
views on economic policy and his value judgments are concerned. But there
is no truth in this as regards his economic theory. It is not decisive of course
that Quesnay himself repeatedly claimed that he was faithfully describing
facts. 4 But application of our own test yields the same result and establishes

3 This point will stand out particularly if we compare Quesnay’s definition with
Montesquieu’s, whose natural laws are nothing but rapports necessaires qui derivent de
la nature des choses, a definition that cannot be commended too highly.

4 Two references may be useful: first, in the dialogue Du commerce (17 66), where
Quesnay expounds part of his. theory of capital, he invites his readers to visit farms
and factories in order to satisfy themselves of the realism of his theory; second, speak-
ing of the economic relations between classes he tells us: La marche de ce commerce

THE ECONOMETRICIANS AND TURGOT

2 33

the validity of that claim: the reader will presently see that no economic
proposition of Quesnay’ s rests upon any theological premisses or would be
affected by discarding what we know about his religious beliefs. This proves
ipso facto the purely analytic or ‘scientific’ nature of his economic work and
leaves no room for extra-empirical influences. Let us now consider briefly the
salient features of his theoretical set-up.

1. All reasoning on economic topics necessarily implies recognition of an
Economic Principle of some sort. Precisely because of this it is difficult to
say when and by whom such a principle was first formulated. But if we wish
to stress explicitness of formulation, then, I think, priority (as against the
Italians) belongs to Quesnay's rule of conduct: greatest satisfaction ( jouissance )
to be attained with the smallest expense or, as he goes on to say, labor-pain.
The importance of this rule or principle, considered as a contribution to formal
theory — or, as we may also call it, to the pure logic of economics — consists
primarily in bringing out the fact that the fundamental problem of that theory
is a maximum problem. The importance of the hedonist garb in which Quesnay
presented it consists in the fact that, considering dates,, it gives him a prom-
inent place in the history of utilitarian social philosophy: he certainly was
one of the founding fathers of utilitarianism though he did not state the
greatest-happiness principle in so many words.

But he also is the most important of all the founding fathers of. the doc-
trine that will henceforth be referred to as the Maximum Doctrine of Perfect
Competition (see A. Marshall, Principles , p. 531). That is to say, he held that
maximum satisfaction of wants for all members of society, taken together, will
result if, conditions of perfect competition prevailing, everyone be allowed to
act freely upon his own individual self-interest. This doctrine was taught
throughout the nineteenth century, unconditionally or with some qualifica-
tion, by most nonsocialist theorists of standing, including many who refused
to accept the utilitarian philosophy: serious, though at first very cautious,
criticism really starts with A. Marshall. All the more necessary is it to point
out how weak its foundations were from the first. The doctrine is of course
never strictly true under any circumstances. But, for certain historical environ-
ments, a case can be made out for it under assumptions that are restrictive
indeed, but not so restrictive as to deprive it entirely of practical value. The
point to which I wish to call the reader’s attention is, however, that Quesnay
did not make any attempt to prove it. It did not seem to him to stand in
need of explicit proof. He manifestly thought that if every individual strives
to realize maximum satisfaction, then all individuals will ‘of course’ achieve
maximum satisfaction. The fact that one of the best brains of our science
could have been content with such an obvious non sequitur is indeed food
for thought: low standards of rigor and sloppiness of thinking have been worse
enemies of scientific economics than has been political bias.

Observe, however, that the physiocrat slogan — ‘the interests of individuals

entre les differents classes et ses conditions essentielles ne sont point hypothetiques.
Quiconque voudray reflechir, verra qu’ils sont fidelement copies d’apres la nature. ..

! 234 II : BEGINNINGS TO ABOUT 179O

are the servants of the public interest' — is not per se open to our objection.
It may mean no more than that, as A. Smith was to put it, we owe our bread
not to the benevolence of the baker but to his self-interest, a pedestrian truth
which it is worth while to repeat again and again in view of the ineradicable
prejudice that every action intended to serve the profit interest must be anti-
social by virtue of this fact alone. A. Smith was careful not to build too much
on this. In particular, he was keenly aware of the antagonism between social
classes. But Quesnay went on, from asserting universal compatibility — or, in-
deed, complementarity — of individual interests in competitive society, to as-
serting universal harmony of class interests, which makes him the forerunner
of nineteenth-century Harmonism (Say, Carey, Bastiat). In this case, however,
we have an attempt at proof: the tableau economique shows how every class,
as it were, lives upon every other class, and in particular how the prosperity
of the landowners conditions the prosperity of the other classes. The proof —
which hails from Cantillon — is open to obvious objections and even to ridi-
cule, but nevertheless Quesnay’s harmonism does not simply hang in the air.
Nor is it necessary to appeal to belief in providential ordinance in order to
explain it.

11. Quesnay possessed a very comprehensive analytic schema, though he
presented it by means of disconnected sketches. Some parts of it, especially
those concerning population, wages, interest, and money, will come in for
notice in subsequent chapters. In order not to leave the present picture in-
complete, however, I shall indicate his positions on these subjects: his theory
of population anticipated that of Malthus in all essentials; his theory of wages

( centered in a minimum-of-existence proposition; his theory of interest may be
said to be almost nonexistent and he entirely failed to account for the phe-
nomenon; his theory of money, unlike Cantillon’s, was what we have decided
to label cartalist.

Barter and pricing he analyzed on strictly ‘subjective’ lines — basing his
theory resolutely upon the fact of consumers’ wants. This is of some impor-
tance — though he added nothing to the price theory of the late scholastics —
because his treatment of the problem (like Condillac’s) must be counted among
the influences that kept this theory alive in France: it points directly to J. B.
Say. There is, however, another point to be recorded in this connection. A.
Marshall may have been right in denying that the theory of consumption is
the scientific basis of economics. But it was certainly the basis of Quesnay’s
economics. ‘Liberal’ economists of the nineteenth century were in the habit
of commending eighteenth-century free traders, especially A. Smith, for having
duly emphasized the truth that consumption is the ‘sole end and purpose of
production’ and for having thereby abolished one of the ‘errors of mercan-
tilism.’ There is very little to this: the truth, so far as it is a truth, is trivial
and the error is largely imaginary. However, Quesnay also attended to con-
sumption in a different sense that would have been very little to the taste

THE ECONOMETRICIANS AND TURGOT 235

of those ‘liberal’ economists and is, if anything, suggestive of 'mercantilist'
lines of thought : 6 unlike Turgot and A. Smith, he made it an explicit con-
dition for the economic process to function smoothly that everybody should
promptly spend his net receipts upon consumers’ goods or, to use a phrase
that has gained currency in Washington in the last years, that everybody
should ‘utilize’ his income fully. If this were not done, he thought, and es-
pecially if some people saved in order to increase their individual stocks of
money , all classes would decay and total output would shrink, since anybody’s
refusal to spend necessarily destroys somebody else’s income. This ‘Keynesian’
aspect of Quesnay’s teaching will be considered later.

hi. Particularly significant as a creative contribution was Quesnay’s theory
of capital. Cantillon and other precursors notwithstanding,, he may be said
to have laid the foundations of this part of economic theory. The performance
is an interesting illustration of the way in which, in the mind of the born
theorist, analytic generalization may grow out of observation induced by pre-
occupation with practical problems. Quesnay’s agricultural program, which to
him was practically equivalent to the sum total of economic policy, was geared
to the needs of fairly large-scale farming: like Cantillon, he never considered
seriously any agrarian world other than one that turned on, and was propelled
by, the enterprise of an intelligent and active farming class in full possession
of all the technological and commercial opportunities of its time. These in-
telligent farmers he did not visualize as owners of their land, but as free from
all interference from landlords, from whom they would rent, for long periods,
large lots of land — cleared and equipped with buildings — in order to do with
them as they pleased. Commons should be dissolved and let to individuals
like the rest of the land; feudal rights and duties — in particular the right to
hunt on farm land — should be abolished; so should internal and external cus-
toms that hamper disposal of products, and taxes that discourage effort (one
of the practical reasons for the single tax that was to be paid by the landlord);
the countryside, as it were, was to dissolve into a swarm of prosperous enter-

6 Quesnay’s free-trade recommendations are, of course, responsible for the tradition
that put him into a position of uncompromising hostility to ‘mercantilist’ doctrine. We.
have seen, indeed, that even in those recommendations there is an element that dis-
tinguishes his free trade from the free trade of the nineteenth-century ‘liberals’; viz., the
emphasis upon the bon prix, the high price, of agricultural products. But in itself this
might be interpreted as an insertion, for reasons of political preference, of a practical
consideration into a doctrinal structure to which it was thoretically extraneous. Looking
more closely, however, we discover that there was more than that to the bon prix.
Unlike A. Smith, who carried the cheapness-and-plenty doctrine to victory (and there-
fore was, if we adopt Lord Keynes’s view, a victim of the ‘fallacy of cheapness’),
Quesnay sponsored, as a matter of analytic principle, the deamess-and-plenty view
(see below, ch. 6, sec. x). And this, taken together with the point to which I am
about to call attention in the text, makes him a brother in spirit, as far as analysis
and not policy is concerned, of writers that are usually classed gs ‘mercantilists’ and
distances him from the nineteenth-century writers who were to follow A. Smith and
from A. Smith himself, at least in one very important respect.

236 II : BEGINNINGS TO ABOUT 1790

prises, left to their own devices, selling at high prices, buzzing with energy
themselves, and energizing the whole of the national economy . 6

Now, if the reader visualizes this particular type of program, he will imme-
diately, see that its success presupposed fulfilment of three conditions: first,
that these farmer-entrepreneurs should actually buzz with energy, a condition
that Quesnay took lightly because, being a typical child of his age, he did
not attach much importance to the problem of innate qualities of personnel;
second, that this farmer’s paradise should not be undersold from abroad, a
condition about which, in eighteenth-century France, it was not necessary to
worry; and third, that there should be plenty of capital — cheap capital —
available for these essentially capitalist farmer-entrepreneurs. Quesnay did
worry about this last condition. He had every reason for doing so, because
his realistic studies, which went into all the details of the technology and
business policy of farming, had given him a true idea of what the capital
requirements of this kind of farming actually are. And it was from these in-
vestigations that, conceptualizing his findings, he developed his theory of
capital. The immediate result is embodied in his classification of the farmer’s
capital requirements into avarices foncikres, initial expenditures on clearing,
draining, fencfhg, building, and the like that do not recur at all or recur only in
long periods, avarices primitives, expenditures on equipment including cattle and
horses and the avarices arinuelles, the current expenditures on seed, labor, and
the like . 7

Quesnay did not bother much about generalizing these concepts: their ex- .
tension to include industry does not present any difficulty. But what do these
avances consist in? It is no doubt the drainage, buildings, oxen, ploughs, seed
and labor, and the like, that the farmer needs. A stock of goods and services,
then? But if so, what are we to do with the facts that ‘capital required’ or
‘capital invested’ is, at the very least, expressed in terms of money, and that,
as a matter of fact, it is also bought for money, which is really what landlord
(for the avances foncieres) and farmer need in the first instance? Quesnay ran
up against all the problems that lurk behind these questions, and his rudi-
mentary attempts at solving them may have been — even if they were not ac-
tually, for it is impossible to be certain about this — the starting points of all
further work upon them. We shall discuss below the reasons that have been
adduced for believing that A. Smith’s capital theory grew out of critical ab-
sorption of Quesnay’s, which would in fact make the latter the ancestor of

6 By way of supplementing what has already been said about the common sense
of much of Quesnay’s economic philosophy, it may be observed that a policy of this
kind seems indeed a more reasonable thing to recommend, in the domestic and inter-
national situation of France around 1750 or 1760, than throwing away means on
colonial ventures which, even if successful, would only provide prizes for the English
fleet, or on financial enterprise that might end as John Law’s had ended, or on mili-
tary establishments that might produce another Rossbach. This psychology of the
thoroughly disappointed nation that Quesnay was addressing must be understood.

7 There are in addition the avances souveraines, public expenditure on roads, et
cetera.

THE ECONOMETRICIANS AND TURGOT

2 37

practically all the capital theories down to J. S. Mill's. And since the man
who first tackles a subject will often throw out all sorts of suggestions that
point in many more directions than he himself is aware of, we might even
be tempted to trace back to Quesnay such later developments as are asso-
ciated with the names of Walras and Irving Fisher, on the one hand, and of
Jevons and Bohm-Bawerk, on the other. This, however, is hardly permissible,
for the logical possibility of doing so simply results from the rich and in-
definite possibilities — of truth as well as of error — that are enshrined in the
word avarices. Of course, no writer on economic subjects can ever have doubted
the simple fact that what 'capitalists’ do is to provide either goods or money
with which to start and carry on production; and 'capitalists’ themselves always
knew that what they were doing was to ‘advance’ money for these purposes.
But one of the fundamental types of analytic achievement precisely consists
in raising some simple fact (for example, that apples, severed from the branches
of the apple tree, will fall to the ground) into the light of theoretical con-
sciousness. This is what Quesnay’s contribution to capital theory consists in:
impressed by the fact that his farmer-entrepreneurs could not start upon their
careers unless they were provided with all sorts of things beforehand , he intro-
duced capital into economic theory as wealth accumulated previous to starting
the production under consideration. But more than this he did not do, and
widely divergent paths may open out from this starting point. In particular,
he did not analyze the formation and behavior of money capital as a thing
distinct from ‘real’ capital — a thing, moreover, that plays tricks of its own.
And he accepted the Janus-face of nonmonetary capital, which is value on one
side ( vaLeurs accumulees) and physical goods on the other, without straighten-
ing out the problems involved, particularly that of the carrying charges which
enter the value concept but do not enter the physical one.

rv. The third chapter of Book n of Marshall’s Principles opens with the
sentence, 'Man cannot create material things.’ This statement hails from J. S.
Mill and Rae and many earlier writers. Since economics is concerned with
the ‘creation’ or production of either utilities or market values, it is difficult
to see the relevance of such a statement, of which, in fact, none of those
writers ever made any use. But, as everyone knows, the physiocrats did put
it to analytic use: following Cantillon they derived from it their theory of
the produit net. This is the only reason why the subject crosses our path
again. For neither their statement of what they believed to be a physical fact
nor the philosophies in which they indulged in connection with it are in
themselves worth our while to discuss. Nor would there be anything par-
ticularly interesting in Quesnay’s terminological decision to call, on the strength
of that fact, agricultural activity ‘productive’ (the farmer’s activity, not that
of the farm laborer) and every other activity ‘sterile’ (which, of course, does
not mean useless), though it is precisely this which was felt to be odd and
attracted an undue amount of critical attention. Let us, however, observe that
it is really not so very odd to look upon an economy as an engine that is
fed materials drawn from the womb of nature and that simply works up these

238 II: BEGINNINGS TO ABOUT 1790

materials without adding to them: the only question that arises is whether
or not the analogy is useful. After what has been said on the subject in our
survey of Cantillon’s work, we can dispose of it quickly.

We have seen in that survey that the theory of Cantillon’s produit de la
terre — and Quesnay’s produit net is the same thing — is a method, though
certainly not the most correct or convenient one, of expressing the fact that
the rent of land is, or contains, a net return. But, as we have also seen, the
theory goes further than this. It holds that the rent of land is the only net
return in existence, and that it is coextensive with the whole of society’s dis-
posable net income, all other returns being balanced by cost items in the
sense that they are not more than sufficient to replace what production uses
up. The workman gets no more than is necessary to reproduce his ability to
work. The capitalist, taking account of risks, gets no more than is necessary
to replace his stock and his ability to work: labor, management, and capital
are 'sterile’ in the sense that, though they produce utilities, they do not pro-
duce any Surplus Value.

In general conception this theory bears a striking similarity to' that of
Marx. Exactly as Quesnay let land alone be productive of surplus value, so
Marx let. labor alone be productive of surplus value. Neither construction
allows any productivity to capital — meaning plant, equipment, and material
— which is indeed a conductor or embodiment of a surplus value created,
respectively, by land or labor but does not add to it. So far Marx’s theory
looks as if it were the result of switching Quesnay’s schema from one of
Petty’s two original factors of production to the other. There seems, however,
to be a fundamental difference between the two. Marx’s way of carrying out
his postulate of productivity’s being inherent in labor alone is, as we shall
see, open to objection. But, with him, labor’s productivity is from the first
a value productivity, and he attempted to show, on the basis of his law of
values, how surplus value emerges from the mechanism of competitive mar-
kets. Quesnay made no such attempt. His starting point was physical pro-
ductivity, that is, 'creation’ of stuff and not of values. He took it for granted
that the fact of physical productivity implied value productivity, and he shifted
in midstream from the one to the other. On the face of it, this seems to be
a definite error of which Marx was not guilty. But we have seen above that,
by means of suitable assumptions, it is nevertheless possible to make the
proposition that the rent of land is the only net return formally valid. And
this means in turn that if we grant these assumptions — which are, after all,
not much worse than those which it is necessary to grant in order to validate
the labor theory of value — it is possible to transpose Quesnay’s irrelevant argu-
ment from physical productivity into a relevant one from value productivity:
the scarce natural agent, by hypothesis operating in agriculture alone, produces
a value surplus over the other factors there employed, and manufacture adds
nothing to it because competition will reduce what it does add to the value
of the materials to the level . of the value of the agrarian products that the
manufacturers and their workmen consume. If we be grimly resolved to go

THE ECONOMETRICIANS AND TURGOT 239

through with this argument, even interest could be explained as a derivate
of the produit net . This would complete the analogy with Marx.

(d) The Tableau Economique. The analytic structure we have been survey-
ing is logically quite complete, and he who knows how to piece it together —
which Quesnay did not do — will not miss any of the essentials that go into a
comprehensive treatise on pure and applied economics. The over-all descrip-
tion of a stationary economic process which Quesnay embodied in his tableau
is not, as his pupils and practically all critics believed, the centerpiece of that
structure but an addition to it that is separable from the rest — painted, as it
were, on a separate canvas — and therefore can be dealt with separately. What
it depicts is the flow of expenditures and products between social classes, which
here become the actors in the economic play — which they are not in the rest
of Quesnay’s work.

Economists, of course, always had some schema of the class structure of so-
ciety at the back of their minds. Cantillon seeips, however, to have been the
first to construct such a schema explicitly and to use it as a tool of analysis.
This schema was adopted by Quesnay. Accordingly, he distinguished land-
owners [class e des proprietaires, or classe souveraine or, what is significant,
classe distributive), farmers ( classe productive), and all the people engaged in
non agricultural pursuits, roughly equivalent to the bourgeoisie ( classe sterile).
Labor may either be treated as a fourth class or added in proper proportions
to the second and third. The latter seems preferable in order to bring out the
nature of the schema, which is not so much a schema of classes as sociological
entities, but of economic groups of the kind we meet in the familiar statistics
of people ‘attached’ to, say, agriculture or mining or manufacturing industries.
In any case, however, labor plays an entirely ‘passive’ role with him exactly as
it did with Cantillon. The flow of expenditures and products, then, is between
a ‘farmer basin/ a ‘landowner basin/ and a ‘sterile-class basin.’ It is not neces-
sary to reproduce Quesnay’s picture of it or to enter into its details . 8 All the
reader needs to retain is this.

Suppose that in the unit period f-i the landowners have received and ac-

8 As already stated, the Tableau economique (‘picture’ would render the meaning
better than does the more usual ‘table’) was first printed in Versailles, 1758, with
much pomp and circumstance — Louis XV himself, so we are told, correcting the
proofs. This original, lost for over a hundred years, was recovered and reproduced in
facsimile for the British Economic Society (as the Royal Economic Society then was
called) in 1895 with a valuable introduction by H. Higgs, and has been repeatedly
reprinted since. But Quesnay himself published another simplified version in the
Analyse (see Oeuvres), which Dupont used in his Physiocratie. The reader finds a
translation of Quesnay’s commentary in A. E. Monroe’s Early Economic Thought.
Mirabeau, in the sixth Part of L’Ami presented a version of his own. There are thus
at least two tableaux (disregarding variants that differ but little), which not only use
different figures but also differ somewhat in theoretically relevant features. We shall
not, however, go into these matters. The best way to get the essential idea with a
minimum of trouble is to look up the excellent presentation by Shigeto Tsuru in
Appendix A to P. M. Sweezy’s Theory of Capitalist Development (1942).

240 II : BEGINNINGS TO ABOUT 1790

cumulated in many instalments the rent due them by the farmers, so that, at
the beginning of period t, they hold in cash all the net national income (in
Quesnay’ s sense) while everybody else stands ready to sell and to produce. We
are to follow the meanderings of that rent or net income through the economy.
Let its 'amount be 1000 units of money. The landowners, so we will further
assume, spend 500 of this on farm products and 500 on manufactures, the
products of the sterile class, that is, . the class that does not produce surplus
value. The 500 units that the farmers get back in this way (for these units
came out of their payments in f-i) are first of all doubled in their hands in
consequence of their surplus value-producing activity so that they swell up to
1000. Half of this then goes to the landlords for rent (not to be spent until
period t + 1), one quarter is 'consumed’ within the agrarian sector, the last
quarter goes to th,e ‘steriles’ in payment of manufactures for the farmers’ use.
The ‘steriles’ do not add any value but only reproduce it. Of the 500 they
received from the landlords, 250 units are absorbed by their and their work-
men’s consumption of their own products. For the other 250 they buy food
and raw material from farmers in whose hands these 250 again swell up to
500. And the same happens with the 250 and any later amounts they get from
farmers. Whatever the farmers receive is always doubled and used for payment
of rent to the landlords to be spent in period t + 1 for consumption in the
agrarian sector and for further purchases from the ‘steriles.’ It will be readily
seen that, if the length of the unit period be properly chosen, we shall find at
the end of it that the 1000 units of net income are back again in the hands
of the landowners, who will, at the beginning of period t+ 1, spend them
and so start the whole process again. The reader will realize that all this, apart
from the pictorial form, amounts to no more than a development in fuller
detail of Cantillon’s schema.® But what is the use of this picture, and what is
the nature of the analytic achievement it embodies?

It should be observed at the outset that so far as the idea of such a schema
is concerned the specifically physiocrat features in the Cantillon-Quesnay

9 The question how ‘credit’ should be distributed between Cantillon and Quesnay
is both difficult and, from the standpoint of the sociology of scientific invention and
scientific success, interesting. Cantillon no doubt felt the scientific need for some such
tool, had the idea of how to construct one, and actually pointed the way toward doing
so. If one of these three criteria for attributing inventions to individuals had been
absent, the case would be much easier to deal with: as it, is, Cantillon did for the
tableau method what both Newcomen and Watt did for the steam engine. Yet I frankly
confess to a reluctance toward attributing to Quesnay no more than the merit of
sharpening Cantillon’s concepts and putting results into the tableau form which puzzled
and attracted. Such deep understanding and wholehearted absorption of another man's
work is rare unless it is propelled by original perception of the same thing. Moreover,
as will presently be pointed out in the text, an essential part of the achievement was
the circuit-flow idea. It is tempting to assume that this idea came independently to
Quesnay, the physician, through analogy with the circulation of the blood in the
human body. William Harvey's (1578-1657) discovery of the latter was then a century
old but had lost nothing of its freshness (E xercitatio anatomica de motu cordis et
sanguinis, 1628).

THE ECONOMETRICIANS AND TURGOT 241

tableau are irrelevant. Having dealt with these already, we are therefore no
longer interested in the central position Cantillon and Quesnay assigned to
landowners and their expenditure: we could just as well start from one of the
two other 'basins/ Nor are we any longer interested in what was of primary
importance to Quesnay, namely the principle that every sum that goes to farm-
ers increases (doubles) in their hands and that sums that go to manufacturers
do not. Every analyst can arrange these points so as to suit his theoretical
set-up. What we are now interested in is the tableau idea considered as a tool,
the tableau method itself. Three aspects of it call particularly for attention.

First of all, the tableau method achieves a tremendous simplification. Ac-
tually the economic life of a nonsocialist society consists of millions of rela-
tions or flows between individual firms and households. We can establish cer-
tain theorems about them, but we can never observe all of them. But if we
replace them by relations between classes or by flows of class (or other) aggre-
gates, the unmanageable number of variables in the economic problem sud-
denly reduces to a few which are easy to handle and follow up. Reserving this
aspect for later discussion, we take the opportunity of noticing a cognate though
different point. A glance at the tableau suggests the idea of a Social Product
or Total Output that is produced in one series of steps and 'distributed’ in
another. We are so familiar with this idea that we rarely if ever realize how
very unrealistic an abstraction it is. Production and distribution are indeed dif-
ferent processes in a socialist society. But in capitalist society they are but
different aspects of one and the same process: the bulk of capitalist incomes
is formed in the course of the transactions that constitute production in the
economic, as distinguished from the technological, sense. Nevertheless, the
realistic idea of income formation — the realistic virtue of which moreover does
not carry any disadvantage that might justify its neglect — has come to the
fore only sporadically . 10 With the French economists, the physiocrat idea of
distribution prevailed throughout and the same holds true of English econo-
mists who adopted it, perhaps, under the influence of J. B. Say, at the begin-
ning of the nineteenth century. The concept of total annual output and its
value ( valeur de la reproduction annuelle) has, of course, its uses independently
of this. It was adopted by A. Smith.

Second, the simplification of the analytic pattern achieved by the tableau
method opens up great possibilities for numerical theory. Quesnay was more
alive to these possibilities than had been Cantillon and, in this particular re-
spect, he carried the latter’s work much further. He troubled himself about
statistical data and actually tried to estimate the values of annual output and
other aggregates. That is to say, he did genuinely econometric work. This
aspect, too, has acquired new actuality in our time through the great work of
Leontief , 11 which, entirely different though it is from Quesnay’s in purpose

10 The first to urge the case for income formation vs. distribution was, I believe,
E. von Philippovich (in the later editions of his textbook, Grundriss der politischen
Oekonomie, 1st ed., 1893-1907).

11 Wassily W. Leontief, The Structure of the American Economy (1941; new rev,
ed., 1951)-

2/|2 II: BEGINNINGS TO ABOUT 1790

and technique, nevertheless revived the fundamental principle of the tableau
method. Marx, who stands between the two, did not attempt to make his
schema statistically operative. 12

Third and most important, the Cantillon-Quesnay tableau was the first
method ever devised in order to convey an explicit conception of the nature
of economic equilibrium. It would seem impossible to exaggerate the impor-
tance of this achievement if admiring disciples had not actually succeeded in
doing so. Economics, like every other science, started with the investigation of
‘local’ relations between two or more economic quantities, such as the re-
lation between the price of a commodity and the quantity of it that
is available iri a market; in other words, it starts with Partial Analysis (see
below, Part iv, eh. 7, sec. 6). Disconnected efforts of this type were directed
toward points that happen to be of some practical interest or to attract our
curiosity for other reasons. It was but slowly that the fact began to dawn upon
analysts that there is a pervading interdependence between all economic phe-
nomena, that they all hang together somehow. We have seen that the best of
the seventeenth-century Discourses of Trade, such as Child’s or Pollexfen’s or,
still more, the writings of Davenant, display unmistakable symptoms of a
growing awareness of this. But they never bothered to investigate how things
hang together. They took it for granted and either were unable to raise this
interdependence to the plane of explicit formulation or did not see the neces-
sity for doing so. They were very far from realizing that this all-pervading in-
terdependence is the fundamental fact, the analysis of which is the chief source
of the additions that the specifically- scientific attitude has to make to the prac-
tical man’s knowledge of economic phenomena; and that the most funda-
mental of all specifically scientific questions is the question whether analysis
of that interdependence will yield relations sufficient to determine — if possible,
uniquely — all the prices and quantities of products and productive services that
constitute the economic ‘system. 7 I have said on a previous occasion that the
first discovery of a science is the discovery of itself. But this does not spell
discovery of its fundamental problem. That comes much later. In the case of
economics, it came particularly late. The scholastics had an inkling of it. The
seventeenth-century businessmen-economists came nearer to it. Isnard, A. Smith,
J. B. Say, Ricardo, and others all struggled or rather fumbled for it, every one
of them in his own way. But the discovery was not fully made until Walras,
whose system of equations, defining (static) equilibrium in a system of inter-
dependent quantities, is the Magna Carta of economic theory — the technical
imperfections of that monument of constitutional law being an essential part
of the analogy (see below. Part iv, eh. 7, sec. 7). The history of economic anal-
ysis or, at any rate, of its ‘pure 7 kernel, from Child to Walras might be written
in terms of this conception’s gradual emergence into the light of consciousness.

Now Cantillon and Quesnay had this conception of the general interdepend-
ence of all sectors and all elements of the economic process in which — so
Dupont actually put it — nothing stands alone and all things hang together.

12 On Marx’s reproduction schema see P. M. Sweezy, op. cit. Appendix A.

THE ECONOMETRICIANS AND TURCOT

4. Turgot

243

And their distinctive merit — shared, to some extent, by Boisguillebert — was
that, without realizing the possibilities of the method later on adumbrated by
Isnard, they made that conception explicit in a way of their own, namely, by
the tableau method: while the idea of representing the pure logic of the eco-
nomic process by a system of simultaneous equations was quite outside their
range of vision, they represented it by a picture. In a sense, this method was
primitive and lacking in rigor — which is, in fact, why it fell out of the running
and why analysis historically developed on the other line. But in one respect
it was superior to the logically more satisfactory method; it visualized the (sta-
tionary) economic process as a circuit flow that in each period returns upon
itself. This is not only a method of conveying the fact that the economic proc-
ess is logically self-contained, a distinct thing that is complete in itself, but it is
also a method of conveying features of it — definite sequences in particular —
that do not stand out equally well in a system of simultaneous equations. Of
course, there is also the simplification of the theory of general equilibrium
adverted to already: Quesnay identified general equilibrium, that is, equilibrium
in the economy as a whole in distinction to the equilibrium in any particular
small sector of it, with the equilibrium of social aggregates — exactly as do the
modern Keynesians . 13

Although Turgot was no econometrician, his great name has been assigned
this place in our gallery because he is so often classed with the physiocrats,
though mostly with qualifications. At first sight, this seems reasonable enough,
for his main work abounds in passages that are evidently intended to empha-
size allegiance to specifically physiocrat tenets. We read that land is the only
source of richesses; that the cultivateur produces not only his own compensa-
tion but also the income that serves to remunerate the class of artisans and
other stipendies; that the farmer’s activity is the prime mover of the social
engine, whereas the manufacturer’s only transforms; that the farmer supports
and feeds all other classes; and so on. But, if we look more closely, we make a
surprising discovery. Those passages are then seen to be strangers to the argu-
ment into which they are inserted. We can suppress them without affecting
the rest. In fact, the rest gains in consistency thereby. Therefore, if we ad-
here to a principle that is uniformly applied in this book to the interpretation
of such professions of faith, namely, the principle of relevance to analytic pro-
cedure and results, we have no choice but to neglect those passages. What are
we to think of this? First of all, commonly accepted rules of criticism would
lead us to suspect those passages if we were dealing with an ancient text. And
it so happens that in this particular case such distrust is not completely un-
warranted. For we know that there was a not quite amicable discussion between
Dupont and Turgot on the subject of the publication of the latter’s manu-
script, and we do not know exactly what the result was. However, I will waive

18 See in particular Joan Robinson, ‘The Theory of Money and the Analysis of
Output,’ Review of Economic Studies, October 1933.

244 n: BEGINNINGS to about 1790

this point. But quite independently of it, there is, considering what we know
of Turgot's generous character, no difficulty in understanding why, writing for
publication at that particular time, he should have gone out of his way to
pay respect to a group with which he agreed on many points of scientific eco-
nomics — from which he had, perhaps, learned a good deal, for example, in
matters of capital theory — and with which he agreed wholeheartedly on all
the immediately practical points of economic policy, though he disagreed with
them on some points of their political philosophy. According to this hypothesis,
which puts him, morally, high above all those who emphasize points of dif-
ference in order to distance themselves from fellow workers to whom they
owe obligation, he should not be classified as a physiocrat with reservations,
but as a nonphysiocrat with physiocrat sympathies. This seems, in fact, to
meet the case.

We went to the trouble of disentangling Turgot from the physiocrats not
only in order to make his figure stand upon its own pedestal, as it should, but
also in order to put this pedestal into the right place. For more closely than
with the physiocrats was he associated with another group, if 'group' is the
word for a very loose connection that was no school in the proper sense of the
term. It centered in a strong and influential man, who was no doctrinaire,
however, and no exponent of any 'system' — Gournay . 1 This fact throws

1 Jacques C. M. Vincent de Gournay (1712-59) was a bourgeois businessman (the
'de Gournay' came from an estate that was left to him by a business connection) who
later in life made himself a public servant by the purchase of the office of intendant
of commerce. He was an altogether superior sort of person of a type that is rare
outside England. But his great services to economics are by no means easy to char-
acterize. They are not embodied in publications (he wrote reports, though, and also
notes to translations of English economic works). Nor are his letters and various utter-
ances (one of which has become famous: laissez faire, laissez passer has been attributed
to him) adequate to convey what he means to the history of our science. We know
pretty well his role in shaping opinion on economic policy by exerting formative influence
upon some of the best minds of the age, and we also know in a general way what it was
he advocated: relaxation of the fetters of public control, moderate protection, and
that sort of thing. But we can only sense, or reconstruct from a few indications, the
formative influence upon analytic work. He appointed himself, as it were, tutor to
his friends, whom he knew how to choose and, like a good tutor, he effaced himself
in order to give stimulating pointers to other people’s teaching. His two provable
claims to our gratitude are his successful propaganda for Cantillon’s work and his
contribution to Turgot’s education as an economist. But below these two peak achieve-
ments there must have been broader middle ranges. In the highest sense of the word
Teacher, this man who never taught in the technical sense may have been one of the
greatest teachers of economics that ever lived. Therefore it seems that the traditional
place that practically every textbook on the history of economics or economic thought
accords to him is well merited, however slender the direct evidence that justifies it.
The whole literature on physiocracy deals with him. G. Schelle’s Vincent de Gournay
(1897) is still the standard work. See also Turgot’s ‘£loge de Vincent de Gournay’ in
the latter’s Oeuvres, and A. Oncken’s Die Maxime: Laissez faire et laissez passer . . .
(1886).

THE ECONOMETRICIANS AND TURGOT

245

much light on Turgot's background as an economist, Goumay had traveled
extensively and was an intelligent observer of English developments. Much of
what we know about his views has a distinctly English flavor. And among his
writings are several translations, in particular one of Child’s New Discourse.
Turgot was his personal friend and was also interested in the works of English
economists, especially Hume and Josiah Tucker, whom he translated. If the
obvious inference may be trusted, we have here an instance of the way in
which not only political but also scientific ideas crossed and recrossed the
Channel. The possible filiation Child-Hume-Turgot is particularly interesting —
still more so in case we have to add the name of A. Smith after that of Turgot. 2
In the French part of his background, the most important figure is Cantillon.

Turgot's brilliant achievements, his unchallenged place in the history
of our science, and his evident title to membership in the triumvirate in
which Beccaria and A. Smith are his colleagues are sufficient reasons why
it is desirable to look for a moment at the man and his career. Anne
Robert Jacques Turgot, Baron de 1 ’Aulne (1727-81; referred to, by his
contemporaries, as M. de Turgot; before 1750, he was known as Abbe
de Brucourt), came from a Norman family that was of old, if not high,
nobility and fairly well to do, if not rich. The sociological type is rendered
by the English word ‘gentry’ and by the German word ‘Junker.’ He was,
as a third son, educated for the Church, and this clerical education,
which gave full scope to his brilliant and precocious gifts, ought to re-
ceive recognition, though it usually does not, in an enumeration of the
factors that made for his achievements. He emerged full of great plans
and master of wide horizons (scientifically and otherwise) as an abb6 at
the Sorbonne, where he became quite a figure, writing, discussing, ex-
periencing the second formative influence of his youth, thait of the
‘secte encyclop6diste,' though he very soon moved away from it. Then
he exchanged the career of churchman for the civil service, and a civil
servant he remained for the rest of his active life. The bureaucracies of
all times and countries may be proud of him, for not only was he an
ornament of the French bureaucracy of the ancien regime, but this bu-
reaucracy also was the third of the environmental influences that helped
to form him. He was a great success as intendant (general administrator)
of the district (generalite) of Limoges, 1761-74, where his zeal, resource-
fulness, and public spirit showed up to best advantage. On the strength
of this success he was appointed, in 1774, Minister of the Navy and, a
few months later, Contrdleur General des Finances (which means Min-
ister of Finance and Commerce and Commissioner of Public Works), a
position he held for twenty months, much of the time tortured by gout.
After his fall, he lived in retirement until his death.

Except for the just pride we economists may take in so brilliant a fel-
low worker, the main importance of this career for a history of economic

2 See below, ch. 6, sec. 6.

246 ii: beginnings to about 1790

analysis is that it explains why Turgot's scientific work did not come to
full fruition. Biographers and historians of economic thought, however,
have always allocated most of their space to his exploits as a minister of
finance and, in dealing with them, have propagated two sagas that have a
bearing upon the sociology of our science and must therefore be briefly
noticed. Before doing so I wish, however, to disclaim any intention of
‘debunking’ the fame of one of the none too numerous significant fig-
ures of which the history of economics can boast: it goes without saying
that nobody would think of writing a volume on Great Ministers of
Finance without including Turgot. The first of those sagas might be en-
titled: ‘The Economist in Action.’ It depicts the man who, from scien-
tific analysis, derives recipes for curing the ills of the state and, on at-
taining power, rushes to carry them into effect. There is nothing what-
ever in this. Turgot was, first and last, a great civil servant, who looked
upon state and society with the eyes of a civil servant. So, when he at-
tained cabinet office — ‘power’ would be a misleading term to use — he
set about to improve the financial administration and the all but des-
perate situation of the royal finances. In both these respects he succeeded
remarkably — in fact almost unbelievably — well, and these were his main
achievements. He also established, by royal decree, internal free trade in
grains and — the only other measure relevant for us — abolished the
jurandes, the craft guilds. These and some minor measures were not
successes in the political sense mainly because of his failure to consider
tactical aspects: they immediately elicited violent resistance, the one con-
cerning the grain trade through a piece of bad luck — its coincidence with
a bad harvest. The point to be observed is, however, that nothing Turgot
actually did or showed any intention of doing has any particular relation
to any doctrine, scientific or other. It was all in the line of an unusually
able civil servant who perceived the currents of his time and tried to
serve them in a practical spirit. He was so little given to obeying abstract
principles — which of course is all to his credit — that, in one instance, he
actually introduced a protective duty, and, in another, embarked upon
state enterprise (in the chemical industry). The physiocrats applauded
him, of course, and made propaganda for him, but they had little to do
with his policies and nothing to do with his advent to office, for in 1774
they were in no position to exert any influence. By the same token, his
fall was not a defeat of any doctrine that was specifically their own.

The other saga derives from the saga of the French Revolution. Since
most of the writers on Turgot were and are in sympathy with the latter,
they were and are inevitably driven to exalting into heroes that fought
for the light in the darkness of despotism’ a chosen few of the servants
of the ancien regime. Turgot is the chief beneficiary of this tradition that
was initiated by the revolutionaries themselves, who, even officially, some-
times referred to Turgot as ce bon citoyen. And some writers have added
the touch that Turgot was raised to office by the voice of the people and
dismissed at the behest of an intriguing court. As a matter of fact, Turgot

THE ECONOMETRICIANS AND TURGOT

247

was appointed Controleur by a thoroughly well-meaning monarch who
looked around among his bureaucrats for the best man for the job. If
there was any other influence, it was that of the Minister de Maurepas.

As soon as he was . in office Turgot, no doubt with the most meritorious
intentions, began to lean heavily on the royal prerogative. Now it is very
easy, when a minister is supported by a monarch, to draw up excellent
decrees and to force them down the throats of parlements who refuse to
register them. The difficulty, since government is carried on among living
people and group's, is to make those decrees accepted. Louis XVI at first
lent his wholehearted support, but the trouble with him, who had many
good qualities, was precisely that he was no despot and quite unwilling
to use force. And though Turgot was also the target of court and other
intrigues — of the former, mainly owing to his policy of retrenchment — it
was the popular resistance of the rural proletariat and of craft guilds that
became after a time the dominant factor of the situation: there were
even local revolts which Turgot suppressed with a firm hand. It would
not be true either, but it would be nearer the truth than is the opposite,
to say that Turgot was raised to ministerial office by the king and over-
thrown by the people. For our purpose, the relevance of this is in the
light it sheds on the personality of one of the greatest scientific econo-
mists of all times. The interpretation submitted makes the king come off
better than does the usual one but, what alone matters here, it does not
make Turgot come off worse. It only makes him come off differently.
We see the excellent civil servant who is a good administrator and (per-
haps) adviser but no leader or tactician. We also see honesty and firm-
. ness (quite as much as do other interpreters) and (what does not, perhaps,
impress these other interpreters quite as much) loyalty to his king. The
answer to the academic question that has been raised, whether or not,
had he stayed in office, he might have prevented the Revolution, de-
pends on what we mean by revolution. If we mean the overthrow of
the monarchy and the sanguinary excesses, the answer should be in the
affirmative: no more, however, because of the reforms he might have
carried in that case than because of his willingness to call out the troops.

No cap of liberty will fit Turgot.

His chief work, the Reflexions sur la formation et la distribution des richesses, was
written for the benefit of two Chinese students in 1766, and published (as has been
stated above, not without some friction that arose from Dupont’s attempts at edi-
torial interference, presumably made in the interest of physiocrat orthodoxy) in the
Ephemerides (1769-70; English trans. 1898). Of minor publications that usefully sup-
plement this work, the most important are the Eloge de Goumay, the letter on paper
money to the Abbe de Cic6 (his first economic publication, 1749), the observations
on the essays by St.-Peravy (1767) and Graslin (1767) on indirect taxation, and a
paper on loans of money (1769). His contributions to the Encyclopedic, including
such topics as 'existence,’ ‘expansibility,’ and ‘etymology,’ and his criticism of Berkeley’s
philosophy — and many others— are interesting as so many proofs of the breadth of
his range. The Oeuvres of Turgot were edited by Dupont de Nemours (1808-11) and

248 II: BEGINNINGS TO ABOUT I79O

again by G. Schelle (1913-23), the latter edition being the one to use. L6on Say’s
Turgot has been translated into English by M. B. Anderson (1888). Also see Alfred
Neymarck, Turgot . . . (1885); S. Feilbogen, Smith und Turgot (1892); W. W.
Stephens, The Life and Writings of Turgot (1895); and especially G. Schelle, Turgot
(1909).

If we now try to compare Turgot’s scientific personality with those of Bec-
caria and A. Smith, significant similarities strike us first: all three were poly-
historic in learning and range of vision; all three stood outside the arena of
business and political pursuits; all three displayed single-minded devotion to
the duty in hand. Turgot was undoubtedly the most brilliant of the three,
though his brilliance was somewhat tinged with superficiality, not in econom-
ics, but in his outlying intellectual domains. The main difference, from the
standpoint of their scientific achievement, is that A. Smith expended very
little of his energies on nonscientific work, Beccaria very much, and Turgot,
from 1761 on, almost all he had. During the thirteen years at Limoges, Turgot
can have had but scanty leisure; during his (nearly) two years of ministerial
office, practically none: his creative work must have been done between the
ages of 18 and 34. And this explains all there is to explain, not indeed about
the comparative merits of the three works in question, but about the differ-
ent degrees to which they were finished works at all.

Turgot was much too able a man to write anything insignificant. Neverthe-
less, only the Turgot specialist needs to go beyond the Reflexions , and with
one exception we shall confine ourselves to this. The slender work was evi-
dently written in hot haste and never thoroughly revised. It looks as Marshall’s
Principles worild look if text, notes, and appendices were destroyed and only
the marginal summaries — and not all of those — were preserved. In fact, it is
not much more than a very elaborate analytic table of contents written for a
bulky but nonexistent treatise. Such as it is, however, Turgot’s theoretical
skeleton is, even irrespective of its priority, distinctly superior to the theoretical
skeleton of the Wealth of Nations. In order to arrive at this opinion, it is not
necessary to impute to Turgot anything he did not actually say or to credit
him with any implications of what he did say that he may possibly not have
seen himself. He actually delivered the goods. In calling the work unfinished
or a skeleton, I do not mean to say that there is need for uncertain conjecture
or generosity of interpretation in order to finish it. It presents a complete
system of economic theory. What is lacking any competent economist could
supply without adding (except criticism) from his own stock of knowledge.
Of course, nobody admires the Wealth of Nations for its theoretical skeleton
alone. It owes its position to its mature wisdom, its luxuriant illustrations, its
effective advocacy of policies. And there is, also, something to be said for the
ponderous creation of the academic professional: it was the product of patience,
of meticulous care, of self-discipline — and we cannot be sure that Turgot
would ever have produced something comparable to it, even if he had had all
the leisure in the world. Still, a lesson does follow from the very different suc-
cess of both works: in economics, at least, intellectual performance is not
enough; finish counts; and so do elaboration, application, and illustration; even

THE ECONOMETRICIANS AND TURGOT 249

now the days are far off when it will be possible, as it is in physics, to shape
international thought by an article that covers less than one page. Turgot’s
contribution fared as well as it did because of his eminence in another walk
of life. Even so it never bore the fruits that it easily might have borne.

Since the only satisfactory way of summarizing that summary is to tran-
scribe it, and since, moreover, the most important points will be touched
upon in subsequent chapters, only a few general comments will be offered
here instead of a Reader’s Guide. Roughly the first third of the treatise — the
first 31 sections 3 — presents the groundwork including the Cantillon-Quesnay
schema of classes and an analysis of their relations in production and distribu-
tion that is splashed with physiocrat colors. Certain fundamental propositions,
like the proposition that competition always reduces wages to the minimum-
of-existence level, are insisted on from the first. Sections xxxii-l contain a theory
of barter, price, and money that, so far as it goes, is almost faultless, and,
barring explicit formulation of the marginal principle, within measurable dis-
tance of that of Bohm-Bawerk. The rest of the treatise is devoted mainly to
a capital theory that anticipates most of the nineteenth-century work, and to
the subjects of interest, saving and investment, and capital values. Originality in
individual points is difficult to assert or to deny, the more so because Turgot
does not quote — which is no reproach in the case of such a sketch. But com-
prehensive vision of all the essential facts and their interrelations plus excel-
lence of formulation are in evidence to a degree that would make the whole
of the work an original contribution even if no individual point had been ex-
clusively Turgot’s own. And there are practically no definite errors to be
found in this first of all the treatises on Value and Distribution that were to
become so popular in the later decades of the nineteenth century. It is not too
much to say that analytic economics took a century to get where it could have
got in twenty years after the publication of Turgot’s treatise had its content
been properly understood and absorbed by an alert profession. As it was, even
J. B. Say — the most important link between Turgot and Walras — did not
know how to exploit it fully.

3 [Apparently, the numbering of the sections in the Schelle edition of the Oeuvres
differs slightly from the original version in the itphemerid.es where one (or more) of
the sections was suppressed. See ch. 6, sec. 7, n. 5.]

CHAPTER 5

Population, Returns, Wages, and Employment

1. The Principle of Population 250

[(a) The Populationist Attitude ] 251

[(b) Growth of Factual Knowledge ] 253

[(c) Emergence of the ‘Malthusian’ Principle] 254

2. Increasing and Decreasing Returns and the Theory of Rent 258

[(a) Increasing -Returns ] 258

[(b) Decreasing Returns: Steuart and Turgot] 259

[(c) Historical Increasing Returns] 262

[(d) Rent of Land] 263

3. Wages 266

4. Unemployment and the 'State of the Poor’ 270

1. The Principle of Population

The problems of population, that is to say, the questions what it is that
determines the size of human societies and what the consequences are that
attend the increase or decrease in the number of a country’s inhabitants, might
well be the first to occur to a perfectly detached observer as soon as he looks
at those societies in a spirit of scientific curiosity. The view that the key to his-
torical processes is to be found in the variation of populations, though one-
sided, is at least as reasonable as is any other theory of history that proceeds
from the prejudice that there must be a single prime mover of social or eco-
nomic evolution— such as technology, religion, race, class struggle, capital for-
mation, and what not. Thus it is quite understandable that population prob-
lems should have received attention in the very beginnings of economic anal-
ysis; that they should have loomed large in the thought of all leading writers
of the period under discussion; and that they should have been given a place
of honor in the one great pre-Smithian system of economics that England
produced. Sir James Steuart’s Principles.

But there was also a practical reason for this prominence of population
problems. Ever since primitive tribes had solved theirs by abortion and in-
fanticide, people in general and social philosophers in particular never ceased
to worry about them. Roughly speaking until the end of the sixteenth century,
the trouble arose from a relation between birth rates and death rates that was
incompatible with stationary or quasi-stationary economic environments: the
problem of population was one of actual or threatening overpopulation. It was
from this angle that it presented itself to Plato and Aristotle. The opposite
type of trouble was quite exceptional — the outstanding example is the decay
of the native Roman stock in the last century of the Republic and throughout
the epoch of the Empire. In the Middle Ages the dwelling places of the lower
stratum of the warrior class, the simple knights, suffered from overcrowding

250

POPULATION, RETURNS, WAGES, AND EMPLOYMENT 251

whenever there were no crusades, wars of the Roses, epidemics, and so on to
reduce numbers; and the artisans' guilds offered livelihood for restricted num-
bers only and experienced perennial difficulties with ever-lengthening ‘waiting
lists/ But all this changed during the seventeenth and eighteenth centuries.
We have seen that the practical economic problems of those centuries were
the problems of countries that were poor in goods but rich in possibilities.
Seen against these possibilities, the population problem became one of under-
population. Moreover, some countries, particularly Germany and Spain, had
actually experienced depopulation for decades together . 1 And, as we have also
seen, these conditions prevailed when ideas of national or territorial power and
expansion filled everybody’s thought and heart.

[(a) The Populationist Attitude .] Accordingly, governments began to favor
increase in population by all means at their command. Measures differed from
time to time and from country to country but were in some cases — for instance
in France under Colbert — as energetic as any that have been resorted to by
modern dictators. Economists fell in with the humors of their age. With rare
exceptions they were enthusiastic about ‘populousness’ and rapid increase in
numbers. In fact, until the middle of the eighteenth century, they were as
nearly unanimous in this ‘populationist’ attitude as they have ever been in
anything. A numerous and increasing population was the most important
symptom of wealth; it was the chief cause of wealth; it was wealth itself — the
greatest asset for any nation to have. Utterances of this kind were so numer-
ous as to render quotation superfluous. In England, in particular, the first-flight
men who go on record as leaders of populationist sentiment, such as Child,
Petty, Barbon, Davenant, were joined by almost all the rank and file . 2 That
German and Spanish writers went further than any others is amply explained
by the conditions of their countries. Since Italy had a comparatively dense
population and was least favored as regards opportunities for national expan-
sion, the Italian economists went less far in this direction and, later on, less
far in the opposite one than did their English and French brethren. As always,
the one question that interests us is: what was the economic rationale of all
this, if indeed economic analysis had anything to do with it at all? The answer
should be obvious. The analytic complement of the populationist . attitude
boils down to one proposition: under prevailing conditions , increase in heads

1 German and especially Spanish writers may have exaggerated the extent to which
there was depopulation. The fact itself is nevertheless beyond doubt.

2 Most of those writers came within the traditional category of ‘mercantilists,’ who
as a group have been charged with the famous ‘confusion’ between wealth and money
or gold and silver which will have to be noticed later on. It is interesting to note,
therefore, that some of the writers who seem to be most guilty of that confusion,
such as the author of Britannia Languens (W. Petyt), at the same time ‘confuse’
wealth with size of population. That author, for instance, expressly stated that ‘people
are . . . the chiefest, most fundamental, and precious commodity.’ Should not this
make us pause before we take either of these ‘confusions' too literally? But there were
also dissenting voices. One of the earliest of them was that of Malynes, who already
pointed to the ‘positive checks’ that increase would eventually bring into operation.

252 U: BEGINNINGS TO ABOUT 179O

would increase real income per head. And this proposition was manifestly
correct.

With unimportant exceptions, these conditions did not substantially change
in the eighteenth century or even in the first decades of the nineteenth. There-
fore, it is quite a problem to explain why the opposite attitude — which might
be called anti-populationist or, to associate it with the name of the man who
made it a popular success in the nineteenth century, Malthusian — should have
asserted itself among economists from the middle of the eighteenth century
on. Why was it that economists took fright at a scarecrow! The first step to-
ward a solution of this problem is to localize the emergence of the Malthusian
attitude. German and Spanish economists were not afraid of the scarecrow.
In fact there never was any native Malthusianism either in Germany or Spain:
such Malthusianism as there ever was in those countries was the product of
English teaching during the first half of the nineteenth century. The Italians,
as stated above, had some real reason to be (mildly) frightened, and were. But
the cradle of the genuinely anti-populationist doctrine was France. The second
step toward a solution is therefore to find out whether there was not some-
thing in the economic and political situation of France that might, 'objective'
opportunities notwithstanding, suggest pessimism as regards the economic fu-
ture of the country and thus explain that change in attitude. As a matter of
fact, there was. During practically the whole of the eighteenth century France
was fighting a losing battle with England. Many of her leading spirits began
to accept this defeat by 1760 and to discount the opportunities for national
expansion. Moreover, the outworn institutional pattern of the last half cen-
tury of the monarchy was not favorable to vigorous economic development at
home. Thus, thought turned from bold venture to the possibilities offered by
agriculture, from dreams of evolution to the picture of a 'mature' or quasi-
stationary economy. The third and final step, then, is to explain why anti-
populationist sentiment gained a hold on the English mind in spite of the fact
that exactly the opposite state of things prevailed in England. In order to un-
derstand this we have to realize that the long-run trend of an evolution is one
thing, and the sequence of short-run situations through which it fights its way
is quite another thing. Thus, the English populationists of the seventeenth
and eighteenth centuries may have been quite right in considering rapid in-
crease as motor, condition, and symptom of economic development, and
equally right in worrying at the same time, as most of them actually did, about
the short-run vicissitudes, the unemployment in particular, which accompanied
that development; this does not convict them of contradiction either in their
analysis or in their recommendations. But in the Industrial Revolution of the
last decades of the eighteenth century, these short-run vicissitudes grew more
serious than they had been before, precisely because the pace of economic
development quickened. And some economists — as will be pointed out in a
moment, a minority only — were so impressed by them as to lose sight of the
trend. The resulting anti-populationist mood then produced the set of analytic
propositions that came to be known, in the nineteenth century, as the Mai-

POPULATION, RETURNS, WAGES, AND EMPLOYMENT 253

thusian principle or theory of population. Before considering its early history,
we must attend to another matter.

[(b) Growth of Factual Knowledge .] In the United States the first census
was taken in 1790; in England in 1801. In Canada and in some countries of
continental Europe there had been earlier ones, but it was only in the first
decades of the nineteenth century that reliable information about the nu-
merical facts of population became available at regular intervals. The writers of
the seventeenth and eighteenth centuries, therefore, theorized about popula-
tion in ignorance of statistical facts. All they had to go on, if we except the
rare cases in which local observation yielded definite results, were untrust-
worthy indications and vague impressions: thus, it was possible for English
writers to disagree on such a question as whether the English population had
increased or decreased during the century between 1650 and 1750. Hence, the
investigations that were undertaken in order to dispel this fog and the resulting
controversies exemplify a peculiar type of theory. Ordinarily, theoretical anal-
ysis is concerned with facts that are, or are supposed to be, known : it marshals,
interprets, explains, establishes relations between, and generalizes from given
facts or ‘data/ This, of course, is also what the theory of population was to do
in the nineteenth century. But in the seventeenth and eighteenth centuries,
the main task of research on population was not to analyze given facts but, so
far as possible, to find out what the facts actually were: it was the kind of
theory that, unlike other kinds, retreats before advancing factual knowledge
and must eventually be replaced by it. But the work done by those investiga-
tions — first by the Political Arithmeticians — also laid the foundations of the
later theory of population. For many of the considerations that were originally
developed in order to form an idea of the facts, served later on to interpret
them. This is why examples of those controversies are presented below.

Sir William Petty’s Essay concerning the Multiplication of Mankind
(2nd ed. rev. and enl., 1686) is the standard example of seventeenth-
century speculation about the facts. Sir Matthew Hale’s Primitive Origi-
nation of Mankind (1677; partly republ. in 1782 under the title of Essay
on Population; on the author see J. B. Williams, Memoirs of the Life ,
Character and Writings of Sir Matthew Hale , 1835) may also be -men-
tioned. Both authors infer facts, on scanty observations, mainly from
‘laws’ derived from general considerations.

Of eighteenth-century controversies we shall first notice one that arose
from Montesquieu’s statement in the Lettres persanes that the ancient
world was more populous than was the Western world of his time. In his
essay ‘Of the Populousness of Antient Nations’ ( Political Discourses ,
1752), Hume proffered reasons for the opposite opinion that were criti-
cized by Robert Wallace in the Appendix to his Dissertation on the
Numbers of Mankind (1753), in which he upheld Montesquieu’s thesis.
Wallace found a follower in William Bell, who expanded the discussion
on numbers into a discussion of causes and effects: in his dissertation
W hat Causes principally Contribute to Render a Country Populous?

II; beginnings to about 1790

And what Effect has the Populousness of a Nation on its Trade? (1756)
he presented the theory that the development of manufacture and trade,
by diverting resources from the production of foodstuffs, tends to pro-
duce a decrease in population (which he took to be a fact and of which
he disapproved); accordingly, he advocated fostering agriculture and an
equal distribution of land among farm families. This tract called forth
another, A Vindication of Commerce and the Arts (1758) by W. Temple
(a clothier, not to be confused with Sir William Temple, the seventeenth-
century statesman and writer). No great importance attaches to either
Bell’s or Temple’s works. They are mentioned here because of a similar
discussion on a similar subject that took place half a century later and is
much better known: opinions not unlike those of Bell, having been re-
asserted by Thomas Spence, elicited a reply by James Mill that estab-
lished his reputation as an economist.

Another controversy was more interesting. In 1779, Richard Price,
now mainly remembered on account of his proposal to establish a sink-
ing fund that would extinguish the national debt, published an Essay on
the Population of England in which he stated that population had de-
creased by one-fourth since the revolution of 1688 and that urban ag-
glomeration was responsible for it. Naturally this was attacked by a
number of writers, especially by W. Wales (An Inquiry into the Present
State of Population in England and Wales, 1781), John Howlett ( Exam-
ination of Dr. Price’s Essay . . . 1781), and others, A. Young among
them. Howlett’s contribution is the most interesting one, not only be-
cause it is a good example of the art of reasoning on inadequate facts
1 but also because, like Bell, he launched out into an analysis of related
economic phenomena. In particular, he interpreted enclosures as a conse-
quence of the increase in population and as a ‘cause’ of some of those
improvements in agriculture that were called for because of that increase
— a theory in which there was an important element of truth.

[(c) Emergence of the ‘Malthusian’ Principle .] The theory of population as
understood in the nineteenth century, however, that is to say, a theory of the

factors — or ‘laws’ — that determine numbers and rates of increase or decrease, \

emerged much earlier than that. 3 Divested of nonessentials, the ‘Malthusian’ I

Principle of Population sprang fully developed from the brain of Botero in
1589: populations tend to increase, beyond any assignable limit, to the full
extent made possible by human fecundity (the virtus generativa of the Latin
translation); the means of subsistence, on the contrary, and the possibilities
of increasing them (the virtus nutritiva ) are definitely limited and therefore
impose a limit on that increase, the only one there is; this limit asserts itself

3 See especially: Rene Gonnard, Histoire des doctrines de la population (1923); J.
Bonar, Theories of Population from Raleigh to Arthur Young (1931); C. E. Stange-
land, Pre-Malthusian Doctrines of Population (1904); J. J. Spengler, French Predeces-
sors of Malthus . . . (1942); F. Virgilii, II Problema della popolazione (1924). Readers
are referred to these works for details of a story that cannot be presented here.

POPULATION, RETURNS, WAGES, AND EMPLOYMENT 255

through want, which will induce people to refrain from marrying (Mai thus'
negative check, prudential check, ‘moral restraint’) unless numbers are peri-
odically reduced by wars, pestilence, and so on (Malthus’ positive check). This
path-breaking performance — the only performance in the whole history of the
theory of population to deserve any credit at all — came much before the time
in which its message could have spread: it was practically lost in the popula-
tionist wave of the seventeenth century. But about two hundred years after
Botero, Malthus really did no more than repeat it, except that he adopted par-
ticular mathematical laws for the operation of the virtus generative! and the
virtus nutritiva: population was to increase ‘in geometric ratio or progression’ —
that is, in a divergent geometric series — food in ‘arithmetic ratio or progres-
sion.’ 4 But the ‘law of geometric progression,’ though not in Botero’s work,
was suggested by Petty in his Essay concerning the Multiplication of Man-
kind (i686), by Siissmilch (1740), by R. Wallace (1753), and by Ortes (1774),
so that, within this range of ideas, there was nothing left for Malthus to say
that had not been said before. Of the eighteenth-century authors who, with-
out committing themselves to this particular mathematical form, stated that
population will always increase to the limit set by the supply of means of sub-
sistence, it will suffice to mention Franklin 5 (1751), Mirabeau (1756) — who
expressed himself in his picturesque manner: men will multiply to the limits
of subsistence like ‘rats in a barn’ — Sir J. Steuart (1767), Chastellux (1772), 6
and Townsend (1786). 7 Steuart, whose priority Malthus was to acknowledge,
was particularly explicit. Exactly as Botero did, he took the ‘generative fac-
ulty’ as a constant force to be compared to a spring that is held down by a
weight and is certain to respond to any decrease in this weight. Townsend
defined the limiting factor as ‘hunger, not as directly felt or feared by the in-
dividual himself, but as foreseen and feared for his immediate offspring.’ As
far as I know, Ortes was the only writer to admit that ‘reason’ may have more
influence than is implied in the anticipation of want — an influence that he
illustrated by the celibacy of the Catholic clergy.

Botero, then, was the first to sound that note of pessimism which was to
become so famous a bone of contention in the days of Malthus: as we have
seen, he associated increase of population with actual or potential misery. But
most of the authors who believed that populations tend to increase without

4 If an initial value be denoted by a and another constant by b, then a geometric
series runs like this: a, ab, ah 2 , ab 3 , . . . The series is divergent, i.e. the sum of its
elements soars above any figure we care to name, if b is equal to, or greater than'
unity. An arithmetic series runs like this: a, a -\- b, a - j- 2 b, a -f- 3 b. . . It is always
divergent.

5 Benjamin Franklin, Observations concerning the Increase of Mankind. Still more
than others Franklin treated the case of human populations in the light of the general
case of all animal species. On the other hand, he emphasized ‘room’ and ‘enemies’ as
limiting factors rather than food.

6 Francois Jean, Marquis de Chastellux, soldier by profession, published a treatise
De la felicite publique that is not without merit.

7 Joseph Townsend, see especially his Dissertation on the Poor Laws, 1786.

256 II: BEGINNINGS TO ABOUT I79O

assignable limit did not share Botero’s pessimism but were on the contrary
in sympathy with the populationist sentiments of their times and countries.
Petty and, before their conversion to the Botero-Malthus view of he matter,
Mirabeau and Paley may serve as examples . 8 This position involves, of course,
no error of reasoning. For the fact that a population is physically capable of
multiplying until it lacks not only food but also ground to stand on is no
cause for worry unless complemented by the additional proposition that it ac-
tually will tend to do this instead of merely responding to an expanding eco-
nomic environment by growing along with it (or even, possibly, by a decrease
in the birth rate). In other words, population must actually tend to ‘press
against’ the food supply. But even if such a tendency be admitted, it need
not cause any worry about the calculable future or, what is more important
for us, have any relevance to the explanation of contemporaneous phenomena.
For this to be the case it is evidently not sufficient to believe that population
will or may ‘press against’ food supply at some indefinitely distant time: we
must believe the pressure to be either actually present or actually imminent.
Unless this can be established, belief in that tendency is compatible with the
opposite belief as regards any given situation or as regards the outlook ex visu
of any given situation. The reader may well think that I am placing unneces-
sary emphasis upon these obvious distinctions, but their neglect is responsible
for the futility of many of the controversies that arose about population both
in the eighteenth and in the nineteenth centuries.

A work by R. Wallace 9 will, however, illustrate the way in which mere be-
lief in pressure of population at some indefinitely remote future may after
all be made relevant to economic analysis. Wallace considered equalitarian
communism as the absolutely ideal form of society. Nevertheless, he rejected
it. And the only reason he adduced for doing so was that in such a society
there would be no check to the operation of mankind’s physical powers of
multiplication, so that the career of a communist society would eventually
have to end in overcrowding and misery — a standpoint that evidently did not
imply any opinion about the situation that actually prevailed in Wallace’s

8 Petty listed populousness among the main assets of the Netherlands which made
them such formidable competitors of England. Mirabeau, in those parts of V Ami
des hommes ou traite de la population that were published in 1756, declared that a
large population is a blessing and the source of wealth: agriculture should be en-
couraged precisely because this would make people multiply like rats. It was Quesnay
himself who induced Mirabeau to reverse the causal relation between wealth and pop-
ulation. William Paley ( Principles of Moral and Political Philosophy, 1785, Book vi,
ch. 11) held the same opinion. He was converted by Malthus’ Essay and recanted in
his Natural Theology (1802).

9 Various Prospects of Mankind, Nature, and Providence, 1761. This work was
criticized by Godwin and, since Malthus’ work in turn started from a criticism of the
latter’s ideas, Wallace may have had more influence upon what became known as
Malthusianism than any other of the writers who anticipated Malthus’ doctrine.
Malthus did full justice to Wallace’s work but made it quite clear that, unlike Wallace
and like Quesnay, he believed that pressure was an actual and indeed ever-present fact.

POPULATION, RETURNS, WAGES, AND EMPLOYMENT 257

time. Whatever we may think of the merits of the argument, it presents two
characteristic features that cannot be underlined too strongly. First, if the prop-
osition about unchecked multiplication were valid, it would evidently come
near to being a 'natural law’ in the strict sense of the term. Most of the Eng-
lish economists of the subsequent hundred years accepted it as such — as formu-
lating an inexorable quasi-physical necessity. The same economists were in the
habit of claiming similar necessity and universal validity, not only for those
economic propositions that are nothing more than applied logic, but also for
others such as their 'law of wages.’ It is evidently not unreasonable to suspect
that this habit of the English economists had something to do with their be-
lief in that biological 'law/ If this be so, the question of the classic 'eternal
laws of economics’ should not be treated as a question of the philosophy of
scientific method but simply as a question of the validity or relevance of an
individual proposition. Second, it never seems to have occurred to Wallace to
look for obstacles to human perfection other than mankind’s power of multi-
plication: except for the dangers that threatened from this he had no more
doubt about human perfectibility than had Condorcet. This was in keeping
with the superficial sociology of the Enlightenment, but it is interesting to
note that Malthus and in fact all the 'classics’ seem to have been of the same
opinion. I know of only one writer who at least sounded the eugenic note. It
was Townsend. In the work mentioned above he argued that provision for
the 'idle and vicious’ would put a burden on the 'more prudent, careful, and
industrious’ that would restrain them from marrying: 'the farmer breeds only
from the best of his cattle; but our laws choose rather to preserve the worst. . .’

The outstanding authority for the other opinion, that is to say, for the opin-
ion that pressure of population was actually present around 1750 — and is in
fact an ever-present phenomenon — was Quesnay. Unlike Cantillon, from whom
he broke away in this point, 10 he held not only that propagation has no other
limits than those of subsistence but also that it tends always to go beyond
them. The only justification he proffered for this dogmatic statement was that,
always and everywhere, there are people who live in poverty or want (indi-
gence). This overpopulation theory of poverty is of the essence of ‘Malthusian-
ism.’ But before the publication of Malthus’ Essay it had so few adherents that
to this day most historians attribute it to him. Populationism did not indeed
hold its own — not, at least, outside Germany and Spain. But everywhere econo-
mists refused to accept the opposite view. Most of them seem to have agreed
with Bishop Berkeley, who delighted in the vision of joyfully bustling multi-
tudes, or with Hume, who called the happiness of society and its populous-
ness ‘necessary attendants.’ Accordingly, A. Smith summed up by reducing
the principle of population to a stale truism, preserving however its character
as a natural law: 'every species of animals naturally multiplies in proportion to
the means of their subsistence, and no species can ever multiply beyond it.’

10 Substantially, Cantillon was populationist. But he touched in passing upon the
problem ‘whether it is better to have a great multitude of poor people or a smaller
number of more prosperous ones.’

►

258 n: beginnings to about 1790

(Wealth, Book- 1, ch., 8.) And at the same time he declared, in the spirit of
the old populationists, that 'the most decisive mark of the prosperity of any
country is the increase of the number of its inhabitants’ (ibid.). Beccaria dis-
counted both the enthusiasms and the pessimisms of economists about in-
creasing numbers: he recognized that increase was not always a blessing to be
prayed for at all times; but also that there was no reason for being afraid of
it at all times. In fact he seems to have been the one authority to teach ex-
plicitly the obviously sensible view. Genovesi went further than this, however,
in effecting a synthesis between the two opposites. He saw that, from the
standpoint of a population living under given conditions, numbers are capable
of being either too small or too great in the sense that increase or decrease
would produce greater 'happiness.’ This led Genovesi to reassert the old idea
of optimum population ( popolazione giusta, Lezioni, Part 1, ch. 5) that was
to be sponsored again by Knut Wicksell. This concept is difficult to handle
and perhaps not very valuable. But it has the merit of bringing out the truth
that populationism and Malthusianism are not the mutually exclusive oppo-
sites they seemed to be to so many people.

2. Increasing and Decreasing Returns and the Theory of Rent

[(a) Increasing Returns.] We have seen that the populationist attitude, so
far as it is economically motivated, implies a belief that increase in population
will (within limits) increase per capita wealth or, as we may also put it, a
belief in Increasing Returns. So does, in most cases, the protectionist attitude
that went with populationism (see below, ch. 7). The idea of increasing re-
turns in this sense — that is to say, increasing returns with reference to a na-
tional economy as a whole, and irrespective of any well-defined- reason why
returns should be increasing and of whether it is physical returns or returns
in terms of money that are meant — is no doubt a hazy one and does not
amount to more than an ‘inkling’ of any of the various meanings that the
concept was to acquire. But beyond such inklings, which were of course very
frequent, we also find here and there more precise arguments such as Petty’s
argument that expenditure on what may be termed social overhead — expendi-
ture on government, roads, schools, and so on — does not, other things being
equal, increase proportionately with population: this puts increasing returns
into the not quite equivalent form of decreasing cost per unit of service, but
nevertheless identifies a definite phenomenon that can be observed in every
society and in every individual firm. Before this, a general law of increasing
returns in manufacturing industry, also in the form of a law of decreasing
unit cost, had been stated explicitly and in full awareness of its importance
by Antonio Serra, 1 much as it was to be stated in the nineteenth-century text-

1 Breve trattato (1613), Part 1, ch. 3: nelV artefici vz pud essere moltiplicazione . . .
e con minor proporzione di spesa (in manufacturing industry, output may be increased
at less than proportional increase in expense). Serra does not tell us to what this fall
in cost is due. It may be plausibly assumed, however, that he thought of the same
facts that A. Smith was to enumerate.

POPULATION, RETURNS, WAGES, AND EMPLOYMENT 259

book. The restriction of increasing returns to manufacturing should be par-
ticularly noticed. Serra did not indeed assert that agrarian production Was
subject to decreasing returns. But the idea that industrial and agrarian pro-
duction as such follow different ‘laws’ was as clearly expressed by him as if
he had. Thus he foreshadowed an important feature of nineteenth-century
analysis that was not completely abandoned even by A. Marshall. In the seven-
teenth and eighteenth centuries, however, most economists said nothing about
this. But many implied, or even explicitly said, that increasing returns pre-
vailed also in agriculture. We shall presently discuss the most important ex-
ample of this position. At the moment let us notice that A. Smith, more than
a century and a half after Serra, took a view that was closely similar to his.
He clearly, though loosely, stated a law of increasing returns for manufactures:
first, in connection with division of labor (Book i, ch. 1) and, second and more
fully, in the digression on the ‘Effects of the Progress of Improvement upon
the Real Price of Manufactures,’ which he inserted into Part in of his huge
chapter on the rent of land (Book i, ch. 11), where he attributed the fact that
‘a much smaller quantity of labour becomes requisite for executing any par-
ticular piece of work’ ‘in consequence of better machinery, of greater dexterity,
and of a more proper division and distribution of work.’ 2 But nowhere did
he state a law of decreasing returns, though he repeatedly brushed against it,
especially in Chapter 11. In fact, in Chapter 1, he merely noted a difference
between agricultural and industrial production in the scope they offer for ever
increasing division of labor, and his text is compatible with the interpretation
that he meant to assert increasing returns also for agriculture but to a lesser
degree. And this in spite of the fact that the two cases of decreasing (physical)
returns, which West and Ricardo were to recognize, had been fully described
before him by Sir James Steuart (1767) and Turgot (1767). 3

[(b) Decreasing Returns: Steuart and Turgot.] Steuart in his Principles
(1767) — and after him Ortes in his Economia Nazionale (1774) — presented
what the late followers of Ricardo were to call the case of the Extensive Margin:
as population increases, poorer and poorer soils have to be taken into cultiva-
tion and, applied to these progressively poorer soils, equal amounts of produc-
tive effort produce progressively smaller harvests. Turgot discovered the other
case of decreasing physical returns, the one that the same followers of Ricardo
were to refer to as the case of the Intensive Margin: as equal quantities of
capital {avarices) — amounts of labor would, however, do just as well in this

2 Observe that this statement mixes up two entirely different things: 'better' ma-
chinery seems to point to an effect of the widening of knowledge — the Technological
Horizon — that occurs in the course of economic development. Improved division of
labor, on the other hand, is one of the consequences of mere increase in output and
may occur within an unchanging technological horizon or an unchanging state of the
industrial arts.

Uv 3 Observations Sur le Memoire de M. de Saint-Peravy, included in the editions of
$-the Oeuvres (mentioned in ch. 4, sec. 4). The date given in the text is not absolutely
pertain; moreover, it is the date of writing. We do not know how wide or narrow a
*&irele of readers the paper reached at the time.

260 ii: beginnings to about 1790

case — are successively applied to a given piece of land, the quantities of product
that result from each application will first successively increase up to a certain
point at which the ratio between increment of product and increment of
capital will reach a maximum. Beyond this point, however, further application
of equal quantities of capital will be attended by progressively smaller increases
in product, and the sequence of these decreasing increases will in the end
converge toward zero. This statement of what eventually came to be recog-
nized as the genuine law of decreasing returns cannot be commended too
highly. It embodies an achievement that is nothing short of brilliant and
suffices in itself to place Turgot as a theorist high above A. Smith. It is much
more correct than are most of the nineteenth-century formulations — Turgot’s
formulation was indeed not surpassed until Edgeworth 4 took the matter in
hand.

A particularly felicitous feature is the insertion of an interval of increasing
returns before the interval of decreasing returns; that is to say, the recognition
of the fact that decreasing returns do not prevail right from the application
of the first ‘dose’ of some variable factor but set in only after a certain point
has been reached. This should have disposed, once for all, of the erroneous
opinion that he who asserts that extension of production will, under given
circumstances, be attended by increasing' returns therefore denies the validity
of the ‘law of decreasing returns.’ Moreover, Turgot’s increasing returns are
defined with unsurpassable neatness: they are the increasing returns that at-
tend the application of a variable factor to one that is given in a fixed quan-
tity — or to a set of factors whose quantities are held constant — before the
optimum combination of factors is attained. Thus, Turgot may be said to
have formulated a special case of what American economists around 1900
were to call the Law of Variable Proportions. 5

4 See below. Part iv, ch. 6, sec. 5b.

6 The same thing may be expressed, by means of a different concept, in a somewhat
different way. This concept, which emerged toward the end of the nineteenth century
(see below, Part iv, ch. 7, sec. 8), is now being called the Production Function. This
function expresses the technological relation that exists between the quantity of product
and the quantities of the ‘factors’ that co-operate in varying proportions to produce it.
Reducing, for the sake of simplicity, the number of these factors to two, we may
mark off the quantities of the product and of the two factors on the axes of a system
of rectangular space co-ordinates. Every point in space that corresponds to any positive
and finite values of those three quantities will then represent that quantity of product
that can (at best) be produced by the corresponding quantities of factors, and the
set of all these points will identify a surface in three-dimensional space, the production
surface. Now let one of the factor quantities be held constant, and cut this surface
by a plane at right angles to this factor’s axis and go through the point on this axis
that corresponds to the constant. The curve of intersection between the surface and
the plane will represent Turgot’s law of first increasing and then decreasing returns.
Though Turgot did not discover either the production function or its geometric pic-
ture, the production surface as such, we may say that he discovered a property of it,
viz., the form of one of its contours, and hence that he got hold of something, pos-
session of which (with ordinary care and competence prevailing in our science) should

POPULATION, RETURNS, WAGES, AND EMPLOYMENT 26 1

And finally it must be recorded to Turgot's credit that he stated his law
in terms of successive increments of product and not in terms of average prod-
uct (per unit of the variable factor). This means that he actually used marginal
analysis and that command of modem technique could have improved only
the form of his statement. There is really nothing to criticize in it except
inadequate awareness of the necessity to specify both the product for which
his law is to hold and also the variable factor that is to be applied: the
basketful of disparate things that hide behind his avarices does not meet the
latter requirement but merely dodges it . 6 To the further objection that he did
not emphasize the fact that his law made sense only with a given state of
technological knowledge, or a given technological horizon, or a given produc-
tion function — as we should say — he would probably have replied that this
goes without saying. But we are about to see that this is not so. Another
point must, however, be noticed before we go on.

Both Steuart and Turgot spoke of agriculture only. Fifty years ago this
would not have astonished anybody, since it was then established practice to
restrict decreasing returns to agriculture. But we who take it for granted that
neither increasing nor decreasing returns are restricted to any particular branch
of economic activity but may prevail in any branch, provided certain general
conditions are fulfilled, are in a position to realize how surprising that actually
was. Explanation seems to lie in the fact that, to the unsophisticated mind,
there is something particularly compelling in the limitations imposed upon
human activity by an inexorably ‘given’ physical environment. It takes pro-
longed effort to reduce the analytic importance of these limitations to their
proper dimensions and to divorce them from the soil and the industry that
works the soil. YeTit should not have taken so long to see that there is really
no logical difference between trying to expand output on a given farm and
trying to expand output in a given factory, and that if farms cannot be in-
definitely multiplied or enlarged, neither can factories. The additional ex-
planation required is provided by the belief of practically all eighteenth-century
authors — a belief that carries over to the ‘classics’ of the nineteenth century —
that while the factor land was given once for all, the other original factor,
labor, would always increase to any amount required if allowed to do so.
If we adopt this view, we shall at once sympathize with the reluctance of
those authors to treat labor and land alike and to apply the laws of physical
returns impartially to both. Then we shall also sympathize with the lopsided
analytic structure they set up.

have brought out the production function of today before the eighteenth century was
out. The reason why this argument is being inflicted upon the reader at this stage is
that the case is so revelatory of the ‘ways of the human mind,’ which rarely discovers
the obvious and fundamental first. More often it gets hold of some particular aspect
of an idea and then works back to the conceptions that hold priority in logic.

6 Unless the factor applied is such a definite physical thing as a fertilizer of invariant
kind and quality or even labor of a given kind and quality, difficulties arise that
threaten the meaning of the law.

262 II : BEGINNINGS TO ABOUT 179O

[(c) Historical Increasing Returns.] As we have seen above, asserting that,
in a given situation, increasing returns prevail in a country’s agriculture, that
is, that increase of input would be attended by more than proportional in-
crease in output, does not imply denial of the validity of the law of decreasing
returns. This fact must now be brought to bear upon the interpretation of the
views of those English economists and politicians who actually did make that
assertion. Whether right or wrong in point of fact, their position was logically
defensible if they meant no more than either or both of two things. They
were all right as to logic (though possibly wrong as to their facts) if they
meant that in the last decades of the eighteenth century English agriculture 7
was moving in an interval of increasing returns, that is to say, that land had
not yet received its optimum complement of other factors. They were not less
right in logic (and, to some extent, in fact) if they meant that there were
looming in the future possibilities of improving agricultural methods of pro-
duction that would materialize if additional resources (‘capital’) were made
available to agriculture — in the same way in which this was actually happening
in industry. Observe, however, that this is something quite different from the
increasing returns we have been discussing. We can indeed, if we so choose,
speak of increasing returns’ attending increased application of resources also
in this case. But these spells of increasing returns, unlike the others, do not
occur within the given pattern of technological practice. Like A. Smith’s im-
proved machines they involve a change in this pattern. If we visualize Turgot’s
intervals, first of increasing and then of decreasing returns, as a curve that
ascends, reaches a maximum, and then descends , 8 then we see that the in-
creasing returns in the previous sense are depicted by a section of the curve,
but that increasing returns in the sense now under discussion are not. They
can, however, be represented by shifting the whole curve upward (altering its
shape or not as the case may require) into a new position: the old curve breaks
off and is replaced by a new one that keeps a higher level (though not neces-
sarily all along its course) but again displays both an interval of increasing re-
turns in the previous sense and an interval of decreasing returns. The increase
in returns in the new sense occurs as the curve shifts from its old to its new
position. It should be added that, if the curve shifts again and again, there
is no reason why the differences between these successive levels should grow

7 Those authors and politicians always spoke of returns to agriculture as a whole
just as nineteenth century economists were in the habit of doing. Strictly, however, the
laws of returns in the sense of Turgot are defined only for the individual farm. It is
an additional merit of Turgot that he so envisaged them. Transition to a whole in-
dustry, let alone the national economy as a whole, is not quite such plain sailing as
primitive analysis assumes.

8 See footnote 5 above. To repeat, the abscissae of the curve there described represent
successive equal ‘investments’ of some resource, say, labor of a given quality, the ordi-
nates the corresponding amounts of total product. But we may also let the ordinates
represent the increments in total product that successively result from each additional
dose of ‘investment.’ Of course, this ‘derived’ curve (of marginal products) will reach
its maximum before the other does.

POPULATION, RETURNS, WAGES, AND EMPLOYMENT 263

smaller: there is no law of decreasing returns to technological progress. In
order to avoid confusion between two entirely different phenomena, we had
better restrict the term Increasing Returns to Turgot's case. This we shall ac-
cordingly do. When we wish to retain the association between the two, mis-
leading though it is, we shall use, for the phenomenon now explained, the
phrase Historical Increasing Returns. The phrase has been chosen in order
to indicate that these historical increasing returns cannot, like the genuine
ones, be represented by any curve or 'law,’ least of all by a curve on which
we can travel back and forth. For new levels of technique are reached in the
course of an irreversible historical process and are hidden from us until they
are actually reached.

An example will illustrate this situation. One of the most interesting Eng-
lish economists of the late eighteenth century, Anderson, 9 boldly asserted that
man's power to increase the productiveness of his fields was such ‘as to make
it keep pace with his population whatever that might be.’ 10

This has been interpreted to spell denial of the law of decreasing returns,
Malthus being the first of Anderson's critics to misunderstand him in this
sense. But Anderson’s emphasis was not upon the product but upon the pro-
ductiveness of land. And this, together with his reference to ‘discoveries’ which
occurs in the same passage, should be sufficient proof that all he was thinking
of was what we have just decided to dub Historical Increasing Returns. In
Anderson’s case, it is particularly easy to satisfy ourselves that his no doubt
exaggerated ideas concerning these possibilities were compatible with the rec-
ognition of the law of decreasing returns. Though it . is true that he nowhere
mentioned Turgot’s case, it is equally true that he accepted Sir James Steuart’s
case. For he actually invented the ‘Ricardian’ theory of rent which presupposes
it.

[(d) Rent of Land.] We have seen that the explanation of the rent of land
was not one of the problems that attracted attention in the early stages of
economic analysis. Cantillon and, after him, the physiocrats, may be said to

9 James Anderson (1739-1808) was a Scottish gentleman farmer. His numerous
writings are as important for an appreciation of the course of the corn-law controversy
as they are for the history of economic analysis. The most important ones are:
Observations on the Means of exciting a Spirit of National Industry . . . (1777);
An Enquiry into the Nature of the Com Laws (1777); and several essays in his 6
volumes of Recreations in Agriculture, Natural History, Arts, and Miscellaneous Litera-
ture (publ. 1799-1802). He had to an unusual degree what so many economists lack,
Vision.

10 Recreations, Vol. iv, p. 374; the passage has been quoted by Cannan, A History
of the Theories of Production and Distribution (3d ed., 1917, p. 145), in order to
prove that the law of decreasing returns was unknown to the agriculturalists of that
time. It is of course beyond doubt that they were thoroughly confused about it and
that, since Turgot’s performance had passed unnoticed, professional and political opin-
ions of the time sometimes read like unalloyed nonsense. But it should not be asserted
without qualification that they actually were unalloyed nonsense or that they were
always vitiated by the ignorance of that law.

264 II: BEGINNINGS TO ABOUT 1790

have been the first 11 to entertain a distinctive view of the phenomenon: it
simply amounted to the proposition, if we may couch it in terms of a later
time, that land yields rent because it is a scarce factor of production (or
even the only 'original’ one), and that this rent is partly an interest payment
on investments made by the landlord and partly a payment for the 'natural
and indestructible productive powers of the soil.' This theory was primitive
and not fully articulate but nevertheless superior to many later speculations.
In addition to the merit of saying or implying nothing that is definitely wrong,
it had another one that raises it above triviality: whoever holds this theory
thereby proves his awareness of the fact that productiveness and scarcity, in
the case of a costless factor, are sufficient to account for its yielding a net
return so that there is no point in looking for other explanatory circumstances.
But this is precisely what most economists failed to realize, then, and through-
out the first half of the nineteenth century. Accordingly, they engaged in
speculations that produced, before the eighteenth century was out, both the
theories of rent that were to prevail during the subsequent epoch (roughly to
the last quarter of the nineteenth century). The one may be associated with
the name of Adam Smith, the other with the name of James Anderson.

A. Smith’s theory of value, which will be discussed in the next chapter,
yields the result that, under conditions of competition, a costless thing really
cannot have a price. The services of land are costless: A. Smith explained at
length that these services are not to be identified with the services of the
capital that may have been invested in the land- Nevertheless, they fetch a
price. Hence 'the rent of land . . . considered as the price paid for the use
of land, is naturally a monopoly price’ (Wealth, Book i, ch. n). If this were
true, rent would have to 'enter into the composition of the price of com-
modities’ exactly as do profit and wages, which A. Smith explicitly denies on
the next page. But of course it is not true: the landed interest is not a single
seller and therefore its income cannot be explained by the theory of monopoly.
The poverty of this rent analysis is overlaid by a plenty of materials and de-
tailed comment that made the eleventh chapter burst the framework of Book
1. Many of these details deserve recording but we must confine ourselves to
three. First, A. Smith placed much emphasis upon the rent of location. Sec-
ond, he worked out a theory that was to enter Malthus’ stock in trade, and
that kept on cropping up in the lower strata of the nineteenth-century theory,
namely, the theory that 'Human food seems to be the only produce of land
which always and necessarily affords some rent to the landlord’ (ch. 11, Part n)
because, by virtue of the principle of population, food production is the only
kind of production which, as it were, will always create its own demand —
mouths always increasing in response to every increase in the supply of food.

11 This disregards the comments that Petty made on the subject — which do not
amount to much — and also something else. Those authors who, like Locke, explained
— or 'justified’ — property in land by labor invested in it might be interpreted to have
held a labor theory of rent. Such attributions are, however, unsafe and I prefer not to
stress this point.

POPULATION, RETURNS, WAGES, AND EMPLOYMENT 265

Though comment is, I trust, superfluous concerning the merits of this proposi-
tion, it is not superfluous to point out that this sort of thing goes far toward
justifying the animosity to theory harbored by institutionalist and historical
economists. It is for the same reason that I mention a third theory (presented
in the Conclusion of ch. n): believing that every increase in the real wealth
of society tends, directly or indirectly, to raise the real rent of land, he con-
cluded that the class interest of the landowners ‘is strictly and inseparably
connected with the general interest of society’ so that, unlike ‘those who live
by profit/ landowners when speaking from the standpoint of their class in-
terest ‘never can mislead’ the public in its search for measures that promote
the general welfare. A truly unbelievable piece of reasoning — the premiss could
be shown to be wrong from material and argument within the covers of the
Wealth, and the conclusion would not follow even if the premiss were right. 12

As has been stated, we need nothing beyond the productiveness and the
scarcity of land in order to explain why there is such a thing as rent. Neither
the fact to be explained nor the explaining facts have anything to do with
decreasing returns. However, the association of rent with decreasing returns,
which was to be one of the most characteristic features of the Ricardian sys-
tem, was established by Anderson. In his Observations of 1777 he arrived at
the conclusion that the rent of land is a premium paid for the privilege of
cultivating soils that are more fertile than others, and in his Enquiry of the
same year he formulated more precisely the conditions which Cannan stated
established the formula: ‘The rent paid in respect of any particular boll is
equal to the difference between the expense of raising the most expensive boll
raised and the expense of raising that boll/ explaining fully how the com-
petition among farmers will secure exactly this amount for the landlord. 13 In
a later essay, included in the Recreations (Vol. v), he presented another aspect
of the same idea by saying that rent was a ‘contrivance’ for equalizing the
profits on lands of different fertility — an emphasis upon the ‘law of the aver-
age rate of profit’ that makes him a forerunner of Ricardo in still another sense.
Except for the claim that it explained rent, all this was quite correct so far

12 Reasoning such as this indicates certain limitations of a man’s judgment once
for all. But we are also within our rights to suspect such an argument of ideological
bias, precisely because of the obviousness of its faults. Therefore, it is interesting to
note that as a matter of fact A. Smith harbored an ideological bias against the landed
interest (see below, ch. 6 ) so that no explanation can be derived on this line.

13 1 fail to understand why the late Professor Cannan, who quoted the passages
(op. cit. pp. 371-3) should have thought it necessary to warn his readers that ‘Ander-
son’s anticipation of particular points in the Ricardian theory must not be mistaken
for an anticipation of the whole theory.’ It is true that Ricardo also noticed the
Turgot case of decreasing returns. But his reasoning practically runs in terms of the
Steuart case, just as does Anderson’s. Like Anderson, moreover, Ricardo seems to have
thought that there would be no rent if there were no decreasing returns, thus con-
fusing the latter with scarcity of land. Hence, as far as the theory (to which Cannan
specifically refers) is concerned — and not the diagnosis of the actual conditions of
English agriculture or the political recommendation — I cannot see any difference what-
soever between Anderson and Ricardo, or, for that matter between Anderson and West.

266

II: BEGINNINGS TO ABOUT 1790

as it went. But the achievement of anticipating a century’s thought on this
subject would have been a noteworthy one, even if all of it had been wrong.

3. Wages 1

The most obvious analytic use to which the principle of population can
be put is surely the theory of wages. Many writers — among the leaders, es-
pecially Quesnay and Turgot — might be cited to show how easy it was, start-
ing from an uncritical acceptance of. that principle, to arrive at a minimum-
of-existence theory of wages as an equally uncritical conclusion. Since, more-
over, the physiocrat theory of capital — the idea of the avarices — was of a na-
ture to suggest the concept of a 'wage fund,’ another pillar of Ricardian eco-
nomics was thus erected by pre-Smithian writers, mainly French.

But the proposition that wages per head tend toward a minimum-of-existence
level (however defined) is no more a theory of wages than the quantity theory
is a theory of money. Both are propositions about the values certain economic
quantities assume in a state of long-run equilibrium and form part of a compre-
hensive theory of wages or money — that is, if we believe in them — but are not
the whole of it. No such comprehensive theory was worked out before A. Smith.
But many pre-Smithian economists contributed fragments. The most impor-
tant of these contributions was Child’s, discussed above in Chapter 4. It had
nothing to do with the principle of population. Child, as we know, was a
populationist who declared that 'most nations in the civilized parts of the
world are more or less rich or poor proportionable to . the paucity or plenty of
people.’ This paucity or plenty he made dependent upon 'employment/ so
that we may interpret him to have meant that the wage rate is determined,
on the one hand, by the demand for labor and, on the other hand, by the
supply that this demand calls forth. This was a good beginning, the more so
because Child said nothing about the particular level at which the forces of
demand and supply would fix wages. In particular, he kept clear of any mini-
mum-of-existence law. Instead, he said that high wage rates are the conse-
quence and 'infallible evidence’ of the riches of a country. Davenant went a
little further in his statement that in a poor country interest is high and land
and labor cheap. Also other writers got as far as this. But nowhere do we find
more than this until we reach the minimum-of-existence theorists mentioned
above.

This does not mean, of course, that people were not interested in wage
questions. On the contrary, economists debated them eagerly and practically
every one of them left us his opinion about wage policy. But most of these

iThe works on the history of population doctrines all take some account of the
history of wage doctrines as well, but Spengler’s should be particularly mentioned.
Facts as well as views the reader finds in Heckscher and Mantoux. Also, see E. S.
Fumiss, The Position of the Laborer in a System of Nationalism (1920), which work,
however, concentrates on the task of bringing out one particular aspect of the picture
and does not aim at presenting the whole; and R. Picard, 'Etude sur quelques theories
du salaire au XVIII e siecle’ in Revue d’histoire des doctrines economiques (1910).

POPULATION, RETURNS, WAGES, AND EMPLOYMENT 267

utterances were preanalytic in nature. They reveal sentiments and evaluations
that reflect important aspects of social history and are a legitimate object for
the application of the Marxist theory of ideology, provided that it be handled
without unintelligent dogmatism. For us, however, these sentiments mean only
an additional difficulty of interpretation: we are driven to unraveling elements
of analysis from the various recommendations of our authors — or such reasons
as they give for their normative statements — and in doing so we are in con-
stant danger of mistaking for an analytic proposition what may have been
no more than a profession of sympathies. Thus Child, though he interpreted
high wages as a symptom of wealth, did not proffer any high-wage theory in
the sense that high wages are in themselves a factor that makes for prosperity.
But he was evidently in sympathy with high wages and hence seems to have
held a high-wage theory in this sense. That this was not the case we can see
from the way in which he behaved when confronted with a low-wage argu-
ment. He did not really argue but simply got angry and hurled defiance at
the obnoxious doctrine: 'a charitable project and well becoming a userer!’ Other
authors offer hints at motivating analytic propositions. Some — including Cary
— looked upon high wages as a part in the mechanism of brisk business and
adumbrated the purchasing-power argument. Others were of the opinion that
high real wages are conducive to better performance . 2 But this did not amount
to much. Neither did the reasoning of the low-wage men. Petty’s argument
was that high wages would only encourage sloth and that if wages were doubled
the supply of labor hours would be reduced to half. The most important ar-
gument on this side of the question was, of course, the argument from com-
petition in international trade. It was because high wages would impair the
competitive situation of the country that Sir James Steuart held that wages
'should’ be kept at the level of physical necessities . 3 D. Hume also believed

2 For example, Daniel Defoe (c. 1659-1731) in Plan of the English Commerce (1728);
B. Franklin, in his Reflections on the Augmentation of Wages, also distinguished high
wages from high cost of labor per unit of product.

3 There cannot be any doubt, of course, that many declarations in favor of low
wages simply and naively voice class interest and are not the result of any attempt
at appraising causes and consequences in a scientific spirit. Not only did low-wage
opinions fit the social structure and the resulting national spirit of those times, but
also whatever low-wage opinions were held were quite freely uttered because the labor
interest was not yet a political factor and intellectuals therefore did not side with it.
So opinions were held with regard to labor — and voiced without inhibitions— that
sometimes recall the opinions held by the Romans with regard to their slaves as
voiced, e.g., by Cato. That the welfare of the laborers, or 'laboring poor,’ or simply
the poor, should have been, by implication, denied the status of an end in itself — -
in the economic literature roughly until Beccaria and Smith — does not necessarily
mean what it seems to mean. For such statements also occur with respect to the
merchant class and are only what we should expect in a nationalist civilization. But
opinions could be cited to the effect that workmen ‘should’ be kept poor, and ignorant
as well as poor, that they ‘should’ be strictly disciplined and, in order to facilitate this,
kept at work from early youth and continually, so that they should never know what
it is to be at leisure and so on. Such views, like the opposite ones, naturally tended

268

II : BEGINNINGS TO ABOUT I79O

that high wage rates are detrimental to a country’s foreign trade, though he
did not draw the same conclusion; on the contrary, he went on to say that
this disadvantage weighs lightly as compared with ‘the happiness of so many
millions.’

A. Smith’s performance in the field of labor economics 4 is highly charac-
teristic and in fact a fair sample of his work as a whole. Moreover it acquires
additional importance by virtue of its having been the first fully systematic
treatment of the subject. He no doubt followed the available leads but, scaling
off edges here and developing there, he made a well-rounded whole of it that
was qualified to serve, as in fact it did serve, as a basis of further analysis.
First of all, he worked out a comprehensive theory of wages. Borrowing a
natural-law proposition that was widely accepted in his time, namely, that
'the produce of labour constitutes the natural recompense or wages of labour,’
he proceeded to explain how it came to pass that labor has to surrender part
of ‘its’ product — meaning the entire result of the productive process — to land-
lords and another part to ‘masters.’ Observe that this indeed posits the funda-
mental problem of wages but that it does so in a peculiar way: A. Smith’s
argument starts from a pseudo-historic background of a natural state in which,
on the one hand, there are no landlords and no ‘masters’ and in which, on
the other hand, labor is the only scarce factor of production; confusing these
two quite different facts, he reduced the problem of wages at once to the
problem of the two other distributive shares which thereby became ‘deduc-
tions from the produce of labour.’ Rent is a deduction from ‘natural’ wages
that is motivated not by the productivity of land but by the emergence of
private property in it which tallies nicely with his monopoly theory of rent:
some people monopolize land exactly as they might monopolize air, were it
technologically possible to do so. And profit is another deduction motivated
not by the productivity of capital — stock ‘advanced’ to the laborer — but solely
by the power of its owners 5 to insist on it, a power that is much enhanced
by the ease with which these owners can combine against the poor and help-
less laborers who ‘must either starve or frighten their masters into an imme-
diate compliance with their demands.’ The reader should realize both the
obvious weaknesses that this argument presents when considered as a piece
of analysis and the appeal it was bound to have. It foreshadowed, in fact, all
the exploitation and bargaining-power theories of wages that the nineteenth

to reflect themselves in the analytic work emanating from their sponsors or in the
way in which its results are formulated; and if that analytic work is rudimentary, it
becomes still more difficult than it is in the case of elaborate theories, to separate whal
for brevity’s sake we may call the logic and the class interest served by that logic. This
political aspect is also important for the topics to be touched upon in sec. 4, which
follows.

4 The substance of it is to be found in chs. 8 and 10 of Book 1 of the Wealth of
Nations. But additional facts and comments are scattered all over the work.

5 It is only here, within the theory of wages, that A. Smith adopts this view. Else-
where he leaves room for other elements, such as risk and trouble.

POPULATION, RETURNS, WAGES, AND EMPLOYMENT 269

century was to produce, and also suggested the idea that labor is the 'residual
claimant.’

A. Smith went much further than that, however. Since the laborer cannot
live without the advances of the ‘masters,’ the latter can, strictly speaking,
reduce his wages to the physical minimum of existence. But the masters’ com-
petition for labor will, with increasing national wealth, force them to ‘break
through the natural combination of masters not to raise wages’ and will raise
wage rates above that level for indefinite periods of time. Accordingly, A.
Smith denied vigorously that wages in Great Britain were anywhere near the
minimum-of-existence level or that they fluctuated with the price of provision
as they would have had to do in that case . 6 For practical purposes this amounts
to denying the validity of the physiocrat theory of wages. In principle, how-
ever, A. Smith accepted it. This reconciliation of two apparently contradictory
opinions he achieved by emphasizing not so much the absolute level of the
wealth from which the demand for labor proceeds but ‘its continual increase’
— it was not great wealth as such but increasing wealth which, outstripping
increase in population, causes wage rates to rise in monetary as well as real
terms. But wealth that does not increase, however great it may be, is no guar-
antee against low wages: the hands will ‘in this case naturally multiply beyond
their employment,’ so that Quesnay would be right in the end. A. Smith also
accepted the wage-fund theory, which he restated in the form that was to be
the object of both elaboration and attack in the nineteenth century. When
dealing with the demand for labor, he stated what reads like a harmless truism:
this demand ‘it is evident, cannot increase but in proportion to the increase
in the funds which are destined for the payment of wages.’ The joker that
lurks behind the word ‘destined’ was responsible for many a headache later
on. But A. Smith lightheartedly concluded that the demand for labor, since
it comes either from the income of the well-to-do, who demand personal
service, or from the stock of businessmen, who demand productive services,
and since ‘the increase of revenue and stock is the increase of national wealth,’
will increase with the increase of wealth, ‘and cannot possibly increase without
it.’ There is no more fertile source of error than apparently trivial premisses.

This theory of wages was copiously illustrated by all sorts of facts, which
is why it gives the reader the impression of fullness and realism. Critical — and
often wise — comments on the labor legislation and the poor laws of that and
earlier times are freely inserted. And A. Smith’s interest in the concrete phe-
nomena of practical life is responsible for many analyses of particular ques-
tions, one of which may be mentioned. Abstract theory reasons about an im-
aginary wage rate, the counterpart of which in real life is a structure of widely
varying wage rates. In order to make sure that a theory working with a single
rate has any relevance at all to the explanation of real phenomena, we must

6 This seems, however, to have been the prevalent popular opinion. Galiani in his
Dialogues (see below, ch. 6) attributes it to Le Marquis whose role it is to voice popular
opinions.

2JO II : BEGINNINGS TO ABOUT 1790

analyze the nature of the differences in the wages — and profits — earned in dif-
ferent employments and places. This is the kind of thing in which A. Smith
both delighted and excelled. The lead had been given by Cantillon. But A.
Smith went much more deeply into the matter, thus creating an important if
not exactly exciting chapter of the nineteenth-century textbook.

4. Unemployment and the 'State of the Poor’

In principle, medieval society provided a berth for everyone whom it recog-
nized as a member: its structural design excluded unemployment and destitu-
tion. Actually, the threat of involuntary unemployment was not completely
absent. The journeymen who worked under the masters within the craft guilds
were often, and the agricultural laborers ( mercenarii ) were always, hired work-
ers whose employment was not guaranteed. But as a rule neither group had
much difficulty in finding jobs. In normal times unemployment was quanti-
tatively unimportant and confined to individuals who had broken loose from
their environment or had been cast off by it and who in consequence had be-
come beggars, vagrants, and highwaymen. The highwaymen were treated with
brutal yet ineffective energy; with the other types, the charity enjoined and
organized by the Catholic Church was perfectly able to cope. It is important
to keep this pattern in mind because it formed an attitude toward unemploy-
ment and the unemployed that persisted for centuries after medieval condi-
tions had passed away. Let us remember in particular that mass unemploy-
ment, definitely unconnected with any personal shortcomings of the unem-
ployed, was unknown to the Middle Ages except as a consequence of social
catastrophes such as devastation by wars, feuds, and plagues.

This changed in and after the fifteenth century. The breaking up of the
medieval world, attended as it was by social upheavals, is in itself sufficient to
account for the widespread suffering and destitution we observe. The agrarian
revolution not only destroyed environments that might have sheltered fugi-
tives from distressed areas but also caused the landless proletariat to increase
more rapidly than did the effective demand for labor. The resistance to change
offered by the organized crafts, while it protected some elements of the popu-
lation, made things worse for others. The rising capitalist industry in the long
run absorbed rather than created unemployment. But there were many bottle-
necks that impeded the development of the new opportunities and the flow
of labor into them. Moreover, when the pace of industrial development quick-
ened in the second half of the eighteenth century, technological unemploy-
ment put in an appearance as a mass phenomenon and frequently overshad-
owed that long-run effect. This explains why the rise of the factory system
was associated with so much misery: for many years labor was not attracted to
the factories by higher wages and better living conditions, but driven into them
in spite of lower real incomes and worse living conditions. The old protective
regulations broke down not so much under the influence of laissez-faire phi-
losophies as under the weight of actual or threatening unemployment. For a
time, though not everywhere to the same extent, all barriers to the deteriora-

POPULATION, RETURNS, WAGES, AND EMPLOYMENT 27 1

tion of the worker’s lot were giving' way. Thus it is not difficult to understand
the paradox already noticed, namely, that governments and writers who were
enthusiastically populationist never ceased to worry about how ‘to set the
poor to work’ or how to combat ‘idleness.’ 1

But the first problem that confronted European governments from the be-
ginning of the sixteenth century was an administrative one. Everywhere the
swelling numbers of destitute beggars and vagrants outgrew the possibilities of
private charity and everywhere public organization of relief had to take; its
place. In England, earlier measures were systemized by the Elizabethan Poor
Law of 1601, which definitely established the compulsory poor rate on a per-
manent basis. The poor rate was a tax that was levied in every parish for the
maintenance of its own destitute inhabitants. The burden was considerable
and above all very visible. Principles and results were evidently debatable. Ac-
cordingly, amendments were suggested, discussed, and actually enacted in an
unending stream until the advent of modern security legislation. Because of
the importance for the history of economics of the corresponding stream of
books, pamphlets, and articles which for more than three hundred years were
to deal with those problems, we had better note the two main questions at
issue. The Elizabethan enactment had left the administration of the funds
raised by the poor rate to honorary local officers elected for the purpose, a
highly inefficient arrangement which was not radically changed until the Poor
Law Amendment Act of 1834; thus the first question was one of central versus
local control. The second question, which is more interesting from our stand-
point, was Outdoor Relief versus Maintenance in a Workhouse. Outdoor re-
lief was the original method which, owing to a variety of administrative abuses
that were only in part inherent in its principles, elicited the criticisms that
brought the workhouse method steadily to the fore, and thus prepared the
ground for its temporary victory in 18 34.2 To repeat, legislation and adminis-
tration in the seventeenth and eighteenth centuries did little to supplement
existing systems of unemployment relief by measures for the protection of the
employed with respect to hours, working conditions, and so on (not even in
the case of women and children). In some continental countries we find the
beginnings of factory legislation within our period, in Austria, for instance, dur-
ing the last 10 years of Joseph II (1741-90). But in England there was next
to nothing before the (ineffective) Health and Morals of Apprentices Act of

1 Those conditions have been described numberless times with widely varying de-
grees of competence and accuracy. Reference to the works of Heckscher and Mantoux
must again suffice for our purpose.

2 The reader will find a sufficiency of relevant facts in almost any economic history.
Three books, however, should be particularly recommended: E. M. Hampson, The
Treatment of Poverty in Cambridgeshire, 1597-1834 (1934); S. and B. Webb, English
Poor Law History (1927-9); and Dorothy Marshall, The English Poor in the Eight-
eenth Century (1926). An eighteenth-century history will be mentioned presently. ,The
outstanding nineteenth -century history is Sir George Nicholls’ History of the English
Poor Law (1854), complemented by his histories of the Irish and the Scotch Poor Law
(1856).

2 .J 2 II : BEGINNINGS TO ABOUT 179O

1802. 3 In another line, however, we may note the Friendly Society Act of
1793, which mitigated the legislation against corporative action by the workers.

The chief remedies for unemployment consisted in measures intended to
foster manufacturing industry. We shall see later (in ch. 7) that concern about
employment opportunity was one of the chief motives of ‘mercantilist’ poli-
cies. In some continental countries, especially in Germany, protection of the
peasant holding was an important safeguard against pauperization of the in-
dustrial workers. And the deficit financing of continental governments, though
not motivated by this purpose, certainly had some alleviating effects. England
came much nearer to balancing her budgets. But some English writers, though
they did not recommend deficits, were more alive to the possibilities of mone-
tary remedies for unemployment than were their continental brethren. 4

The late scholastics, 5 like their predecessors, had emphasized the role of
charity and defended the beggar against the rough reactions of the environ-
ment. In particular, they had defended the ‘right to beg.’ But they came to
realize that unemployment was growing beyond the possibilities of private
benevolence and therefore entered upon a discussion of the possibilities
offered by legislation and public administration, touching, first incidentally,
later on more systematically, upon problems of causation. This discussion was
taken up by laic writers, mainly the Consultant Administrators, all over Eu-
rope. In Germany, das Armenwesen naturally became a standard subject within
the ‘cameralist’ literature. German governments accepted the state’s responsi-
bility for employment and maintenance as a matter of course. The same prin-
ciple was repeatedly asserted in England, for example, by the Berkshire magis-
trates in 1795. But there is not much to record for the historian of economic
analysis. 6

In the first place, a great many writers on the poor laws argued on the ex-
plicit or implicit ‘theory’ that, barring misfortune, and especially sickness, the
destitute unemployed was personally to blame for his fate. In appraising this
view, contempt for its inadequacy as a theory of the social phenomenon to be

3 See, e.g., B. L. Hutchins and A. Harrison, History of Factory Legislation (1903).

4 The question how far economists of the seventeenth and eighteenth centuries may
be credited with what we should call a monetary theory of employment will be briefly
considered in the next chapter.

5 The tracts by de Soto and de Medina (sixteenth century) mentioned already (see
above, ch. 2), may again serve as examples from a large literature which continued to
pour forth, especially in Spain and Italy, throughout the seventeenth and eighteenth
centuries. We confine ourselves to noticing one of its latest and most successful prod-
ucts, Giovanni Battista Vasco’s (1733-96) Memoire sur les causes de la mendicite et
sur les moyeris de la supprimer, 1790 (republ., with other works of his, in the Custodi
collection). Vasco was a Piedmontese priest who, under the influence of Turgot and
A. Smith, developed into a thoroughgoing ‘liberal’ in the laissez-faire sense.

6 For further information, see especially T. E. Gregory, ‘The Economics of Employ-
ment in England, 1660-1713,’ Economica, 1921. There is no equally valuable survey
for any other country. Reference should, however, be made to the interesting article
by G. Arias on Ortes’ theory of unemployment, Giornale degli Economisti, September
1908.

POPULATION, RETURNS, WAGES, AND EMPLOYMENT

273

explained, and indignation at the callousness of which it may he the symptom,
must not blind us to the element of truth in it which has come to be as much
underrated in our own time as it was overrated then. It was at the basis of the
argument of the defenders of the workhouse system and survived, in various
nuances, until 1914. The principles that relief should be confined to main-
tenance in the workhouse and that life and labor in the workhouse should be
made less eligible than the least eligible employment may merely aim at test-
ing the presence of destitution; actually, however, they were often associated
with punitive intent that can be explained only on the theory in question. In
the second place, writers who went beyond this mentioned a number of factors
that were all of them more or less relevant to the explanation of either un-
employment or substandard conditions among employed workers but without
subjecting them to any elaborate analysis. The most important ones were for-
eign competition, high rates of interest, taxes and regulations that hampered
enterprise, enclosures, and, mainly in connection with enclosures, property in
land. It is very difficult to tell how much insight any such statement reveals.
To mention one example, Child listed high interest as a cause of unemploy-
ment. But the reason he adduced was not that high interest may restrict invest-
ment but that it facilitates premature retirement from business, which, though
not quite indefensible, looks very much like an analytic blunder. Machinery
as a cause of unemployment (or of low wage rates) was mentioned with in-
creasing frequency as the eighteenth century wore on. But nobody attempted
to develop a theory of the mechanization of the productive process. On the
whole, the opposite view prevailed, namely, that the introduction of machinery
tends to increase employment and to raise wages. This opinion, already held
by Cary, seems to have been shared by A. Smith. In the third place, during
the last quarter of the eighteenth century a tendency asserted itself to explain
unemployment by means of the ‘principle of population.’ The analytic nature
of this line of reasoning can be best conveyed by an analogy. One of the fa-
miliar phenomena we observe in every depression is that producers cannot sell
their wares at prices that will cover cost; hence nothing is easier than to jump
at the conclusion that the root of the trouble is ‘overproduction.’ This is the
most primitive of all theories of crises or depressions. And the most primitive
of all theories of unemployment is that people cannot find work at living wages
because there are too many of them. It was almost always at the bottom of
arguments to the effect that more generous provision for the ‘able-bodied poor’
would make matters worse for the working class as a whole, or even that the
poor law as it then stood was breeding poverty by fostering increase in popu-
lation. 7 Observe that this theory, as far as there is anything to it at all, ap-

7 Such arguments were freely and effectively used against the legislation proposed
by William Pitt which would have favored large families. The outstanding performance
in this discussion was Jeremy Bentham’s Observations on the Poor Bill . . . [of] Mr.
Pitt (1797), which foreshadowed the opinion of the ‘classical’ economists of the
nineteenth century on what, speaking from their standpoint, we might describe as
the Fallacy of Relief. See Works, vol. vm.

274 II: BEGINNINGS to about 1790

plies equally well to the relief granted to unemployed persons, and to the subsi-
dies that the poor-law authorities were in the habit of granting to persons em-
ployed at less than living wages. The latter practice was severely criticized on
account of the administrative abuses to which it gave rise — it made it pos-
sible for local potentates to shift part of their wage bill on to the poor rate.
This is probably the reason nobody produced anything that could pass for a
tolerably adequate theory of wage subsidies. But the fundamental similarity
between unemployment and employment at substandard conditions stood out
j all the more clearly. Both entered into the concept of ‘poverty’ or ‘indigence,’

which, as we know, Quesnay had been the first to explain by overpopulation.

; The discussion on the related problem of child labor was still less productive

of analytic performance. Children had always worked with their parents on the
j farm and, under the system of domestic industry, in the home. The spread of

factories merely created new opportunities for the employment of children at a
very early age in the tending of simple machines and induced a new practice
of binding out the children of paupers to cotton manufacturers in order to
reduce the poor rate. Those writers who were impressed by the incidental hor-
rors or by the obvious consequences for the health of the race were few indeed.
The large majority accepted child labor, not only as a matter of course but
with approval — as a sound discipline and as a solution of many of the work-
er’s problems. Some seventeenth-century writers hailed it as a boon to the
masses and seem to have considered the children’s earnings as a net addition to
the family income of workers, without taking account of the effects that the
competition of the children must produce on the wages of adults. This theory,
which was held by Yarranton , 8 qualifies well as an example of ideological dis-
tortion of vision. But it also qualifies as an example of early economic reason-
ing that in spite of its crudity contained an element of truth. If we choose to
disregard everything except money income, then it is likely that in the condi-
tions of that time child labor did result in a gain to the working class — though
I this gain was certainly less than the amount of the children’s earnings — and

did promote Yarranton’s ideal of cheapness and plenty. This attitude changed
but slowly in the eighteenth century, and humanitarian feelings had more to
\ do with it than had economic analysis. Many instances could be adduced of

writers who mention full employment of children at as early an age as possible
\ — at six or even four years — with unqualified satisfaction; or who at least ac-

] cepted it unquestioningly as the normal state of things . 9 Arthur Young’s esti-

mates of the normal budget of a rural laborer’s family take it for granted that

8 Andrew Yarranton (1616-84), England’s Improvement by Sea and Land (1677).
Both the man and the book we shall meet again in ch. 7. It is of some interest to
note that in his advocacy of extensive employment of children Yarranton pointed to
German practice as an example to be followed.

9 To quote at least one instance, in his Tour thro ’ . . . Great Britain (1724-7), vol.

I in, Daniel Defoe noted that in some English villages through which he traveled there

I were no children to be seen — inferring with pleasure that they were all at work, as

f they should be. The same attitude is in evidence in his Plan of the English Commerce

! • (1728).

POPULATION, RETURNS, WAGES, AND EMPLOYMENT 275

the chief breadwinner could not have provided a minimum of existence for
his family without the earnings of his wife and children.

But fact-finding activity was in a much better situation, and its results con-
stitute, in the field of labor economics, the most important achievement of that
epoch. The outstanding performance was Eden's, 10 which in scope and method
has no equal in the English or any other literature of the period. Of particu-
lar interest for us- is the fact that the author, although he disclaimed any in-
tention beyond what fact-finding implies (he offers some interesting discus-
sions, nevertheless), was fully aware of the importance of his facts, not only for
the purpose of legislative and administrative practice but also for economic
analysis. He worked, as he said himself, as one of the 'hewers of stone and
drawers of water' without whom 'the edifice of political knowledge cannot be
reared.' It is of the utmost importance to bear in mind, if the history of eco-
nomics is to be understood, that, though the greatest figure, he was not alone
in that field. Davies’ collection of family budgets of agricultural laborers and
his careful analysis of his data were conceived in the same spirit, 11 and so was
Richard Burn’s History of the Poor Laws, 1764. Work of this type paved the
way toward the legislative developments of the nineteenth century.

10 Sir Frederick Morton Eden (1766-1809), The State of the Poor: or an History
of the Labouring Classes in England from the Conquest to the Present Period; in
which are particularly considered their Domestic Economy . . . ; and the various
Plans which, from time to time, have been proposed and adopted for the Relief of
the Poor ... (3 vols., 1797; abridged ed. by A. G. L. Rogers, 1928). The price and
wage data and the budget study in the third volume are particularly important.

11 David Davies, The Case of Labourers in Husbandry stated and considered, in
three Parts: Part 1. A View of their Distressed Condition. Part 11. The Principal Causes
of their Growing Distress and Number . . . Part in. Means of Relief Proposed. The
budgets are given in the Appendix. The work was (partially) published in 1795.

A few more titles of English books that are of some interest from either the factual
or the analytic standpoint may serve as pointers for the interested reader. Their choice
must be understood, however, to be the result of very unsystematic browsing: L. Lee,
Remonstrance . . . touching the Insupportable Miseries of the Poore of the Land
(1644) — a scheme of re-employment by means of semipublic workshops; Roger North,
A Discourse of the Poor . . . (1753); Anon., Observations on the Number and Misery
of the Poor . . . (1765); Anon., Observations on the Present State of the Poor of
Sheffield . . . (1774); Anon. [R. Potter], Observations on the Poor Laws, on the
Present State of the Poor, and on Houses of Industry (1775). John Hewlett's (see
above, sec. 1) interesting argument concerning enclosures should be particularly no-
ticed: Enquiry into the Influence which Enclosures have had upon the Population
of this Kingdom, 1786, and The Insufficiency of the Causes to which the Increase of
our Poor and of the Poor’s Rates have been Commonly Ascribed (1788).

CHAPTER 6

Value and Money 1

1. Real Analysis and Monetary Analysis 276

[(a) Relation of Monetary Analysis to Aggregative or Macroanalysis] 278

[(b) Monetary Analysis and Views on Spending and Saving ] 280

[(c) Interlude of Monetary Analysis (1600-1760): Becher, Boisguillebert,

and Quesnay] 283

[(d) Dearness and Plenty versus Cheapness and Plenty ] 285

•2. Fundamentals 288

[(a) Metallism and Cartalism: Theoretical and Practical ] 288

[(b) Theoretical Metallism in the Seventeenth and Eighteenth Centuries ] 289

[(c) Survival of the Antimetallist Tradition ] 293

3. Digression on Value 300

[(a) The Paradox of Value: Galiani] 300

[(b) Bernoulli’s Hypothesis] 302

[(c) The Theory of the Mechanism of Pricing ] 305

[(d) Codification of Value and Price Theory in the Wealth of Nations] 307

4. The Quantity Theory 311

[(a) Bodin’ $ Explanation of the Price Revolution] 312

[(b) Implications of the Quantity Theorem] 312

3. Credit and Banking 317

[(a) Credit and the Concept of Velocity: Cantillon] 318

[(b) John Law: Ancestor of the Idea of a Managed Currency] 321

6. Capital, Saving, Investment 322

7. Interest 327

[(a) Influence of the Scholastic Doctors] 328

[(b) Barbon: ‘ Interest is the Rent of Stock’] 329

[(c) Shift of Analytic Task from Interest to Profit] 330

[(d) Turgot’s Great Performance] 332

1. Real Analysis and Monetary Analysis

We have already touched upon this subject in Chapter 4 when discussing
Quesnay’s work. It if now time to go a little more deeply into it in order to
visualize as clearly as we can a doctrinal development that has acquired addi-
tional interest for the student of modem economics owing to the fact that
Monetary Analysis has once more conquered in our own time. Let us first of
all re-define the meaning of these two approaches.

1 [Although this chapter was apparently written rather early, it was unfinished and
not typed at the death of J. A. S. The manuscript pages were unnumbered and some-
times there were two or three versions of the same page. This chapter was put to-
gether with the assistance of Arthur W. Marget.]

276

VALUE AND MONEY

2 77

\ f Real Analysis 2 proceeds from the principle that all the essential phenomena

of economic life are capable of being described in terms of goods and services,
of decisions about them, and of relations between them. Money enters the
\ picture only in the modest role of a technical device that has been adopted

in order to facilitate transactions. This device can no doubt get out of order,
and if it does it will indeed produce phenomena that are specifically attrib-
utable to its modus operandi. But so long as it functions normally, it does not
affect the economic process, which behaves in the same way as it would in a
barter economy: this is essentially what the concept of Neutral Money implies.
Thus, money has been called a ‘garb’ or ‘veil' of the things that really matter,
both to households or firms in their everyday practice and to the analyst who
observes them. Not only can it be discarded whenever we are analyzing the
fundamental features of the economic process but it must be discarded just as
a veil must be drawn aside if we are to see the face behind it. Accordingly,
money prices must give way to the exchange ratios between the commodities
that are the really important thing 'behind’ money prices; income formation
must be looked upon as an exchange of, say, labor and physical means of
subsistence; saving and investment must be interpreted to mean saving of
some real factors of production and their conversion into real capital goods,
such as buildings, machines, raw materials; and, though 'in the form of money,’
it is these physical capital goods that are 'really’ lent when an industrial bor-
rower arranges for a loan. The specifically monetary problems can then be
treated separately, much as we treat many other things separately, for example,
insurance.

Monetary Analysis, in the first place, spells denial of the proposition that,
with the exception of what may be called monetary disorders, the element of
money is of secondary importance in the explanation of the economic process
of reality. We need, in fact, only observe the course of events during and after
the California gold discoveries to satisfy ourselves that these discoveries were

2 The phrase is not very felicitous. In particular, it invites confusion with another
of the many meanings of the word 'real.’ Real Analysis stands for. emphasis upon real
in the sense of non-monetary processes. But we commonly use the word /real' for
monetary quantities that have been 'corrected’ for changes in some price level. For
instance, we speak of real income when we mean money income divided by a cost of
living index. Such ‘corrected’ monetary quantities are, however, still monetary quan-
tities and are, along with uncorrected ones, used also in Monetary Analysis. Therefore
our distinction must not be identified with the distinction between analysis in terms
of dollars of constant purchasing power and analysis in terms of ‘current’ dollars.
Moreover, we are defining both Real and Monetary Analysis as pure types in order
to convey an important truth. In actual practice, neither type is ever pure. Hence the
contrast between them is less sharp than we are forced to make it. There are many
midway houses. And neither Real nor Monetary Analysis can ever get along without
using concepts and arguments that strictly speaking belong to the other. Sponsors of
Real Analysis have often used a monetary capital concept; sponsors of Monetary
Analysis always use the essentially ‘real’ concept. Employment.

_jfL.

270 II : BEGINNINGS TO ABOUT 179O

responsible for a great deal more than a change in the significance of the unit
in which values are expressed- Nor have we any difficulty in realizing — as did
A. Smith: — that the development of an efficient banking system may make a
lot of difference to the development of a country’s wealth. To some extent,
these and other things can be, and have been, recognized within the pale of
Real Analysis. We may even hold monetary theories of business cycles or of
interest without leaving its precincts. The reader should observe, however, that
one cannot go very far on this route without becoming aware of the fact that
the monetary processes that account for conspicuous 'disturbances’ do not
cease to act in even the most normal course of economic life. We are thus
led, step by step, to admit monetary elements into Real Analysis and to doubt
that money can ever be 'neutral’ in any meaningful sense. In the second place,
then, Monetary Analysis introduces the element of money on the very ground
floor of our analytic structure and abandons the idea that all essential fea-
tures of economic life can be represented by a barter-economy model. Money
prices, money incomes, and saving and investment decisions bearing upon these
money incomes, no longer appear as expressions — sometimes convenient, some-
times misleading, but always nonessential — of quantities of commodities and
services and of exchange ratios between them: they acquire a life and an im-
portance of their own, and it has to be recognized that essential features of the
capitalist process may depend upon the ‘veil’ and that the 'face behind it’ is
incomplete without it. It should be stated once for all that as a matter of
fact this is almost universally recognized by modem economists, at least in
principle, and that, taken in this sense. Monetary Analysis has established
itself.

[(a) Relation of Monetary Analysis to Aggregative or Macroanalysis .] Mone-
tary Analysis, as usually understood, means more than this: in the third place,
it means in addition Aggregative Analysis or, as it is sometimes called, Macro-
analysis , 3 that is to say, analysis that attempts to reduce the variables of the
economic system to a small number of social aggregates, such as total income,
total consumption, total investment, and the like. Quesnay’s tableau is the
’ outstanding example for the alliance between Monetary and Aggregative Anal-
ysis. The alliance is not a logical necessity but is nevertheless close: it is pos-
sible, as we have put it, to introduce money on the ground floor of general
economic analysis without adopting the aggregative view. But monetary aggre-
gates are homogeneous, whereas most nonmonetary ones are but meaningless
heaps of hopelessly disparate things; and if we wish to work with a small num-
ber of variables, we can hardly help resorting to monetary ones. And since this
alliance with the aggregative approach actually runs through the whole history
of Monetary Analysis, we shall henceforth restrict this term to analysis in
terms of aggregates 4 — mainly, as we have seen in our study of the tableau,

3 This term is due to Professor Ragnar Frisch.

4 Some readers may welcome illustration from the leading system of Monetary
Analysis of today, the Keynesian system. Readers entirely unfamiliar with the latter
are requested to neglect this note. The chief variables of that system are quantity of
money (sum total of cash balances demanded and supplied), national income, con-

VALUE AND MONEY

279

streams of expenditure. It was pointed out there that analysis of this type does
not do away with real analysis, but only confines it to the description of
the behavior of individual households and individual firms. The point is, to
repeat, that the social totals that result from this behavior are then dealt with
as such and without referring back again, at every step, to the individual acts
or decisions behind them. For instance, investment as a social total is the
algebraic sum of a great many individual — positive or negative — investments.
Monetary Analysis leaves the explanation of these to the Theory of Individual
Households and Firms, and concerns itself only with that algebraic sum on
the hypothesis that this is- all that matters for the economic process as a whole
and that all the effects on the economic process as a whole that emanate from
the multitude of individual investment decisions are measured by their alge-
braic sum , 5 It cannot be emphasized too strongly that Monetary Analysis that
accepts this hypothesis is not in as safe a position as is Monetary Analysis that
does not. For it can be strictly proved that this hypothesis is in general con-
trary to fact. For our purpose, it is, however, sufficient to illustrate this by the
example just mentioned. Suppose that, for any given year, the investment
decisions of all firms sum up to zero. It stands to reason that the course of
events to be expected from this will not depend solely on this fact but also
on the component individual decisions: the effect will be different, for in-
stance, if all firms have actually decided to invest nothing, that is, to leave their
capital commitments unchanged, from what it would be if some of them had
decided to make positive investments while others had decided to reduce their
capital commitments by the same amounts. Moreover, effects — on the eco-
nomic process as a whole — will differ according to the heal' nature of the in-
vestments of the individual concerns and, in particular, according to whether
these investments are complementary to, or competitive with, each other. It is

sumption, and investment, all measured either in money or in wage-units (the money
wage of an ideal unit of labor). To these monetary aggregates correspond equal ag-
gregative 'schedules’ that embody assumptions about the behavior of households and
firms in the aggregate: the schedule of marginal propensity to consume, the schedule
of liquidity preference, and the schedule of marginal efficiency of capital (see below,
Part v, ch. 5). Individual prices do not enter explicitly, apart from the rate of interest.
It will be observed, however, that, though rate of interest is not an aggregative quan-
tity, it fits well into a system of aggregative quantities because, unlike any other' in-
dividual price, it can be readily put into a meaningful relation to them: a relation
between the price of wheat and total investment does not, in general, make sense;
but the relation between the interest rate and sum total of net investment does. We
must hence extend our idea of aggregative variables so as to cover any nonaggregative
ones that may have to be introduced into an aggregative system. The wage rate is
the most important other instance.

5 This point of view has been formulated by Joan Robinson, with unsurpassable
energy and brilliance, in 'The Theory of Money and the Analysis of Output,’ Review
of Economic Studies, October 1933. From the standpoint defined in the text, the
'theory of money’ — what we call Monetary Analysis — in fact becomes identical with
the theory of social aggregates and, ultimately, of total output in terms of the mone-
tary values of consumption and investment.

280

II : BEGINNINGS TO ABOUT I79O

true that, so far as the immediate effects of firms' expenditure as such are
concerned, our algebraic sum still tells us something. This is precisely why
Monetary Analysis is not valueless. But it is not more than a part of the theory
of the economic process as a whole and becomes seriously misleading if ap-
plied alone . 6

[(b) Monetary Analysis and Views on Spending and Saving .] In the fourth
place, as we have also seen in the case of Quesnay, Monetary Analysis is, asso-
ciated, not by logical necessity but nevertheless closely, with a characteristic set
of views about Spending and Saving and, in connection with these, about mone-
tary and fiscal policy. In fact, so soon as we see the economic process — pri-
marily or exclusively — as a system of streams of expenditures, we shall be
tempted to expect all sorts of disturbances from any obstruction to the even
flow of these streams and, vice versa, to attribute any disturbance we observe
in the economic process to such obstructions — as at least its proximate cause.
The way in which households and firms handle their money and react to
monetary magnitudes will thus acquire importance independently of the com-
modity aspect of their actions. In particular, we may be led to attach more
importance to people’s 'making full use of the income they receive from firms,’
that is, to their spending it promptly on products of these firms than to the
commodities they acquire in so doing and the prices at which they acquire
them. By the same token, we may be led to identify Saving with obstruction
to that flow of expenditure and, in the limiting case, to see it in the role of
economic Disturber General. Thus, Monetary Analysis not only qualifies well
as a tool for economists who are 'spenders’ and 'anti-savers’ independently of
any theory but also tends to produce in the minds of its votaries the 'spend-
ing’ and 'anti-saving’ attitude by focusing attention on the process of the gen-
eration of monetary income behind which everything else disappears from
sight.

Having cleared the ground, we must now follow the fortunes of Real and

6 In partial recognition of this, modern votaries of Monetary Analysis, and in par-
ticular its leading exponent, Lord Keynes, frequently introduce a most significant re-
striction: they assume the organization and technique of production and the capital
equipment as given (in the short run), thus reducing the problem before them to the
question what determines (in the short run) the degree of utilization of a given in-
dustrial apparatus; and, in further simplification, they identify this greater or smaller
degree of utilization with greater or smaller employment of labor so that increase or
decrease of industrial investment simply means a greater or smaller wage bill. It is
easy to see that, in this special case, plus and minus investments are much more
nearly compensatory in their effects than they are in the general case and that hence
their algebraic sum comes much nearer to expressing adequately this total effect on
the economic process. But the reader should observe (a) that the restrictive assumption
in question excludes the very essence of capitalist reality, all the phenomena and prob-
lems of which — including the short-run phenomena and problems — hinge upon the
incessant creation of new and novel capital equipment, and (b) that, because of this,
a model framed upon this restrictive assumption has next to no application to ques-
tions of practical diagnosis, prognosis, and, above all, economic policy unless reinforced
by extraneous considerations.

VALUE AND MONEY

281

Monetary Analysis during the epoch under consideration. Let us face at once
the chief difficulty of this task. It arises from the circumstance that we meet
the ideas underlying, or associated with. Monetary Analysis, as it were, on two
levels — on a prescientific and on a scientific one. Ever since wages began to be
paid in money, every servant girl has felt that all would be well if only her
employers spent their money freely enough; and ever since trading began to
mean taking in money, every trader has felt that he would be able to sell
whatever it was he wished to sell, if only there were money enough or if the
people who had it could only be persuaded to part with it. With exceptions
that prove the rule — in nineteenth-century Europe they almost ousted the
rule — this is and always has been a major item of the economics of the man
in the street who never really believed in the gospel of thrift even when he
paid lip service to it. The first thing that analytic effort does is to dispel
some of these 'monetary illusions/ But other analytic efforts keep on creating
and re-creating a Monetary Analysis on a scientific level which is sometimes
just as successful in its attacks upon Real Analysis as the latter has been in
its attacks upon those 'popular prejudices/ These two levels, however, are
not unconnected, and this is where the historian’s trouble comes in. On the
one hand, popular sentiments about money and spending proved invincible.
They always survived and always manifested themselves in a literary current
that ran sometimes outside and sometimes inside of 'recognized’ economics.
And they always lent powerful support to attempts to establish Monetary
Analysis on the scientific level: just as the popular success of socialist argu-
ments forged by trained economists is not due to their scientific merits but to
the fact that they fall in with cravings of the human heart that defy rational
formulation, so the popular successes of scientific Monetary Analysis cannot
be explained without taking into account the fact that its arguments fall in
with extra-rational sentiments and therefore are likely, particularly in times of
stress, to be greeted with many a sigh of relief . 7

The most effective propositions of scientific Monetary Analysis are, in fact,
those in which the public is able to discover a pointer toward the easy way
out of difficulties and which bear a family likeness to what growling profession-
als call popular errors. On the other hand, these popular prejudices, like others,
contain elements of scientifically provable truth so that association with them
does not constitute a prima facie case for rejecting scientific Monetary Anal-
ysis. However, the exponents of Real Analysis thought that it did: not only
did they neglect those elements of truth, to the disadvantage of their own
teaching, but they also used the opportunity in order to represent the results
of Monetary Analysis simply as new versions of what indubitably were popular
fallacies. Later on, whenever they were in a position to do so, the votaries of
Monetary Analysis retaliated in kind, the more zealously so because, in part,
they actually did serve up exploded error in new dressing. No indictment of
subjective honesty is intended. Such mix-ups will, however, arise as long as
economists continue to analyze with an eye on practical programs they wish

7 The case of the United States illustrates all this to perfection.

282

II ; BEGINNINGS TO ABOUT I79O

to recommend or to combat, as most of them did and do. For any effort of
this kind will inevitably partake of the characteristics of political warfare in
which the most 'primitive tactical wisdom precludes any admission to the ef-
fect that there may be something in the opponent’s standpoint — with the re-
sult, in the case in hand, that both 'real’ and 'monetary’ analysts invariably
overbid their hands. Bufin order to complete the analogy, it is necessary to
add that they also committed all sorts of mistakes in playing them. However,
we shall now try, so far as seems possible, to straighten out the tangle, first,
by visualizing some broad contours of doctrinal development and, second, by
mentioning a few representative names.

The history of economic analysis begins with Real Analysis in possession of
the field. Aristotle and the scholastic doctors all adhered to it. This is per-
fectly understandable, since there was nothing to face them except the pre-
analytic sentiments of the public. But, as we know, there is an important quali-
fication to be made: they offered monetary explanations for the phenomenon
of interest. Very roughly, this state of things prevailed until the beginning of
the seventeenth century. Again, the history of economic analysis in the period
under survey ends with a victory of Real Analysis that was so complete as to
put Monetary Analysis practically out of court for well over a century, though
one or two efforts were made on its behalf in the court of scientific economics,
and though it continued to lead a lingering life outside of that court, in an
‘underworld’ of its own. 8 This victory is also understandable. It was, of course,
greatly facilitated by vivid memories of monetary troubles — medieval and more
recent ones — of spectacular mismanagement of banking methods — John Law’s
doings (see below, sec. 5) were still in everybody’s mind — and by the antag-
onism to ‘mercantilist’ teachings. But powerful though they were, these fac-
tors 9 should not be overemphasized to the point of making us forget that
Real Analysis was also the result of analytic advance and instrumental in
bringing about further advance.

8 The men who stand out from the conquering host are Turgot and A. Smith, who
were to find, in the subsequent period, the ally who completed the conquest, J. B.
Say. Lord Keynes (from whom I have borrowed the word ‘underworld’ that expresses
so well the status of Monetary Analysis during the nineteenth century) dates the vic-
tory of Real Analysis from the controversy between Ricardo and Mai thus (General
Theory, p. 32). This is not correct, but there is truth in his statement that the views
on policy associated with Real Analysis ‘conquered England [and the rest of the
world, J. A. S.] as completely as the Holy Inquisition conquered Spain.’ In fact, any-
thing savoring of Monetary-Analysis ideas was disapproved of, not only as erroneous
but also as not quite all right morally: it was — and, needless to say, not always without
reason — associated with advocacy of dilettantic and frivolous policies and, especially in
the United States, with sponsorship of loose banking practice and the silver interest.

9 They are good examples of ideological influence if we define ideologies in a sense
that is both broader and more useful than the Marxist one. Any obsession that limits
our range of vision and enslaves our thought then comes within that concept. And
the idea, e.g. that nothing that writers tinged with ‘mercantilism’ had ever written
could be true and that anything that we should call inflationism must be fought at
any price, may well be called an obsession.

VALUE AND MONEY

[(c) Interlude of Monetary Analysis (1600-1760) : Becher, Boisguillebert, and
Quesnay .] But between, say, 1600 and. 1760, there was an important interlude
of Monetary Analysis. The businessmen, civil servants, and politicians, who
then took up their pens, attended to the monetary aspects of their troubles as
a matter of course. They would as soon have doubted that they got wet when
it rained as that more money spelled more profit and more employment, or
that high prices were a boon, or that high interest was just a nuisance. But
though this literature unmistakably took off from the preanalytic level of
Monetary Analysis and never quite lost contact with the servant girl’s eco-
nomics, it did not stay there but eventually produced, barring technique, practi-
cally everything that has come to the fore again during the thirties of this
century. Deferring consideration of the specifically ‘mercantilist’ tenets and,
for the moment, also of all other matters, we shall now notice the emergence
of Monetary Analysis in its most significant sense, that is, in the sense of a
theory of the economic process in terms of expenditure flows. Though Ques-
nay’s example suffices to show that, in strict logic, it has nothing to do with
protectionism, the first document that presents such a theory with a clearness
that is beyond the possibility of doubt was a strongly ‘mercantilist’ tract,
Becher’s Politische Discurs (1668). 10 This tract contains the rudiments of an
analytic schema that turns upon people’s expenditure on consumption — the
prime mover or, as Becher said, the ‘soul’ of economic life. In itself the ob-
servation that one man’s expenditure is another man’s incpnpe — or that con-
sumers’ expenditure generates income — is as old as it is trivial. But it can be
turned into a principle of analysis — the principle that Quesnay, a century later,
was to embody in his tableau — just as. can the old and trivial observation that
a body at rest remains at rest unless some external force acts on it. We shall
call it Becher’s Principle, because he seems to have been the first to realize
its theoretical possibilities. He did little to develop any system of Monetary
Analysis and, of course, left plenty for Lord Keynes to do. 11 But so far as rec-

10 Politischer Discurs von den eigentlichen Ursachen dess Auff- und Abnehmens der
St'ddt , Lander, und Republicken, in specie, -wie ein Land folckreich und nahrhafft zu
machen und in eine rechte Societatem civilem zu bringen (i.e. how to make - a country
rich and populous and to develop it into a real society). Johann Joachim Becher (1635-
82) was something of an adventurer. Professionally a physician and a chemist, he
came to Vienna brimming over with plans and projects, and there played a certain
role until he had to flee from his creditors. But his vigor and originality were universally
recognized even by men like Leibniz and Stahl.

11 Lord Keynes (General Theory, ch. 23) is not only generous but overgenerous in
his recognition of the ‘mercantilist’ contribution. While this is admirable from a moral
or aesthetic standpoint and appropriate in a man who cares more for the cause he
espouses than for his own claims to originality, it is apt to convey a somewhat mis-
leading picture and to obscure the amount of preanalytic wisdom and error that went
into those works. Becher he does not mention. Instead he mentions W. von Schroder
(1640-88; main work: Furstliche Schatz- und Rentkammer, 1686), a less important,
especially less original, contemporary of Becher, who seems to have been influenced
both by the latter and by Thomas Mun.

284 II : BEGINNINGS TO ABOUT 179O

ommendations may be trusted at all to reveal an author’s analytic schema,
there is practically complete concordance between the t,wo (excepting their
views on population), 12 among other things, in the matter of domestic in-
vestment.

It is not surprising that Becher found successors in Germany. The German
Consultant Administrators were far indeed from understanding the analytic
importance of his principle. But Monetary Analysis, in the sense defined, works
with concepts which, though actually very abstract and indeed unrealistic,
carry a surface meaning that is perfectly familiar to everyone. This surface
meaning they absorbed readily because it fitted in excellently with the rest of
their thought — so much so that it is not even necessary to assume dependence.
Many of their diagnoses and recommendations may in fact be co-ordinated and
rationalized with reference to Becher’s Principle. Thus, many of them be-
lieved in the pivotal importance of high-level mass consumption or, to put
the same thing into .their normative way of expressing themselves, in measures
that would stimulate mass consumption. For some of them, Justi for example,
this was the main reason for putting so much emphasis on increase in popula-
tion — as a means of expanding demand — rather than the other way round.
Becher himself perceived the interaction of the two. His principle was of
course relevant, as it is today, to the appraisal of the effects of high prices,
saving, and luxury.

In England, neither Becher’s Principle nor anything closely related to it was,
so far as I know,* explicitly formulated. All the more often was it implied. For
instance, Potter’s argument (1650) to the effect that an increase in the supply
of money will increase the rate of spending and production proportionately
points in this direction, and so does the analogous though more guarded argu-
ment of Law (1705). 13 The French literature offers, among others, the most
noteworthy example of all — Boisguillebert’s ( Dissertation sur la nature des
richesses, see ch. 4 above), which is the more interesting because, like Quesnay,
he was in principle a free trader and laissez-faire advocate. He did not invoke
state management to secure the steady flow of monetary values (expenditures),
but on the contrary pointed to the state-made impediments to it: the export
duties, the internal barriers to trade, regulative interference with agriculture
and manufactures, the vicious operations of the most important direct tax, the
taille — all of which desolated the countryside and impoverished the towns

12 Becher’s posthumous fame has been fostered by the eulogies of many German
historians. Following the lead of Roscher ( Geschichte der Nationalokonomik in
Deutschland, 1874, p. 270), they have kept on listing a number of more or less in-
teresting points in Becher’s teaching, for instance, his concept of three market con-
figurations of which he strongly disapproved, monopolium, propolium (forestalling),
and polypolium (perfect competition). But there is not much in this. His lack of
enthusiasm for perfect competition and his almost Keynesian dislike of laissez-faire
will no doubt be judged more favorably now than it was in the nineteenth century,
but it is likely that his analytic grasp was below rather than above the free-competition
argument of a later time.

13 On Potter and Law, see below, sec. 1 and 5.

VALUE AND MONEY

285

because they restricted consumers’ expenditure. Also, while we look upon the
wage earners as the most dependable spenders, Boisguillebert, in the social pat-
tern of his time, assigned this role to the landowners. But these differences
serve only to emphasize the fundamental similarity both of his theory and his
outlook upon practical problems with those of our own time. Consumers' ex-
penditure was the active principle of economic life. Equilibrium was an
equilibrium of reciprocal demand, in terms of money, of all groups for the
products or services of all other groups; it would realize itself if and only if
every seller promptly became a buyer. 14 Anything that interfered with prompt
expenditure on consumers’ goods would induce a fall in prices, hence a fall in
incomes, then in turn another fall in consumers’ expenditure, and thus result
in cumulative deflation. Therefore his horror, never surpassed by anyone’s out-
side the United States Senate, of that worst of all disasters — cheap bread.
With delightful naivet6 he warned lawyers, physicians, actors, and so forth
not to clamor for low prices of agricultural products: in doing so they were
‘digging their own graves’; for the landowners, who are nothing but inter-
mediate spenders, would then find their incomes reduced and have to reduce
their expenditure, and where would those lawyers, et cetera, be? Thus, his
idea of a prosperous society did not involve Cheapness and Plenty but Dear-
ness and Plenty. He did not use the phrase Fallacy of Cheapness of which
modern ‘spenders’ are so fond, but it is evident that he meant exactly the
same thing. Since this question has never ceased to arouse interest — at least
in that no-man's land that lies between professional and popular economics —
we had better take this opportunity to comment upon it.

[(d) Dearness and Plenty versus Cheapness and Plenty .] First of all, it
is quite clear that both of the opinions envisaged are strongly rooted in
the public mind and that the politicians, legislators, and administrators
who took action in order to give effect to the one or the other simply re-
sponded to popular demands. This is as true today as it was for the price
edicts of the later Roman Emperors, and explains not only the contradic-
tions in professed motives and in actual measures that we observe but
also the many insincerities in the use of apparently general arguments
for what was meant to improve the relative position of some particular
group. Broadly speaking, the workman always wanted low prices of com-
modities, the businessman high prices, and both assumed uncritically the
absence of any further effects of either cheapness or dearness. Early anal-
ysis, here as elsewhere, proceeded from those popular sentiments and ra-
tionalized and reshaped them into doctrines. But in doing so, writers —

14 This involves the concept of aggregate demand, in terms of money, for output
as a whole and may hence be said to anticipate the Malthusian (and Keynesian) con-
cept of aggregate demand which will be discussed on a later occasion. It has been
observed already that, almost a century after Boisguillebert, essentially the same idea
was sponsored by G. Ortes (see above, ch. 3, sec. 4d): to say that total consumers’
demand is the limiting principle of production (employment) comes to the same thing
as saying that it is the active principle of production.

<6 II: BEGINNINGS TO ABOUT 1790

again: here as elsewhere- — usually sided with the one or the other and
hence were slow, and often unwilling, to see the elements of truth in the
other. The scholastic doctors associated prosperity with cheapness; dear-
ness they associated with famine and mass misery. The English business-
men-economists of the seventeenth century, quite naturally in the condi-
tions of their environment, inclined to the opposite position but not al-
ways: some, for example Roger Coke, made a case for Cheapness and
Plenty; but the majority associated Dearness and Plenty — and, so we may
add, a low rate of interest — with brisk trade and high levels of employ-
ment. It will be seen that the difference between them, as well as the dif-
ference between their majority and the scholastic doctors, was entirely
due to differences in the situations that different writers and groups of
writers envisaged, so that there really was no logical incompatibility be-
tween what at first blush looks like diametrically opposed views. But no-
body saw or admitted this, for everyone wanted to teach a practical lesson.
And this remains true for the more refined analysis of the eighteenth
century. The high-price argument proved difficult to beat and was, at
least in some respects, upheld by front-rank men, such as Boisguillebert
and Quesnay, but it was beaten eventually, the tenable and even sug-
gestive parts of it no less than the really fallacious ones. A. Smith cast
his vote for Cheapness and Plenty, and practically all nineteenth-century
economists of standing followed him. Again, it is to be observed that all
that the Cheapness-and-Plenty school really did was, first, to assert such
trivial truths as that any general level of prices and monetary expressions
to which the economic process is adapted is, so far as a closed economy
is concerned, as good as any other and that, so far as this goes, it is only
the relations between some prices and others that matter, for instance,
the relation between commodity and factor prices; second, to interpret
cheapness in terms of effort rather than in terms of money; third, to ac-
cept the fall in money prices that occurs in consequence of accumula-
tion and improvement as the natural method for giving effect to the in-
creasing cheapness of things in terms of effort; and, fourth, to make
light, on the one hand, of the disturbances that are inseparable from
falling prices and, on the other hand, of the possibilities of stimulation,
inherent in policies of rising prices. Thbre was really nothing in all this
that can properly be called a fallacy. In important respects, the victory of
the Cheapness-and-Plenty advocates spelled analytic advance. But it was
a one-sided advance that neglected many promising suggestions of the
Dearness-and-Plenty men.

But, second, it should be observed that the slogan of Dearness and
Plenty is not necessarily connected with Monetary Analysis in the sense
of analysis in terms of monetary aggregates. Evidently, there is nothing in
the latter to prevent us from associating prosperous conditions with
cheapness. On the face of it, then, the connection between Monetary
Analysis in that sense and dearness is historical only and therefore calls
for special motivation in each case. In the case of Boisguillebert, this re-

VALUE AND MONEY 287

quirement can be easily met. His high-price argument was really an
argument about high prices of agricultural products, and the effects of
these on welfare were motivated by the consideration that they meant
high incomes for the landowners on whom Boisguillebert principally re-
lied for doing the spending: just as modern economists identify high
wage rates with a high total income of the working class and this with
liberal expenditure by consumers, so Boisguillebert identified high prices
of agricultural products with high rents, high rents with liberal expendi-
ture, liberal expenditure with high levels of employment and welfare.
Here, then, we have a logical relation between Monetary Analysis and a
high-priceq)hilosophy. But Verri’s argument to the effect that an increase
in the supply of money, owing to its stimulating effects on production,
may induce a fall in prices (Verri is the most important pre-Smithian au-
thority on Cheapness and Plenty) could be worked up into a piece of
Monetary Analysis that would be allied to a low-price philosophy.

Quesnay was of the same opinion in regards to prices (see, especially, his
Maximes generates, 1758). He also thought that, whereas plenty and low
value are not riches, and scarcity and dearness spell misery, abundance and
dearness spell opulence: prices must not be allowed to fall because telle est
la valeur venale, tel est le revenu (xyiii). One must not think that cheapness
is advantageous for the poor — it only makes their wages fall. And the means
(aisance) of the lowest classes must not be diminished (xix), for then their
consumption (that is, total demand in terms of money or spending) will be
reduced, and this in turn will reduce production and income. But nothing is
so characteristic of this type of theory, which can be so easily translated into
modern language of familiar ring, as is the attitude to saving, adumbrated by
Boisguillebert, fully developed by Quesnay. In this analytic schema the prompt
onward flow of purchasing power is everything. Saving is believed to interrupt
it.' Hence saving is a sort of public enemy. Quesnay makes it one of his max-
imes: que la totalite des sommes du revenu rentre dans la circulation annuelle
et la parcoure dans toute son etendue (vn). There must be no formation of
fortunes pecuniaires (accumulations of actual cash?). Landowners and those
who practice lucrative professions must not retain ie p6cule du royaume au
prejudice de la rentree des a vances de la culture . . . : cette interception du
p6cule diminuerait la reproduction des revenus et de rimpot.’ Le pecule may
no doubt be interpreted in the sense of uninvested savings. Even so, the simi-
larity with Keynesian views is striking: in itself, saving is sterile and a dis-
turber; it must always be 'offset/ and this offsetting is a distinct act that may
or may not succeed. A fairly strong anti-saving tradition thus acquired addi-
tional support shortly before it almost vanished into thin air. This is all that
need be said about the monetary theory of the physiocrats.

How was it then that Real Analysis conquered so easily and completely?
This question will be answered in the last two sections of this chapter, where
two of the chief battlefields of its victorious campaign will be surveyed, the
theory of saving and the theory of interest. A general answer may, however, be

288

II : BEGINNINGS TO ABOUT 179O

given at once: the reason for the defeat or rather the collapse of Monetary
Analysis in the last decades of the eighteenth century was its weakness. Even
if, for the sake of argument, we grant without qualification that the principle
of monetary analysis is sound and that the modern development of it is an
improvement upon the real analysis of the nineteenth century, it should be
clear that the latter was not less superior to the monetary analysis of the
eighteenth. Such spirals of advance are, I believe, not uncommon: theories
that it is an achievement to displace may return to displace those by which
they had been displaced, and both the displacement and the return may bene-
fit that strange thing, scientific knowledge.

2. Fundamentals 1

We now turn to the theory of money in the narrower and still more usual
sense — let us say, briefly though imperfectly, the theory of money as a techni-
cal device. For this purpose, it is convenient to introduce a few terms that will
facilitate exposition throughout the rest of this book.

[(a) Metallism and Cartalism: Theoretical and Practical .] By Theoretical
Metallism we denote the theory that it is logically essential for money to con-
sist of, or to be 'covered’ by, some commodity so that the logical source of the
exchange value or purchasing power of money is the exchange value or pur-
chasing power of that commodity, considered independently of its monetary
role. It is true that in principle any commodity can be chosen to serve as
money. But the term Commodity Theory of money has also another meaning.
This is why, availing ourselves of the fact that in modern times only gold and
silver have been normally chosen for that role, we prefer the term Metallism,
though it is not strictly correct. It is also true that the ‘standard’ chosen may
consist. of more than one commodity: the singular is used merely in order to
avoid adding 'or commodities’ each time. By Practical Metallism we shall de-
note sponsorship of a principle of monetary policy, namely, the principle that
the monetary unit ‘should’ be kept firmly linked to, and freely interchangeable
with, a given quantity of some commodity. Theoretical and Practical Cartalism
may best be defined by the corresponding negatives. Thus, we shall speak of
theoretical cartalism wherever we find denial of the proposition that it is log-
ically essential for money to consist of, say, gold, or to be promptly convertible
into gold; of practical cartalism wherever we find sponsorship of the principle
of policy that the value of the monetary unit ‘should’ not be tied to the value
of any particular commodity . 2

1 [J. A. S. had tentatively suggested ‘Ground Theory’ ( Grundlagenforschung ) as the
title of this section, but he used ‘Fundamentals’ as the title of the corresponding sec-
tions in Part m (ch. 7, sec. 2) and Part iv (ch. 8, sec. 3).]

2 The words Metallism and Cartalism are borrowed from G. F. Knapp’s State Theory
of Money (see below. Part iv, ch. 8, sec. 3). Since, according to the metallist view,
the theory of money derives directly from the logically prior theory of barter, metallist
theories are (roughly or exactly, I am not quite sure) what L. von Mises has called

VALUE AND MONEY

289

These distinctions owe their importance for us to the fact that theoretical
and practical metallism need not go together. An economist may, for instance,
be fully convinced that theoretical metallism is untenable, and yet be a strong
practical metallist. Lack of confidence in the authorities or politicians, whose
freedom of action is greatly increased by currency systems that do not provide
for prompt and unquestioning redemption in gold of all means of payment
that do not consist of gold, is quite sufficient to motivate practical metallism in
a theoretical cartalist; this does not involve any contradiction. But the reader
will realize that this fact may cause great difficulties in interpreting authors who
are in the habit of confusing theoretical and practical considerations. Nor is
this the only reason why it is not always easy to tell whether or not a man
should be classed as a theoretical metallist. For,, without being one, he may
still believe that ‘the most salable commodity' constitutes the historical as
distinguished from the logical source of the phenomenon of money . 3 Again, he
may wish to stress the role of government in choosing the commodity that is
to serve as money and its power to alter this decision in various ways. In do-
ing so he may easily, if not very sophisticated or careful, use language that will
tempt us to class him as a cartalist. We remember that this difficulty arose in
the case of Aristotle (eh. 1, above). Finally, basic theories are malleable and
writers are often inconsistent, still more often vague. When we find that a
writer compares money to a ticket — a ticket that admits the bearer to the great
social store of all goods — we feel inclined to register him as a cartalist. But the
phrase need not mean much, and both J. S. Mill, who used it in the nine-
teenth century, and Berkeley, who used it in the eighteenth, are more prop-
erly called metallists. There is no denying that views on money are as difficult
to describe as are shifting clouds . 4

[(b) Theoretical Metallism in the Seventeenth and Eighteenth Centuries .]
Theoretical metallism, usually though not always associated with practical
metallism , 5 held its own throughout the seventeenth and eighteenth centuries

catallactic theories of money (xaTaX^arreiY, to exchange). But the word Metallism
conveys the essential point more tellingly, besides offering easy transition to Mono-
metallism and so on.

3 Here we brush against a highly interesting question of methodology. [J. A. S.
wrote: please leave rest of page for note.]

4 [The next few pages were inserted by J. A. S. from an earlier version typed in
March 1944 (see Appendix).]

5 I am taking it for granted that theoretical metallism is untenable, i.e. that it is
not true that, as a matter of pure logic, money essentially consists in, or must be
backed by, a commodity or several commodities whose exchange value as commodities
are the logical basis of their value as money. The error involved consists in a con-
fusion between the historical origin of money — which, in very many cases, although
perhaps not universally, may indeed be found in the fact that some commodities,
being particularly salable, come to be used as the medium of exchange — and its na- ,
ture or logic — which is entirely independent of the commodity character of its ma-
terial. This type of error occurs very frequently in all fields of social analysis, especially
in its early stages: it requires considerable analytic experience to perceive that primitive
forms of social institutions may be more complex than modem ones and that they

29O II : BEGINNINGS TO ABOUT 1790

and prevailed victoriously in the 'classical situation' that emerged in the last
quarter of the latter. Adam Smith substantially ratified it. And for more than
a century to come it was almost universally accepted — by nobody more im-
plicitly than by Marx — so much so, in fact, that the majority of economists
came to suspect not only unsoundness of reasoning but something very like
obliquity of purpose behind every expression of antimetallist views.

This development, as we know, was in accordance with established tradi-
tion. The philosophers of natural law and those Consultant Administrators
who were directly influenced by them simply repeated and developed the
teaching of Aristotle and the scholastic authors. But the majority of those
writers on money who cannot be proved to have experienced any influence
from that quarter — for instance the English merchant economists — also fell
in with that tradition. Examples abound for all countries. For England it will
Suffice to mention, first, some economists of the first rank, such as Child,
who clearly identified money with those parts of the stocks of gold and silver
that fill the monetary function and held that in spite of this function gold and
silver, coined or uncoined, still remained commodities exactly like 'wine, oil,
tobacco, cloth and stuff'; Petty, who also reasoned about money in terms of
its material; and Locke , 6 who did likewise, though he was more ready to admit

may hide, rather than reveal, logical essentials. We shall have to return to this before
long.

But one may realize all this and yet be a practical metallist, i.e. believe that in
some or all cases effective association of the monetary unit with, say, gold is the best
or even the only way to establish a monetary system Or to make it function. This is
not a matter of pure theory, however, and may be right or wrong according to cir-
cumstances and individual or group standpoints and interests. But although theoretical
and practical metallism are logically independent, the reader will not be surprised to
find that they are not always easy to distinguish. Few authors are quite explicit on
the subject; the majority is to this day in the habit of confusing them; but practical
metallists and practical antimetallists often display a tendency to strengthen their
arguments, concerning the practical -expediency of associating the monetary unit with
a quantity of metal, by a metallist or antimetallist theory. Two additional facts further
increase the difficulties of interpretation: on the one hand, metallist and antimetallist
opinions are not so strictly incompatible as one would expect but admit of a great
many nuances; on the other hand, turns of phrase — such as 'money is a ticket' — that
do seem to point clearly toward one of the alternatives may mean very little if not
followed up. Such difficulties we have met already in the case of Aristotle. I am by
no means absolutely sure that I was right to class him with the theoretical metallists.
Galiani, whom we shall meet presently, interpreted him in the opposite sense. In the
case of tracts written without minute attention to fundamentals, these difficulties often
become the more insuperable the deeper we probe into an author’s ideas. What follows
in the text must be read in the light of these considerations. I prefer putting my
doubts frankly before the reader to dogmatizing with a confidence I do not feel.

6 The wide horizon of the author of the Essay concerning Human Understanding
and his sustained interest in economic facts and problems (of which his journal gives
ample proof) should make it possible to construct a comprehensive system of his eco-
nomic thought. This has in fact been attempted more than once, most successfully,
perhaps, by W. Roscher (Zur Geschichte der englischen Volksmrthschaftslehre, 1851)

VALUE AND MONEY

291

that the monetary function makes a difference; Hume, 7 whose teaching on
this particular point differs from Child's only in explicitness and polish; Can-
tillon (op. cit. Part 1, ch. 17), whose theoretical metallism exerted consid-
erable influence in France; and, second, the authors of what may be con-
sidered as the two standard English works on money of the seventeenth and
the eighteenth centuries. Rice Vaughan 8 and Joseph Harris. 9

and J. Bonar ( Philosophy and Political Economy, 1893). Nevertheless, though we have
had, and shall have again, to mention his name in other connections, his claim to a
place in the history of economic analysis rests exclusively on his work on money (mainly
in Some Considerations of the Consequences of the Lowering of Interest, and Raising
the Value of Money, 1692; the Further Considerations . . . 1695, add but little),
which, though date and form of its publication were prompted by current contro-
versies, yet embodies the thought of decades and amounts to much more than a tract
for the day, to much more also than the title conveys, by virtue of the energy with
which the author digs down to fundamental principles. Even so, however, we cannot
speak of a great, still less a faultless, contribution to monetary analysis. Slips are fre-
quent and, whatever the degree of ‘subjective originality,’ there is little "that was not
said as well or better by other writers at about the same time. The influence exerted
was considerable also on the Continent.

Our right to class him as a metallist can be fully established from the structure of
his argument. Doubts might be raised, however, on the strength of Locke’s statement
that money exists by virtue of common ‘consent.’ ( The question is the same as that
which arises in connection with Aristotle’s owftrixTi (see above, ch. 1), and may, I
think, be answered in the same way: on the one hand, even though money evolves
from the habit of using one commodity for the purposes of indirect exchange of the
others — in order to facilitate barter — this might be expressed by saying that people
‘agree’ on the choice of that commodity; on the other hand, even though the monetary
commodity acquires a ‘price’ through the market mechanism, this price may be said
to arise from ‘consent’ as indeed may any other.

7 David Hume’s ‘Of Money’ is one of the major contributions contained in his
Political Discourses (1752). Its position in the history of economics, while not unde-
served, is due to the force and felicity with which it formulated the results of previous
work rather than to any novelties. However this does not necessarily exclude ‘subjective
originality.’ The main items will be mentioned in the text.

8 Rice Vaughan, A Discourse of Coin and Coinage (about 1635, publ. 1675), re-
printed in McCulloch’s Select Collection of Scarce and Valuable Tracts on Money
(1856). Perusal of this creditable performance may serve usefully as an antidote for all
those who have learned to look upon seventeenth-century thought on money as unre-
lieved nonsense. But it may also serve as an illustration for the difficulties of interpreta-
tion alluded to in footnote 6 above. Vaughan falls in promptly with a typically metallist
line of reasoning, but when explaining the nature of money, he uses phrases which
taken by themselves would also admit of antimetallist interpretation.

9 The Essay upon Money and Coins (two parts 1757 and 1758) by Joseph Harris
(1702-64) has some claim to being considered one of the best eighteenth-century per-
formances in the field of monetary analysis. Its importance for us does not, of course,
consist in his various recommendations that account for the survival of his name (his
monometallism, his views on foreign trade, which were not very far removed from those
of Hume and Smith, and so on) or in his copious historical references but in what
might be termed the theoretical, anchorage of this theory of money and of foreign ex-

292 n: BEGINNINGS TO ABOUT 1790

For the rest, we shall confine ourselves to instances from the Italian litera-
ture on money, which throughout the period kept a higher level than any
other. Practically all the leading men were uncompromising metallists. The
most important names are Scaruffi, Davanzati, Montanari, Galiani, and Carli.
Beccaria and Verri should be added as examples of the treatment accorded
to the subject of money in the comprehensive treatises on general economics.

Almost all the works of these authors have been republished in the Custodi col-
lection (see above, ch. 3). In this note an attempt will be made to convey a general
idea of the performance of each author excepting those of Beccaria and Verri, which
are characterized elsewhere (ch. 3, sec. 4d above). Verri’s and Carli’s contributions,
moreover, will again be met with in another connection (ch. 7, Mercantilism). Verri’s
monograph D ialogo suite monete (1762) should not go unmentioned, however.

Gasparo Scaruffi (i5i5?-84), a banker of Reggio in the Emilia, published in 1582
a monograph on money entitled Alitinonfo, which admirably illustrates the range of
sixteenth-century thought — starting from the functions of money and dealing with
problems of coinage in a strongly metallist vein: money is a stamped piece of metal,
the stamp has only declaratory importance. His proposal of international bimetallism
(somewhat marred by an irrational faith in an invariable relation of 1:12) with an in-
ternational unit to be issued (without seignorage) by an international authority implies
a lot of fairly advanced theory. But very little of it comes out explicitly. Thus the step
is great indeed to Bernardo Davanzati (1529-1606), 'un mercante letterato Fiorentino,’
as Montanari called him. Davanzati’s Lezione delle monete (1588; see also Notizia
de’cambi, 1582) is the 'all-time high,’ also as regards literary elegance, of the metallist
theory of the origin and the nature of money.

About a century later, Geminiano Montanari (1633-87), a professor of mathematics
and astronomy in Bologna and Padua, wrote a Breve trattato del valore delle monete
in tutti gli stati (1680); followed by La zecca in consulta di stato (later title, Della
moneta, 1683-7), which presents the same teaching in a more fully developed form
but without adding anything essential to it.

The Neapolitan, Ferdinando Galiani (1728-87), a typical eighteenth-century abbe,
sparkling with esprit, did for his time what Montanari had done for the seventeenth,
and Davanzati for the sixteenth, century in his treatise Della moneta (1751; first book:
De’metalli; second book: Della natura della moneta ; third book: Del valore della
moneta ; fourth book: Del corso della moneta; fifth book: Del frutto della moneta —
not only on interest, however, but also on public debts and exchange), which would
have been received with respect if it had appeared in 1851. Another work of Galiani’s
will be mentioned in the next chapter. One point about his thought must be em-
phasized before we tear ourselves away from one of the ablest minds that ever became
active in our field: he was the one eighteenth-century economist who always insisted
on the variability of man and on the relativity, to time and place, of all policies; the
one who was completely free from the paralyzing belief — that then crept over the
intellectual life of Europe — in practical principles that claim universal validity; who
saw that a policy that was rational in France at a given time might be quite irra-
tional, at the same time, in Naples; who had the courage to say: 'Je ne suis pour

changes; he put the subject into a wide framework of general economic principles of
which he never loses sight. His treatment thus contrasts favorably with that of all
those authors, old and new, who fail to see that any satisfactory theory of money
implies a theory of the economic process in its entirety.

VALUE AND MONEY

293

rien. . . Je suis pour qu’on ne deraisonne pas’ ( Dialogues sur le commerce des bles,
1769, first dialogue); and who properly despised all types of political doctrinaires, in-
cluding the physiocrats. There is quite a Galiani literature, and there are several re-
prints of, and selections from, his works. They are listed in Giorgio Tagliacozzo’s
Economisti Napoletani dei sec. XVII e XVIII (pp. lxv and lxvi), which also contains
an essay on Galiani and extracts from Della moneta and the Dialogues.

Gian Rinaldo (Conte) Carli (1720-95), professor of astronomy at Padua, later on
president of the Board of Finance in the Milanese state (then a part of the Habshurg
monarchy), in which capacity he, among other things, reformed the coinage according
to a plan of his own, a most versatile writer whose comments on the United States
in Delle lettere Americane (1st ed. 1780; 2nd ed., in 4 vols., 1786) deserve mention
even in a sketch like this, must be listed here because of his work entitled Delle
monete . . . (first instalment, under the title Dell’ origine e del commercio della
moneta . , . 1751, the whole work in 3 vols., 1754-60), which includes the essay
Del valore e della proporzione dei metdlli monetati con i generi [commodities] in Italia,
which contains the contribution to be mentioned below. Other economic writings of
his will be noticed in the next chapter.

It is but natural that most of such advance as the analysis of monetary
processes made links up with metallist foundations, even where, in strict
logic, antimetallist starting points would have been more appropriate. This
should not surprise us, however; in spite of its shortcomings, theoretical
metallism, properly handled, gets us almost as far as would a more correct
theory — which is precisely one of the reasons why it proved so hardy a plant.

[(c) Survival of the Antimetallist Tradition .] There was also, however, an
antimetallist tradition, weaker no doubt but equally ancient, at least if we
choose to trace it to Plato. It received impetus from governments in financial
difficulties, and from inflationists, deflationists/ and bank promoters of the
period — though the proponents of bank schemes were not all either inflation-
ists or antimetallists , 10 and though there is no necessary relation between in-
flationism and theoretical antimetallism — but its survival during our period
must not be wholly attributed to this factor. Of continental -writers it will
be enough to mention Ortes and Boisguillebert . 11 Corresponding English in-

10 Examples of metallist sponsors of national-bank schemes are numerous. The author
of the proposal of 1576 was one. John Cary (An Essay, on the Coyn and Credit of
England, 1696 and An Essay towards the Settlement of a National Credit, same year)
was another. The writers who stood for the foundation of the Bank of England were
all metallists so far as I know.

11 Ortes, Economia Nazionale (1774). His theoretical antimetallism — money defined
as a symbol of wealth and expressly excluded from the items that constitute wealth
itself — is another one of the striking parallelisms with the work of Sir James Steuart.
Boisguillebert was antimetallist in the sense that he did not consider gold and silver —
or, so we may obviously add, any other commodity — to be the essential material of
money. The question why, if that be so, money should ever have been made from a
material that could serve other uses he answers correctly by pointing to the fact that
money so made is a pledge or security (gage) for the future delivery of whatever the
payee really wants to have and that such a pledge is practically necessary where the
payer’s credit is not beyond all doubt. To deny that the concept of money requires a

294 11 : BEGINNINGS TO ABOUT 1790

stances are Potter, Barbon, Berkeley, Steuart, and, if we claim for England
that Scotsman who became a Frenchman, Law.

William Potter’s The Key of Wealth, published (anonymously) 1650
and followed by two interpretative publications, recommends a plan,
namely the foundation of a corporation of tradesmen (to be strength-
ened by another body ‘insuring’ the credit of these tradesmen) which
was to accept — or, what in this case amounts to the same thing— to issue
‘bills’ secured by land, buildings, and other assets and intended to cir-
culate like legal tender money. This plan for mobilizing physical property
not only puts Potter in the position of a forerunner of the land-bank pro-
jectors (sec. 5) but also obscures the analytic work behind it, which is
of considerable interest. The antimetallist character of both the plan
and the analysis is beyond doubt, though Potter does not entirely sever
the connection of his bill currency with gold and silver, because, if such
a plan were adopted, that connection would reduce to one of historical
origin only: though money would have originated in the form of a com-
modity, its value and behavior would no longer be governed by that
commodity.

The reputation of Nicholas Barbon, a physician who embarked upon
various business enterprises, suffered in his own time as well as later on,
from the many freakish elements not only in his plans but also in his
analytic arguments. In addition, he was one of the land-bank projectors.

In spite of this, he must, I think, be ranked with, say, the top half-dozen
English seventeenth-century economists. We shall also meet him in an-
other connection, but his main importance for us is in the field of money
and interest. His Discourse of Trade (1690) has been republished by
J. H. Hollander. Reference must also be made to: A Discourse concerning
Coining the New Money Lighter (1696).

George Berkeley’s (1685-1753) — Bishop Berkeley’s — contribution to
economic analysis is not on a level with his contribution to philosophy.

It is chiefly contained in his Querist (1st ed., 1735-7). The idea of put-
ting a prolonged argument into an endless string of wearying questions
may not be to everyone’s taste. But the forceful common sense, which
is the strong point of his philosophic thought, is conspicuous in almost
every one of them.

Sir James Steuart we have met already. For the subject of money it
is necessary to add other publications to his Principles, especially the
Principles of Money applied to the Present State of the Coin of Bengal
(i77 2 )-

John Law (1671-1729), I have always felt, is in a class by himself. Fi-

commodity element in order to be logically complete and then to introduce the latter
on the score of (good or bad) reasons of practical convenience is the very definition of
theoretical antimetallism, combined (if these reasons are held to be valid) with prac-
tical metallism. But the term ‘pledge’ is also used by writers of metallist persuasion.
It occurs, e.g., in R. Vaughan’s explanation of the nature of money.

VALUE AND MONEY

nancial adventurers — but is it fair so to call that administrative genius? —
often have a philosophico-economic system of sorts. The Pereires of Credit
Mobilier fame had one (of St. Simonist complexion). But Law’s case
is different. He worked out the economics of his projects with a brilliance
and, yes, profundity, which places him in the front rank of monetary
theorists of all times. And this is all that matters for us. Since it is plain,
however, that his analysis has been condemned, for about two centuries,
primarily on the strength of the failure of his Banque Royale, it is perti-
nent to point out, first, that its predecessor, the Banque Generate, founded
1716, was a perfectly orthodox bank that was to issue notes and to re-
ceive deposits payable on demand and to discount commercial paper —
no antimetallism about that — and that the Banque Royale and the Com-
pagnie des Indes, which it absorbed, failed because the colonial ventures
combined in the latter did not, for the time being, prove to be the source
of anything but losses. If these ventures had been successful. Law’s
grandiose attempt to control and to reform the economic life of a great
nation from the financial angle — for this is what his plan eventually
amounted to — would have looked very different to his contemporaries
and to historians. Even as it was, that gigantic enterprise was not simply
a swindle and it may well be doubted whether France was the worse for
it, on balance. However, economists not only fell in with the popular
opinion that the scheme was nothing but swindle but also pointed to
certain technical defects in it that were in fact important subsidiary
causes of its failure. Thus that event acquired considerable influence on
the evolution of what eventually became the classic theory of banking.

Law’s performance as a monetary theorist is contained in his tract:
Money and Trade considered, with a Proposal for supplying the Nation
with Money (1st ed. 1705, 2nd ed. 1720; republ. in Somers’ Tracts , 1809;
French version, together with other writings including interesting
Memoires justificatifs, in the Guillaumin edition of Economistes-financiers
du XVIIP siecle, under the title of Considerations sur le numeraire et
le commerce). The reader who wishes further information about that
colorful personality is referred to A. W. Wiston-Glynn, John Law of
Lauriston (1907), and P. Harsin, Etude critique sur la bibliographie des
oeuvres de John Law (1928).

One of his plans was concerned with a land bank that was to issue
legal tender paper money up to a certain proportion of the value of
land and to receive as deposits for placement money that would other-
wise lie idle, so that money would never be either too cheap or too dear.
In this he followed the English land-bank projectors who must now be
mentioned briefly.

The landed gentlemen in the House of Commons were no more, than
were and are any other agrarians, able to see why they should not borrow
as easily and cheaply as traders or financiers, and they did not take kindly
to arguments about the difference between a bill and a mortgage. A land
bank that, among other things, might satisfy these longings eventually

296 II : BEGINNINGS TO ABOUT 179O

became a Tory plank when the foundation of the Bank of England was
in the offing. At the right time (1693) an intellectual, Hugh Chamberlen,
an obstetrician by profession, presented a plan of a land bank where
landowners would get loans at 4 per cent and the government would get
more money than it had got from the Bank of England. The plan, which
failed through lack of financial support, need not detain us. But there
were supporters who attempted to supply it with an analytic background.
Barbon, as we already know, was one. John Asgill ( Several Assertions
Proved . . . 1696, republ. in the Hollander series) was another;, his tract
illustrates the truth, which I try incessantly to emphasize, that the fact
that we may be able to see some point in that scheme does not in itself
salvage every devious argument that may have been put up for it. But
John Briscoe ( Discourse on the Late Funds . . . 1694; abstract of it in
the same year), who claimed to have been plagiarized by Barbon and
Asgill and was himself accused of having plagiarized Chamberlen, did
provide some analytic groundwork with respect to which all those ac-
cusations are meaningless. Many economists would call him a metallist
because he attributes importance to a stock of gold and silver. On re-
flection it will be realized, however, that a man’s belief in the usefulness
of a stock of universally acceptable commodities proves nothing about his
views concerning the nature of money.

We cannot, and need not, go into the literature pro and con the
foundation of the Bank of England. Not uninteresting in other respects,
it was, so far as I know, sterile in the one that interests us here.

Barbon was more definite than anyone else in renouncing theoretical metal-
lism on the ground that 'money is a value made by law/ to which the value
of its material is not essential. John Law implies rather than states the same
thing when emphasizing the virtues of paper money, which consist in its quan-
tity’s being amenable to rational management. Berkeley is, as far as I know,
the author of the ticket analogy: 'Whether the true Idea of Money, as such,
be not altogether that of a Ticket or Counter?’ ( Querist , no. 23). The only
effort at building a theory of money on an antimetallist basis stands to the
credit of Sir James Steuart. But he made so little headway and slipped up so
often that the promising beginning was lost in the metallist current.

The point is this. The practice of the epoch, especially the practice of the
four great clearing and deposit banks, 12 had familiarized economists with the
idea of a money of account which was defined by quantities of metal and
which existed only as a bookkeeping device for the purpose of facilitating
large-scale trade and finance in a world of numberless and ever-changing cur-
rency systems. In this sense the money of account also entered monetary theory
of the metallist type. Galiani called it moneta ideale or moneta immaginaria , 13
and distinguishes it from moneta reale, which consists of actual pezzi di me-
tallo. Steuart ( Principles , Book m) makes the same distinction between 'money

12 Of Amsterdam, Hamburg, Genoa, and Venice.

13 If there be any difference between these two phrases, it has escaped me.

VALUE AND MONEY

2 97

of accompt’ and 'money-coin/ but with him this distinction acquired a dif-
ferent meaning. Having previously ( Principles , Book 1, p. 32 of the edition of
1767) defined money as ‘any commodity which purely in itself is of no ma-
terial use to man hut which acquires such an estimation from his opinion of
it as to become the universal measure of what is called value . . .’ — a faulty
way of defining a pure numeraire of which he thus may be called the dis-
coverer 14 — he then starts from a money of account, considered as an ‘arbi-
trary scale’ for measuring values and, unlike the money of account of prac-
tice and also of metallist theory, devoid of any commodity connotation. He
tries unsuccessfully to find primitive instances of such a unit, 15 and does not
succeed in explaining how such a unit can be theoretically constructed and
how it might function in practice. But he had the idea and he also saw me-
tallic money in its true light, namely, in the light of a very special case.

Every writer who went into fundamentals at all recounted and developed, as
the scholastics had done, the particular virtues that explain why the precious
metals proved so universally acceptable as to acquire their monetary role (their
divisibility, mobility, and so on). Somewhat less trivial was the listing of the
four functions of money that were to gain such prominence in the nineteenth-
century textbook: the Aristotelian ‘measure of (exchange) value’ and ‘medium
of exchange’ were supplemented by ‘store of value’ — an element much em-
phasized by the specifically mercantilist writers (see next chapter) — and by
‘standard of deferred payments,’ though I know of no case where these four
functions appear neatly side by side — some writers even stressed the first only
and others the second only. It was gradually realized that these two functions
are separable and that their theories are different.

The economists of that period had before their eyes, as had the scholastics,
almost all the forms of bimetallism that it is possible to conceive and hence
all the practical problems that are incident to this system. It is the more sur-
prising that so little progress was made with its analysis. In particular, the es-
sential point about the legal ratio of the two metals does not seem to have
been noticed: theorists realized, of course, that the metal which this ratio
overvalues with respect to the other will tend to drive out the one it under-
values; they had discussed this phenomenon at least from Molina’s time —
one may in fact, if one so desires, subsume it under Gresham’s law; but they
failed to see that, so long as both metals are in circulation, this mechanism
will tend to increase the market value of the one and to decrease the market
value of the other and thus tend, within limits, to stabilize the market values

14 It will be observed that the use of the word commodity does not make him a
metallist. For a commodity that, by definition, is incapable of serving any purpose out-
side of its monetary function is not a commodity in the relevant sense of metallist
theory.

15 He mentions the macute, a unit that is supposed to have been current among
West African tribes. Perhaps this was suggested to him by Montesquieu ( Esprit des
lois, Book xxxi, ch. vm), who was also an antimetallist and used the macute as an in-
stance of a monetary unit that was a signe [of value] purement ideal. But the instance
is of doubtful validity.

298 II: BEGINNINGS TO ABOUT 1790

of both, which is the most interesting property of bimetallism. Locke, who was
monometallist on principle, even argued on general grounds that there should
be no legal ratio at all — no more than a legal rate of interest or a legal ex-
change rate — without observing that in this case the system becomes indeter-
minate. 16 Beccaria and others are not more satisfactory on this matter.

It will be convenient, before going on, to touch briefly upon a number of
topics, some of them of great importance in themselves, that cannot be dealt
with fully in a history of economic analysis.

First, questions of coinage were bound to be eagerly discussed under circum-
stances in which the state of the currency continued to give trouble. The large
literature on technique, principally Italian, contains little that is of interest
to us. But we may mention the question of seignorage. The old feudal privi-
lege of kings and princes to coin inoney and to levy a tax in doing so, often in
addition to a fee (brassage as it was sometimes called), was onerous even when
it did not lead to frequent recoinage and produced an irresistible popular de-
mand for free coinage. Accordingly, in England seignorage was abolished in
1666, while in other countries the tendency was to reduce it to the cost of
coinage. There are two points about this that are relevant to the theory of
money. One is that some writers, among them Sir William Petty, maintained
that free coinage was essential for gold and silver to fill the function of money:
if any charge at all were made for coining, they would no ' longer be true
measures of the value of other things — which looks like a theoretical slip. The
other is that the act which introduced free coinage was motivated by a desire
to attract gold and silver — the costs to be defrayed by import duties on other
commodities — and therefore was a typically ‘mercantilist’ measure. Economists
were by no means in love with it and practically the entire free-trade chorus
from North to Smith and from Smith to Milt recommended a cost-covering
charge as did most continentals, though in the case of the German economists
we might be tempted to attribute this to the fact that they were advising poor
governments.

This naturally leads, secondly, to the discussion of devaluation or debase-
ment (‘raising the coin’). The old arguments, characteristic of strict metallism,
that to debase was to defraud continued to be repeated: we find, them in a
host of writers, including Locke, Justi, and A. Smith. 17 But economists came

16 I know of no clear recognition of this fact until Walras pointed it out, but Gali-
ani recognized it implicitly. For he argued for the legal — though variable — ratio on
practical grounds, one of which looks very much like it. A similar claim may be made
for Massie.

17 If economists were more given to clear statement than they are, the question what
this fraud precisely consists in might well serve as a test for the presence or absence of
metallist belief. If the fraud be held to consist in depriving the creditor of part of the
metal that is due to him, we behold a metallist. If the fraud be held to materialize
only, if, as, and when debasement or devaluation increases the money in circulation
and hence decreases the creditor’s potential share in the things that may be bought for
money, then we behold a cartalist. The logical justification for this distinction is too
obvious to require comment, but it may be well to point out that there is also a prac-

VALUE AND MONEY

299

increasingly to talce another and much more interesting view of the matter:
they began to attend less to rights and wrongs and more to the effects of de-
basement upon the economic process. Sporadically, we find considerations of
this type even in the sixteenth century, when people discussed whether debase-
ment was advantageous or disadvantageous for the public finances. In the second
half of the seventeenth and in the eighteenth century, discussion turned to the
effects on the foreign trade and on the economic development of a country.
Let us take cursory notice of a few beacon lights on this route. First, the Eng-
lish currency (silver monometallism with an increasing actual circulation of
gold), having fallen into bad repair in the last decades of the seventeenth cen-
tury, William Ill’s Whig government, in which Charles Montague managed
financial affairs, carried a bill (1698) according to which the silver coins were
to be restored to their old weight and fineness at the public expense, this ex-
pense to be covered by a window tax, an operation that was completed by
1699. The debate on the measure is glorified by the name of Locke, who was
the literary protagonist on the side of the government, and its interest to us
reduces to the light his contribution sheds on the extent of his comprehension
of monetary phenomena. Unfortunately, it is a sorry picture that unfolds itself
before the eyes of Locke’s reader. It is not only that he mainly worked the
fraud line — this is a moral judgment and is his affair, not ours — but he failed
to see (a) that recoinage at an average of the actual silver content of the silver
coins could not be called debasement or could be called so only with the
qualification that the economic situation was already adapted to it, so that
in effect he was advocating overvaluation of the coin and undervaluation of
the silver contained in it; (b) that in consequence, unless all prices adapted
themselves promptly — which was not to be expected and would have, if it had
happened, greatly accentuated the prevailing depressive conditions — silver
would emigrate, as in fact it did; (c) that the presence of gold coins in actual
circulation was at all relevant to the problem. He even went so far as to hold
that what he called debasement was futile — in fact impossible — on the ground
that an ounce of silver could never be worth more than an ounce of silver!
His case and his defense of it was below that of his chief opponent, Lowndes —
this is what happens to the man ‘who gives up to party what was meant for
mankind.’ It is curious and melancholy to note that both the measure and
Locke’s advocacy of it have been eulogized, sometimes in extravagant terms,
for more than two centuries.

Next we shall note, from the French discussion of the monetary troubles
during and after the last wars of Louis XIV, the duel between Melon and
Dutot [text breaks off at this point].

tical difference: devaluating governments need not and often do not inject the corre-
sponding amount of money into circulation. They may hold it — wholly or in part — •
or use it for payments to foreign creditors, and there are other reasons why this access
of money need not act upon prices. It even may he used in ways that benefit creditors.
In fact, modern experience clearly shows that devaluation and depreciation are differ-
ent things, and they are universally distinguished by now.

300

II : BEGINNINGS TO ABOUT 179O

3. Digression on Value

Work in this field also proceeded from the scholastic background. We know
that the scholastic doctors had developed the essentials of a realistic analysis
of value, cost, and price — including a rudimentary concept of equilibrium —
that needed only to be elaborated in content and perfected in technique. To
some extent this is exactly what was done during the period under discussion.
This work was powerfully propelled by the preoccupation with the problem of
the value (purchasing power) of money. The metallist theory, as a theory of
money, may not be much good in itself. But it certainly leads the economist
who accepts it to inquire more closely into the problem of value in general.
We shall therefore not be surprised that a great part of the best work in this
field was done by students mainly interested in monetary phenomena. This is
why this section stands where it does. We are going to try to bring out,
by means of a brief survey of outstanding performances, the points that are
most important for subsequent developments.

[(a) The Paradox of Value: Galiani .] The Italians from Davanzati on (Lezi-
one delle moneta, 1588) were the first to realize explicitly how the Paradox
of Value — the paradox that many very ‘useful’ commodities such as water have
a low exchange value or none at all whereas much less ‘useful’ ones such as
diamonds have a high one — can be solved and that it does not bar the way
toward a theory of exchange value based upon value in use. The astounding
fact that both Smith and Ricardo thought it did is, however, seen in its full
significance only if we add that, for the century and a half after Davanzati, a
lengthy list of writers might be compiled who understood quite well precisely
how the element of utility enters into the process of pricing and that there
were several Englishmen among them. John Law, in particular, in the tract
quoted above ( Money and Trade considered . . . 1705), gave a short but ex-
cellent account of the matter — actually using the examples of water and dia-
monds. However, we shall confine ourselves to the economist who carried this
analysis to its eighteenth-century peak, Galiani. 1 Unlike Law, he was so un-
compromising a metallist that he felt compelled to inquire into the value of
gold and silver considered as commodities and therefore into the value of all
commodities. In doing so he displayed sure-footed mastery of analytic pro-

1 This, of course, involves injustice to his predecessors, to whom, in fact, he was un-
believably unfair himself. For instance, in developing Davanzati’s argument, he writes
in a vein of quite unwarranted superiority. Moreover, it must not be forgotten that the
theory he developed was really that of the scholastics. It was not only in this matter
that Galiani — like other economists — failed to acknowledge indebtedness properly. In
his sociology — or, if readers prefer, social philosophy — he leaned heavily on Vico with-
out acknowledging this debt either. See Tagliacozzo, op. cit. pp. xv (the most beauti-
ful page in the whole Vico literature, so far as I know it) et seq., and F. Nicolini
(‘Giambattista Vico e Ferdinando Galiani,’ Giornale storico della letteratura italiana,
1918, and the Note to his edition of Galiani’s Della Moneta, 1915; but, being a phi-
losopher, Nicolini is inclined to exaggerate the dependence, which amounted to little,
so far as technical theory is concerned).

VALUE AND MONEY

3°i

cedure and, in particular, neatness in his carefully defined conceptual con-
structions to a degree that would have rendered superfluous all the nineteenth-
century squabbles — and misunderstandings — on the subject of value had the
parties to these squabbles first studied his text, 2 Della moneta, 1751 (outlined
in the preceding section of this chapter).

Having resolutely (first Book, ch. n) defined the term Value to mean
a relation of subjective equivalence between a quantity of one commodity and
a quantity of another — the objective equivalences on the market are treated
as a special case of this, but he did not work out the transition from subjective
to objective values in this sense — so that the phrase Value of a Commodity
has no meaning except with reference to a given quantity of another, Galiani
answers the question on what this value depends by Utility and Scarcity (utilitd
e raritd), and proceeds to develop these concepts in much the same way in
which I suspect they are explained in many an elementary course today. Utility
is not usefulness as understood by the observer — ‘useful’ in the economist’s
sense is everything that produces pleasure ( piacere ) or procures welfare (felicita).
Fashion, prestige value, and altruistic components are all trotted out in due
course. And scarcity is the relation between the existing quantity of a thing
and the uses one has for it and explains why a golden calf is valued more
highly than a natural calf. To repeat, all that was not original with Galiani.
The famous ‘paradox of value,’ which was gravely discussed again in the nine-
teenth century — the fact that obviously useful things fetch a low price and
much less ‘necessary’ ones a high price — had been resolved several times be-
fore. But never before, or for more than a century to come, was this theory
put forth so completely and with so full a sense of its importance. What sep-
arates Galiani from Jevons and Menger is, first, that he lacked the concept of
marginal utility — though the concept of relative scarcity comes pretty near it —
and, second, that he failed to apply his analysis to the problems of cost and of
distribution. The first shortcoming is perhaps a reason why he stops short of
a satisfactory theory of price, though he could have got further than he did in
spite of it, as Isnard’s later success suffices to show. Even so, however, he left
his mark upon the subject. Having indicated how price derives from utility
and scarcity, he ran up against the fact that this price, by limiting the quantity
of the commodity consumers can procure, reacts in turn upon scarcity as felt
by these consumers. It at the same time regulates, and is regulated by, demand
(consumo). He knew perfectly how to deal with this phenomenon of interde-

2 There was another Italian writer on money, Giovanni Ceva ( De re nummaria,
quoad fieri potuit [!] geometrice tractata . . . 1711), an engineer in Mantua, who did
not, so far as I can see, add anything new to the theory of money, but whom no
history of economic analysis can afford to pass by because of his insight into the nature
of economic theory: real phenomena are always obscure and unmanageably complex;
practice is always minus exacta ; to understand the principles of things we must hence
construct rational models by means of assumptions ( petitiones ) or else we must always
move in the darkest of nights ( versari in obscurissima node); and the proper way of
dealing with these models is by mathematics, a methodology that took two centuries
to assert itself.

302 II : BEGINNINGS TO ABOUT 179O

pendenee. And in the three pages he devotes to the subject he actually dis-
covered the concept of long-run equilibrium and sketched out the profit mech-
anism that works to bring it about, visualizing a country, hitherto Mohamme-
dan and teetotal, that suddenly embraces Christianity and thereupon develops
a demand for wine. There is a Mandeville flavor about these pages that per-
haps detracts a little from what otherwise would have to be considered as a
remarkable display of originality. But this does not alter the fact that but
little care and patience would have been sufficient to evolve from this a much
more perfect body of theory than was to be presented by A. Smith.

While Galiani thus foreshadowed much later developments (marginal util-
ity), he also anticipated the value theory of the next hundred years (Ricardo
and Marx). For, with surprising abruptness, he turns from rarita, by way of
quantity of commodities, to labor ( fatica ) and forthwith enthrones it as the
only factor of production and the only circumstance che da valore alia cosa.
In One sense this spoils his theory of value, but in another it is highly interest-
ing. Fatica means quantity of labor — corrected for the social habits that de-
termine how many days a year and how many hours a day a man actually
works and for the differences in natural ability ( talenti ) which account for the
different prices of the fatica of different people — and, with a qualification for
the monopoly price of unique things ( Venere de Medici , for instance), equi-
librium value is made proportional to that quantity (temporary fluctuations
being dfily attended to). But this is in all essentials and in many details the
theory of Ricardo and Marx, and more satisfactory — if we place ourselves on a
Ricardian standpoint — than that of A. Smith. 3

[(b) Bernoulli s Hypothesis .] But let us bear in mind that it was the ‘sub-
jective' or ‘utility' theory of price that had the wind until the influence of the
Wealth of Nations — and especially of Ricardo’s Principles — asserted itself.
Even after 1776, that theory prevailed on the Continent, and there is an
unbroken line of development between Galiani and J. B. Say. Quesnay, Bec-
caria, Turgot, Verri, Condillac, 4 and many minor lights contributed to estab-
lishing it more and more firmly. They all linked price and the mechanism of
pricing directly to what they conceived to be the fundamental purpose of eco-
nomic activity, the satisfaction of wants. They all accepted Cantillon’s defini-
tion of richesse, not only as a phrase to be forgotten as soon as stated, or, as
in the case of Smith, to be remembered only in order to recommend policies
favorable to consumers, but as the starting point of price analysis. Moreover,
with all of them, the price phenomenon was rooted in the calculus of pleasure
and pain, exactly as it was with Jevons: in this respect they were Benthamites
by anticipation, and stronger Benthamites than were to be Bentham’s ad-
herents among English economists. Thus, they were not only the forerunners
of the ‘subjectivists’ of the second half of the nineteenth century, but they

3 Quantity of labor in turn is, in one place, equated to the expense of the laborer’s
subsistence (spesa del nutrimento). Though not Ricardian in form, this passage can
be interpreted in a Ricardian sense. But it rather harks back to Cantillon.

4 Le Commerce et le gouvemement (1776), see above, chs. 2 and 3.

VALUE AND MONEY

3°3

also sealed that unfortunate alliance between the theory of value and utili-
tarianism that was to prove so embarrassing a century later. 5 For the moment,
however, we shall not go into this any further but instead notice a perform-
ance that, besides presenting a number of other points of interest, anticipated
the theory of marginal utility still more definitely.

In a paper 6 written in 1730 or 1731, Daniel Bernoulli, the eminent scientist
whom we have already had occasion to mention, suggested the hypothesis
that the economic significance to an individual of an additional dollar is in-
versely proportional to the number of dollars he already has. Referring this to
income rather than, as Bernoulli did, to the monetary value of the total net
assets of an individual, we readily identify this additional dollar with what, in
the terminology of a later epoch, was to be the marginal dollar, and its signifi-
cance with what, in the same terminology, was to be its marginal utility, the
statistical measurement of which has been attempted by Fisher and Frisch in
our own time. 7 No less interesting are the applications to business practice

5 See below. Part in, ch. 3, : sec. 1a.

6 ‘Specimen theoriae novae de mensura sortis,’ publ. 1738 in the Commentarii
academiae scientiarum imperialis Petropolitanae. The German translation by Professor
Alfred Pringsheim ( Die Grundlage der modernen 'Wertlehre : Daniel Bernoulli . . .
1896) contains instructive notes by the translator as well as a very useful introduction
by Ludwig Fick. It is, however, highly characteristic of the haziness of our knowledge
of doctrinal developments that Mr. Fick not only hailed Bernoulli as a precursor of
Gossen, Jevons, Menger, and Walras, but also as one of the first, if not the first, to
recognize that value is not an inherent property of things but a relation between a
valuating person and the things valued — though this was perfectly clear to the scholas-
tic doctors and, in any case, to dozens of eighteenth-century writers who did not know
of Bernoulli’s paper.

7 This will be particularly clear on exact formulation. Let x denote an individual’s
income and y the ‘satisfaction’ derived from it. Bernoulli’s hypothesis then says that

dy ~ K

dx
x ’

dy = K
dx x ’

the factor of proportionality (X), being a constant for ever}' individual, but different
for different individuals — the range of variation in the individual K’ s taking account
of individual differences of tastes or intensities of feeling (Bernoulli seems to have at-
tributed the same K to all individuals excepting uninteresting abnormalities, but never
mind) — dy/dx is obviously the marginal or final degree of utility, which therefore put
in explicit appearance in 1738. As stated by Bernoulli, his fundamental idea was antici-
pated (1728) by the mathematician Cramer, who offered, however, a different hypothe-
sis about the form of the marginal utility function, viz..

dy = K4=,

V x

but Bernoulli’s hypothesis is, within moderate intervals, quite reasonable though it
fails to make use of all we know, or think we know, about the behavior of this func-
tion (see below. Part iv, ch. 7).

Since even believers in the measurability of utility or satisfaction will not think it
safe to say anything about its behavior in desperate situations, for instance, for in-

304 II I BEGINNINGS TO ABOUT 1790

that Bernoulli made of his hypothesis (op. cit. §§ 15, 16). The underlying idea
is that even where the probabilities of gains and losses are strictly calculable —
as are, for instance, the chances of loss in sea transport if long experience af-
fords sufficient material — rational action is not determined by the value of
these probabilities alone. It is also necessary to take into account the impor-
tance to the individual businessman of given gains and losses, which differs
of course according to the individual’s means, and Bernoulli’s hypothesis sup-
plies a method for effecting this. Thus he deduces a criterion by which to de-
cide whether or not it is advantageous for a man to pay a given sum for in-
suring his cargo, and also a rule by which to evaluate the advantage to be
derived from transporting a given quantity of wares in several ships, or from
investment of a given sum in several securities instead of in one — important
suggestions for a theory of business risks and of investment that even now
are not fully exploited. And there may be point in recalling a sentence from
Bernoulli’s text (op. cit. § 17); ‘Precisely because these results agree so well
with observed business behavior, it does not seem right to neglect them like
unproven statements that are based on insecure hypotheses.’ I lament the im-
possibility of discussing other points 8 about this paper that are of absorbing

comes below which the individual cannot survive, we had better exclude such a ‘mini-
mum of existence’ from consideration. If we call it a, total satisfaction derived from
an income of the amount b may then be represented by the definite integral

y = P K — = K(log b — log a) = K log --
Ja x a

8 Brief allusion to two of them may be permissible, however. The first is that it
remained practically unknown to economists until it was noticed by some who had
arrived by themselves at the same or similar ideas. Fick mentions Hermann (1832),
F. A. Lange, Die Arbeiterfrage . . . (1865), and especially Jevons, and I have no
names to add. This neglect is remarkable owing to Laplace’s sponsorship of the
Bernoulli formula in his Theorie analytique des probability (1812), which was of
course widely known. The second fact is that Bernoulli’s attempt to solve the paradox
of the St. Petersburg game is not among the many valuable contributions of his paper,
although it was the primary object of it. The problem is this. A coin is to be tossed n
times. X promises Y to pay $1 if heads turns up on the first throw; $2 if heads, hav-
ing failed to turn up the first time, turns up the second time; $4 if heads, having
failed to turn up the first two times, turns up the third time, and so on. The series
of Y’s possible gains is hence 1, 2, 2 2 , 2 3 , . . . 2 n ~ 1 . We derive his mathematical ex-
pectation of gain by multiplying each of the possible gains by its probability, that is,
if the coin be perfect, r A, %, and so on. It is seen that this multiplication reduces
each item to % so that, summing up, we get for Y’s total mathematical expectation
n/ 2, and if n is allowed to increase beyond any assigned limit, an expectation greater
than any sum we care to mention. Nevertheless, it is the fact that nobody will pay
X any considerable sum for it, as the reader can easily find out for himself. Why?
Bernoulli thought that all we need to do in order to answer this question is to cor-
rect the possible gains by applying his hypothesis to them, which would in fact pro-
duce a finite ‘moral’ expectation in the place of the ‘infinite’ mathematical one. But
this procedure, though not in itself meaningless, does not solve the problem. Neither
do, for that matter, the points made by Professor Pringsheim in a footnote to his trans-

VALUE AND MONEY 305

interest to the student of the ways of the human mind and of the mechanism
of scientific progress.

[(c) The Theory of the Mechanism of Pricing .] As regards the theory 'of
the mechanism of pricing, there is very little to report before the middle of
the eighteenth century. The contributions of even the brightest lights, such
as Barbon, Petty, Locke, do not amount to much, and the vast majority of
the Consultant Administrators and Pamphleteers of the seventeenth century
were content with the kind of theory they found or could have found in
Pufendorf. They attended to practical problems of regulative policy, but the
analytic side they took largely for granted and were slow to realize the need
of rigorous conceptualization and proof. A few examples will illustrate the
situation. People were quite familiar with the pattern of monopoly, on which
they bestowed an impulsive hatred, and with competition, which they con-
ceived to be the normal pattern without bothering to define it. But as early
as 1516, it occurred to Sir Thomas More ( Utopia , see ch. 3 above) that for
competition to prevail it is not necessarily sufficient that a commodity be sold
by more than one seller. Prices may fail to fall to the competitive level also
if sellers are few, quod ... si monopolium appellari non potest . . . certe
oligopolium est. s Thus More introduced the concept of oligopoly. We might
expect that this hint would have led to closer analysis of the concepts of
monopoly and competition, especially in England, where the interminable dis-
cussion of monopolies of various types and of restraints of trade of all types —
both the restraints that competitors agree on in order to further their com-
mon interest, and the restraints monopolists impose upon other people — that
preceded and again followed the Statute of Monopolies of 1623/4, furnished
all the motive and material one can desire. But there was hardly anything of
the kind. Politicians, lawyers, and some businessmen fought 'monopolies' pas-
sionately, much as they do today — particularly those of the chartered trading
companies — and the attacked interests defended themselves as best they could,
also much as they do today. Intellectually, both sides made a poor show, once
more much as they do today. Though practical results were achieved and

lation, although they, too, are by no means irrelevant. We cannot go further in this
subject. But the reader would be much mistaken if he thought that it is without in-
terest to the economist. The theory of games of chance is on the contrary highly im-
portant for many problems of economic logic. If proof were needed, a recent book by
Professors Morgenstern and von Neumann would supply it ( Theory of Games and Eco-
nomic Behavior , 1944). And the first pointer in this direction still stands in Bernoulli’s
name. In economics it may take 206 years from a first step to the second — just about
the same length of time as in the case of the statistical demand curve.

9 I am indebted to Mr. E. Marz for having drawn my attention to this passage. The
fact is curious. Sir Thomas did not only use — and so far as I know coin — the term
(oligopoly) that plays so great a role in modern theory, but he used it in order to de-
note exactly the same thing, and he at once pointed to a feature of it that modem
theory was to emphasize — after a lag of about 410 years. Yet the thought is no doubt
suggestive and important. And the Utopia was very widely read. It is true, however,
that this passage does not occur in the English translation of the Latin original.

306 II : BEGINNINGS TO ABOUT 179O

though the historian of economic thought and policy finds plenty to record, 10
the historian of economic analysis goes from that literature almost empty-
handed. Not to neglect any crumbs, however, let us notice, first, the tendency
to extend the concept of monopoly beyond the case of a single seller 11 and,
second, the rudiments of the argument that monopoly while striving to maxi-
mize profits — as we should say — changes the conditions with reference to
which this maximization is attempted and so need not necessarily set a higher
price than would prevail under competition working under different con-
ditions. 12 We may also^ mention again Becher’s attempt to classify — illogically
— market patterns into monopolium, propolium, and polypolium, that is, mo-
nopoly, forestalling, and unregulated competition — which according to him is
productive of disorganized markets in which every participant is proletarized.

But better things were to follow in the eighteenth century. We shall con-
fine ourselves to the peak achievements of Beccaria, Turgot, and Isnard, and
then consider the manner in which the Wealth of Nations codified the whole
of the value and price theory of the epoch.

Beccaria dealt with value and price in Part iv, Chapter 1 (‘Del commercio’)
of his Elementi (publ. posthumously, 1804): the subject stands there pretty
much where it was to stand in J. S. Mill’s Principles. He explains the phenome-
non of value, as mentioned already, by utility and scarcity, and then proceeds
to investigate the modus operandi of a hypothetical market in which wine is
bartered for wheat (cf. Marshall’s apples and nuts). 13 He recognized clearly

10 The reader is referred to Professor Heckscher’s Mercantilism 1, pp. 269 et seq.,

for a masterly interpretation of that struggle for ‘free trade’ in the seventeenth-century
sense. If he follows this advice, he cannot fall to be impressed by the distressing ob-
servation that popular and political discussion of this matter — as of others — shows
practically no progress at all. — - -

11 See Heckscher, op. cit. pp. 273-4, especially the argument of Sir Edwin Sandys
(an ardent trust-buster) put forth in the House of Commons debate in 1604, to the
effect that the ‘name of monopoly ... is fitly extended to all improportionable
paucity of sellers. . . If ten men had the only sale of all the horses in England," this
were a monopoly.’ Viewed as an analytic effort, this is of course somewhat short of
admirable. But it is clear that there is something in what Sir Edwin unsuccessfully
strove to express.

12 Other arguments used for defense turned either on denials of the presence of
monopoly — mostly quite true if monopoly be defined strictly, but inconclusive pre-
cisely because of this — or on the assertion that in certain cases — especially those of
trade with uncivilized countries where protection was an important consideration —
monopolistic organization was a practical necessity. Or on other points that, whatever
their practical weight may have been, are of no interest from the standpoint of ana-
lytic technique. One of the best, if not the best, expositions of ‘defensive’ arguments
I have come across is John Wheeler’s A Treatise of Commerce. Wherein are showed
the Commodities arising by a well ordered and ruled trade . . . (1601). This was no
doubt ‘special pleading’ on behalf of the Merchant Adventurers, of which company
Wheeler was an attorney. But there is, from our standpoint, no reason for ruling it out
on that account.

13 I hope that we need not take too seriously his proposition that the exchange value
of one commodity relatively to the other (the exchange ratio) will be in ragione reciproca

VALUE AND MONEY

3°7

that the exchange ratio is indeterminate in the case of isolated exchange (be-
tween two individuals) and that determinateness is brought about by compe-
tition through the 'higgling of the market': fluctuations must eventually lead
to the price at which quantity demanded equals quantity supplied. His careful
treatment of the exchange of three commodities against one another, in which
he insists on the phenomenon (and necessity) of indirect exchange, is par-
ticularly satisfactory. This is about as much as the average economist had to
say a century later.

Beccaria’s performance has been chosen for comment because of its. com-
parative fullness, but it had been strikingly anticipated by Turgot’s Reflexions,
xxxm-xxxv (written in 1766, published -in 1769-70). After having deduced
trading (commerce) from besoins reciproques, Turgot, too, touches upon the
case of isolated exchange and then introduces the determining force, competi-
tion. His description of the market mechanism is very similar to that of Bohm-
Bawerk (see below. Part iv, ch. 5, sec. 4). The resulting market price ( prix
courant ) is then made to vary under the impact of forces acting through de-
mand, or supply. The crowning achievement of the epoch in this line of anal-
ysis is Isnard’s. 14 In his not otherwise remarkable book there is an elementary
system of equations that — barring the difference in technique — describes the
interdependence within the universe of prices in a way suggestive of Walras.

[(d) Codification of Value and Price Theory in the Wealth of Nations.]
A. Smith’s 'chief work was to combine and develop the speculations of his
French and English contemporaries and predecessors as to value.’ 15 Also, it is

delle loro quantity. Possibly there is a connection between this and his friend Verri’s
hyperbolical demand law, which however is not open to the same objection but, on the
contrary, must be recorded as the first attempt to give a precise form to the demand
curve: if p be price (in money), q quantity, and c a constant, then, according to
Verri’s law, pq = c.

14 Achille Nicolas Isnard’s Traite des richesses appeared in 1781, and thus forms no
part of the material 'codified’ by A. Smith. There is, however, a question of the lat-
ter’s influence upon the former. Isnard’s treatise, also the contribution mentioned in
the text, could have arisen from a perusal of the 'Wealth of Nations. Isnard does not
mention A. Smith, however, unless, indeed, I have overlooked the reference.- The title
of the book is included in Jevons’ list of mathematical writings, which is how I came
to know of it. I have found no traces of its influence.

15 A. Marshall, Principles, 4th ed., p. 58. The reader will realize that the opinion
of a workman such as Marshall is worth a ton of philosophizing by less workmanlike
people, and we cannot do better than use that dictum of a master of economic theory
as a motto. Also, the reader will realize that even Marshall, whose admiration for
Smith was unbounded, does not go beyond what our own term 'codification' implies.
Though he was far from attributing to Smith any original ideas, he nevertheless ar-
rived at an estimate of the performance that seems much higher than ours. One rea-
son for this may be that he was speaking of a brother — for as has been and will be
emphasized, there are many similarities in the performances and in the historical posi-
tions of the two. Another may be that he was speaking of a countryman — for Marshall
was very insular. A third one may be that he was speaking of a fellow liberal — for
Marshall, too, was a strong free trader. But whatever the reason, the reader should

308 II : BEGINNINGS TO ABOUT I79O

quite true that he made 'a careful and scientific inquiry into the manner in
which value measures human motive/ that is to say, I take it, that he made
exchange value (price or, at all events, relative price) the centerpiece of a
primitive system of equilibrium. But he was not, as Marshall held, the first
to do so; moreover, in codifying, he dropped or sterilized many of the most
promising suggestions contained in the work of his immediate predecessors.
Of course, he may not have known Turgot’s Reflexions, and he cannot have
known Beccaria’s Elementi: Pufendorf and then Cantillon, Harris, Locke, Bar-
bon. Petty — these last five are mentioned by Marshall — and Quesnay were
presumably his principal guides so that his 'subjective’ performance was greater
than was his ‘objective’ achievement. But he ‘developed’ this material less suc-
cessfully than had Turgot and Beccaria. The blame is at his door for much
that is unsatisfactory in the economic theory of the subsequent hundred years,
and for many controversies that would have been unnecessary had he summed
up in a different manner.

The reader should refresh his recollection of the Reader’s Guide presented
above . 16 A. Smith’s exposition in the first Book surges purposefully up to the
phenomenon of price and down again into the component parts of commod-
ity prices, which components are the cost and income categories, wages, profit,
and rent. This is, to repeat, a primitive way of describing the universal inter-
dependence of the magnitudes that constitute the economic cosmos; but it is
an effective way. Critics who did not understand that the theory of price is
but another name for theory of economic logic — including, among other things,
all the principles of allocation of resources and of formation of incomes —
blamed him for having adopted the narrow point of view of the businessman.
Other critics who did not understand the nature of a system of interdependent
magnitudes accused him of circular reasoning. His shade easily wins out against
these and other criticisms. It is this part of his performance that constitutes
his chief merit in this field. There are others. As primitive but as distinctly
visible as is his concept of universal interdependence is his concept of equi-
librium or ‘natural’ price. This equilibrium price is simply the price at which
it is possible to supply, in the long run, each commodity in a quantity that
will equal ‘effective demand’ at that price. This again is the price that will,
in the long run, just cover costs. And these, in turn, are equal to the sum
total of the wages, profits, and rents that have to be paid or imputed at their
‘ordinary or average rates. 7 Thus, we also get a glimpse of Marshall’s distinc-
tion between short-run and long-run phenomena, A. Smith’s market price being
essentially a short-run phenomenon, his ‘natural’ price a long-run phenomenon

observe that, so far as Marshall's very brief comments enable us to judge, there is no
difference as to the facts of the case except this: Smith may certainly be said, in a
sense, to have ‘developed’ existing doctrines of value and 'price; but whereas Marshall
approved unconditionally of the manner of this ‘‘development,’ I have some fault to
find with it.

16 [After writing this, J. A. S. apparently removed several pages on A. Smith, in-
cluding the Reader’s Guide, from the manuscript. This material has been restored by
the editor and is to be found in ch. 3, sec. 4e.]

VALUE AND MONEY

3°9

— Marshall’s long-run normal. 'It is all in A. Smith’ was a favorite saying of
Marshall’s. But we may also say: 'It is all in the scholastics.’ There is no
theory of monopoly. The proposition (Book i, ch. 7) that 'the price of mo-
nopoly is upon every occasion the highest which can be got’ might be the
product of a not very intelligent layman — taken literally, it is not even true.
But neither is the mechanism of competition made the subject of more
searching analysis. In consequence, A. Smith fails to prove satisfactorily his
proposition that the competitive price is 'the lowest which the sellers can
commonly afford to take’ — to the modern reader it is a source of wonder what
kind of argument he took for proof. Still less did he attempt to prove that
competition tends to minimize costs, though it is evident that he must have
believed it.

But what was A. Smith’s theory of value in the narrow sense of the phrase,
meaning his views on the problem of causal explanation of the phenomenon
of value? Since .during the subsequent century economists were much inter-
ested in that problem, they eagerly discussed Smith’s views about it and for
this very reason we cannot pass it by. In itself, the answer is plain enough.

First of all, if the reader will look up the last paragraphs of Book 1, Chap-
ter 4, he will be able to satisfy himself of two things. On the one hand, A.
Smith declares there that he is going to inquire into the rules which ‘men
naturally observe in exchanging’ goods ‘either for money or for one another.’
This means that he was not primarily interested in the problem of value in
the sense just defined. What he wanted was a price theory by which to estab-
lish certain propositions that do not require going into the background of the
value phenomenon at all. Evidently this was also Marshall’s opinion. On the
other hand, having distinguished value in use and value in exchange, he dis-
misses the former by pointing to what has been called above the 'paradox of
value’ — which he evidently did believe to be a bar to progress on this line —
thereby barring, for the next two or three generations, the door so auspiciously
opened by his French and Italian predecessors. No talk about his 'recognizing
the role of demand’ can alter this fact. Second, in Book 1, Chapter 6, A. Smith
expressly states: ‘Wages, profit, and rent, are the three original [my italics]
sources of all revenue as well as of all exchangeable value.’ If words mean
anything, this is conclusive. His theory of value was what later on came to be
called a cost-of-production theory. This is indeed the opinion of many stu-
dents. But, third, the matter is complicated by the fact that a very large num-
ber of passages in the 'Wealth of Nations seem to point to a labor theory of
value or rather to several. 17

In Book 1, Chapter 5, of the Wealth of Nations occurs the proposition: 'The
real price of everything, what everything really costs to the man who wants
to acquire it, is the toil and trouble of acquiring it’ — one of those treacherous
platitudes that may mean anything and nothing. On the face of it, however,

17 It is still not sufficiently recognized that the term labor theory of value covers
several distinct meanings. The subject has, however, been exhaustively dealt with by
H. J. Davenport, Value and Distribution, 1908.

310 II: BEGINNINGS TO ABOUT 179O

it indicates a tendency to base the vaflue phenomenon upon the irksomeness
or disutility of work, or to adopt a labor-disutility theory of value. This theory,
however, may be discarded, because A. Smith makes no use whatever of it.
Again, at the beginning of Book i. Chapter 6, Smith produces the famous ex-
ample about the beaver: ‘if . . . it usually costs twice the labour to kill a
beaver which it does to kill a deer,’ one beaver would naturally sell for as
much as two deer. There it is quantity of labor that ‘regulates’ value and not
toil and trouble, which is, of course, not the same thing. No doubt is possible
but that this passage is the root of Ricardo’s and Marx’s labor-quantity theories
of value. But A. Smith limits this theory to ‘that early and rude state of society
which precedes both the accumulation of stock and the appropriation of land,’
which, interpreted charitably, means that competitive prices of commodities
will, in equilibrium, be proportional to the labor entering into their produc-
tion if the labor is all of the same ‘natural’ quality and if there are no other
scarce means of production. This is true but does not in itself constitute a
labor-quantity theory, or any labor theory, of value, because, for this special
case, all theories of value would arrive at the same result. Finally, as we have
already had occasion to notice, A. Smith (Book i, ch. 5) considers the quantity
of labor a commodity can command in the market the most useful substitute
for its price in money, that is to say, he chooses labor for numeraire. On prin-
ciple, there can be no objection to this decision, which in itself no more com-
mits him to a labor theory of value than the choice of oxen for numeraire
would commit us to an ox theory of value. But he tries to motivate his deci-
sion by so many arguments that seem to claim deeper meaning for it — such as
that ‘labour alone . . . never varying in its own value, is alone [sic] the ultimate
and real standard’ of the values of all commodities or that ‘it is their real
price’ or ‘the only universal as well as the only accurate measure of value,’
which are all wrong — and seems himself so little clear about what is and what
is not implied in choosing something for numeraire that it is almost excusable
if many later economists misunderstood what he actually did mean and that
they, among them Ricardo, 18 accused him of having confused the quantity of
labor that enters a commodity with the quantity of labor it will buy. This in-
dictment fails, however, and it is important that it does, for it amounts to
accusing Suiith of an absurdity: taking what a commodity exchanges for, no
matter what it is, as the explanation of its value would be one of the worst
slips in the history of theory. It should be added that, if choosing an hour’s or
day’s labor as the unit in which to express prices does not imply accepting a
labor theory of value, no more does emphasis upon labor’s role in production
or upon labor’s claims or wrongs. As has been mentioned already, there is
plenty of this in the Wealth of Nations, much of it, perhaps, inspired by
Locke. ‘The produce of labour constitutes the natural recompence or wages of

18 Ricardo did not misunderstand him always, however. Ricardo also argued that
the exchange value of labor is no more exempt from fluctuations than is the exchange
value of anything else. But this is relevant only with regard to making labor a
numeraire that is to function over time.

VALUE AND MONEY

3 11

labour’ (Book i, ch. 8). It is the laborer who raises the crop and the land-
owner, having appropriated the land, demands a share of it. Profit makes a sec-
ond deduction from the 'produce of labour/ To this day, it has remained diffi-
cult to make the philosophy-minded see that all this is completely irrelevant
for a theory of value — considered not as a profession of faith or as an argu-
ment in social ethics, but as a tool of analysis of economic reality.

4. The Quantity Theory

It will not surprise the reader to learn that the effects of the violent price
revolutions of the fifteenth, sixteenth, and seventeenth centuries should have
been zealously discussed. But it might surprise him to learn that there was
any question about their causes. For debasement of the currency — devalua-
tions by governments as well as fraudulent clipping of coins by individuals —
and the torrent of American gold and especially silver were before everyone’s
eyes; and not even the most sophisticated theorist of today could find fault
with the obvious diagnosis, seeing that the monetary units newly created by
either the debasement of the coinage or the influx of the American silver were
very promptly spent, while the very wars on which they were mainly spent
greatly interfered with production. Nevertheless, though it is probably possible
to find early arguments that more or less distinctly imply this obvious diag-
nosis, 1 it seems to be the fact that no explicit, full, and — so far as it went —
theoretically satisfactory presentation of it appeared before 1568, when Bodin
published his Response to the Paradoxes sur le faict des Monnoyes (1566) of
M. de Malestroict. (There is a translation of Bodin’s Response in A. E. Mon-
roe’s Early Economic Thought.) On the strength of this, he is universally
voted the ‘discoverer’ of the Quantity Theory of Money. Since the matter has
received attention quite out of proportion to its importance, we shall go into
it briefly ourselves.

1 1 say ‘probably’ because I do not myself know of any clear instances. The cases
mentioned by Professor Seligman (article, ‘Bullionists,’ Encyclopaedia of the Social
Sciences) are not convincing. Some historians who trace this kind of ‘quantity theory’
to the Middle Ages and even to the Roman jurist Paulus have misunderstood the word
quantitas, which must not be translated by ‘quantity’ (see above, ch. 1). The best ex-
ample I can mention — but it followed by a year Bodin’s work, which I am about to
mention in the text — is in the Summa de tratos y contratos of Tomas de Mercado
fist ed. 1569; ed. used 1571). By the end of the century, recognition of the effects
on prices of the American silver was widespread, if not universal, as well it might have
been. Luiz Valle de la Cerda ( Fundacion , 1593; Desempeno, 1600) called the price
rise the ‘efecto muy natural de la rapida multiplicacion de los signos y moneda.’ The
words ‘very natural’ in this passage have nothing to do with natural law but simply
stand for ‘indubitable’ or ‘obvious.’ The contrary impression, voiced by Professor Ham-
ilton, viz. that the influence of the inflow of silver upon prices was being persistently
ignored or denied, seems due to the facts that many later authors had reasons for em-
phasizing the other factors in the price rise which ' were operative, especially in the
case of Spain, and also that the common run of writers was then, as it is now, quite
impervious to even the simplest economic truths.

3 1:

II : BEGINNINGS TO ABOUT 1790

[(a) Bodin’s Explanation of the Price Revolution.] Jehan Cherruyt de Males-
troict had argued that the universal rise in prices was due to debasement and
that, expressed in full-weight coin, prices had not risen. Bodin replied — and
then repeated in Les six livres de la Republique, 1576 — that this argument
overlooked the influence of American silver. The price revolution, accord-
ing to him, was due to (i) the increase in the supply of gold and silver; (2)
the prevalence of monopolies; (3) depredations that reduced the stream of
available commodities; (4) the expenditure of kings and princes on the objects
of their desires; and (5) the debasements that were the only factor considered
by his opponent. He added, moreover, that the first cause was the most impor-
tant one. The. reader will observe that this analysis needs but little readjust-
ment or generosity of interpretation to be a correct diagnosis of the historical
case as it presented itself in 1568. Even as regards general theoretical content,
it is superior to much later work. In fact, Bodin’s analysis escapes several of the
typical objections that were to be raised against the quantity theory in the
nineteenth century. But does it state or imply this theory?

The question may seem surprising, but it is well worth asking. Let us em-
brace, for a moment, uncompromising metallism and consider the case of per-
fect gold monometallism — gold metallism such that gold can move freely in
and out of the monetary system — from this standpoint. Gold being a com-
modity like any other, the value in terms of commodities of the golden mone-
tary unit will fall, other things being equal, if gold production increases, just
as the price of eggs will fall, other things being equal, if egg production in-
creases. Any rise in prices in terms of gold that may occur is here explained
as a consequence of increased supply. Let us note that the extent of this fall
(in the value of gold) will simply depend upon the shape of the demand
schedule for gold as a commodity in terms of some other standard, and that
the operative 'quantity’ in question is the total amount of the increase. In
consequence, there is no reason to suppose that, however equal the other things,
the fall will be proportional to the increase. It will be seen that no special
hypothesis enters into the argument, which flows smoothly from the metallist
basis and would have been accepted by the scholastics as a matter of course.
But recognition of the relevance of ‘quantity’ to the value of money in this
sense and for this reason has no more to do with the Quantity Theory of
Money than that the word quantity occurs in both arguments. And no more
than this is required for Bodin’s argument or, let us add at once, for that
of A. Smith.

[(b) Implications of the Quantity Theorem .] In order to make this clear,
let us look at the same case from the standpoint of the quantity theory. To
facilitate exposition we shall assume that there is an absolutely fixed collection
of goods that must be sold for whatever money buyers have, and that these
buyers feel compelled to spend promptly all of whatever money they have
upon that collection of goods. Also we shall henceforth speak, instead of the
quantity theory , of the quantity theorem, because it is not a complete theory
of money but merely a proposition about the exchange value of money. Keep-
ing, then, everything else severely as it is, we let gold production increase. As

VALUE AND MONEY

3*3

in the simple metallist argument, we infer that this will make the unit of
gold less valuable, that is, raise all prices in terms of it. The reason for this is
the same as before so far as that part of the increase is concerned that goes
into industrial uses. But that part of the increase which spills over into circula-
tion now operates in a different way and produces a fall in the exchange value
of the monetary gold — a rise in commodity prices— for a different reason: the
fall, under our highly artificial assumptions, is exactly proportional to the in-
crease in the quantity of the monetary gold stock; and the immediate reason
for this is not the fall in the commodity value of the gold — which is rele-
vant indeed but only at one remove, that is, by virtue of the fact that it will
determine the extent to which the quantity of monetary gold will be increased
— but the increase of the quantity of coins per se. It is the increase in this
quantity which, the purchasing power of the total monetary stock remaining
constant, is the immediate cause of the resulting fall in the exchange value of
the monetary unit. And this fall will be the same as if this stock, without be-
ing increased, had been split into units of smaller gold content, because in
either case there is now less of every commodity per coin. Operation of the
new gold in the commodity use may be likened to the effects of adding workers
of the same skill to a given plant and equipment. Operation of the new gold
in the monetary use may be likened to the effects of replacing the working
force ‘operating a given plant and equipment by more workers of proportion-
ately less skill. Thus the quantity theorem does three things: first, it recognizes
the fact that the monetary function will affect the value of the commodity
chosen for money and is a logically distinct — though not independent — source
of the exchange value of gold (this, of course, we can recognize without com-
mitting ourselves to the next steps); second, it recognizes that the mechanism
that determines the value of gold in circulation is different from the mech-
anism that determines the value of the industrial gold or of any other com-
modity; third, it offers a specific schema — very primitive but also very simple —
of that mechanism. The apparent difficulty of this really simple matter is due
to the facts that in the case of perfect gold monometallism the two different
mechanisms must, of course, produce the same values of gold in the mone-
tary and in the industrial sphere; and that the influences of an increase in
gold production upon the commodity value and upon the monetary value of
gold so intertwine that we do not see either quite clearly. But it is one of the
strong points of the quantity theory that it can be applied to the case of paper
money without any auxiliary construction. And in this case — when there is no
commodity value of the material to cause ambiguity about what quantity we
mean and what modus operandi we attribute to it — all becomes perfectly
clear. This logical affinity of the quantity theorem with theoretical cartalism
should be borne in mind: the theorem essentially amounts to treating money
not as a commodity but as a voucher for buying goods, though not everyone
who does consider money in this light need accept the specific schema offered
by the quantity theorem. It is the more important to remember fhis point
because later developments tended to obliterate it.

There is no trace of considerations of this type in Bodin. But there is in

314 II : BEGINNINGS TO ABOUT I79O

Davanzati (1588, see above, sec. 2), who confronted the mass of commodi-
ties with the mass of money — stock with stock — and would have to be cred-
ited with superior formulation of the quantity theorem in its most primitive
form even if we interpreted Bodin's argument in the same sense. Subsequent
advance on this line was slow. Mere recognition of the effect upon prices of
American gold and silver imports or of any increase in a country's stock of
gold and silver, of course, soon became commonplace. It is not always easy to
tell from the uncouth writings of the less literate ‘mercantilists' what it was
they had in mind, but some of them, especially Malynes and Mun (see below,
ch. 7), tried, I think, to convey the genuine quantity-theory idea — though in
a quite rudimentary form — while others, perhaps the majority, were content
with ‘simple metallism.’ 2 However, Davanzati at long last found a successor
in Montanari (1680), and in England instances become frequent in the sec-
ond half of the seventeenth century. Among these Briscoe (1694) deserves
special notice, 3 because he was the first, so far as I know, to write an equation
of exchange in the unsatisfactory form: stock of money equals prices times
real income. 4 In the course of the eighteenth century it was the genuine quan-

2 Malynes says categorically: ‘Plentie of money maketh generally things deare’
(Tudor Economic Documents m, 387), which at least admits the interpretation above.
Mun’s case is similar. An illustration of a recognition of the effect of increased ‘treasure’
that does not imply the genuine quantity- theory idea is in Sir Robert Cotton’s speech
on the ‘Alteration of coine,’ 1626: ‘Gold and silver . . . are Commodities valuing
each other according to the plenty or scarcity; and so all other Commodities by them’
(Reprinted in McCulloch’s Scarce and Valuable Tracts on Money). It should be ob-
served, however, that what we have called the theory of ‘simple metallism,’ i.e. theo-
retical metallism without the specifically, quantity-theorem element in it, is sufficient
to protect ‘mercantilists’ from the indictments that in general they failed to perceive
the effect of their beloved gold and silver imports upon prices and that, whenever
they did, they really refuted their argument for export surpluses. The specific or genu-
ine quantity theorem is not necessary for perceiving that effect. And the proposition
that export surpluses are desirable because they will bring ‘treasure’- into the country,
whatever its demerits may be, is not refuted by the argument that this inflow of gold
and silver will raise prices and thus stop the exports. For, first, much treasure can be
collected on the way to this consummation. Second, the treasure imported would have
that effect only if it entered circulation, which was not always the idea. There are
also other possible lines of defense that will appear as we go along.

8 Montanari and Briscoe are discussed in sec. 2, above.

4 Since this is the first time that we meet this analytic tool, it is convenient to make
at once a few comments that will be of help to the beginner. Other comments will
be added later (Part iv, ch. 8). The equation of exchange (also called the Fisher equa-
tion after the most eminent of those modern economists who used it as a starting
point of the theory of money) is now usually written: MV = PT, where M means
quantity of money, V velocity, P price level, and T physical volume of transactions.
Briscoe’s equation becomes identical with this by putting V = 1. The first thing to
note is that M, V, P, T can each of them be given any of a number of different
meanings, which must, of course, be made to correspond; for instance, M may
mean only full-weight coin, or only legal tender (including government paper), or only
legal tender plus bank notes minus the reserves held against them, or legal tender plus

VALUE AND MONEY

3 1 5

tity theorem that, sometimes in the crudest possible form, became a common-
place for many of the leaders. It is taken for granted by Genovesi, Galiani,
Beccaria, and Justi, and Hume reasserted it with an emphasis that was hardly
necessary (1752). All the more significant is it that A. Smith did not definitely
commit himself to more' than simple metallism.

But Briscoe’s equation of exchange, was already obsolete when he published
it: 5 a major step forward had been taken before. The most primitive way of
looking at the relation between quantity of money and prices, but to the primi-
tive mind the most natural way, is to compare a stock or fund of money with
a stock or fund of goods that are supposed to be exchanged against one an-
other. The next idea to occur to one’s mind, when one comes to think of it
more carefully, is that this stock of goods is a rather doubtful entity: the total
of the coins may indeed be thought of as a definite stock of pieces that, unless
demonetized or exported, are also permanent; but the commodities that are
being currently exchanged for these coins are not each time the same indi-
vidual pieces — the individual units of bread and wine and doth and so on
disappear from the market for good and are currently replaced by other units
to meet, on the next market day, the same coins again. Therefore, comparison
is between a stock and a flow. The obvious way to reduce them to compara-
bility is to choose a unit period and to multiply the stock by a coefficient that
tells us how often in this period the stock meets the flow, that is, how often
per period the money does what the goods can do only once. The problem is
greatly simplified, though its solution loses much in value, if we assume that
all the coins are spent — none held back — and spent only once each market
day — -equal quantities of all goods being offered on each day — and that there
are no other transactions: then the Velocity’ or ‘rapidity of circulation’ of money
will equal the number of market days per unit period. If this number be 12
per year, the stock of money will support the same price level that a stock
12 times as great would support with but a single market day per year. Taken
in this sense, ‘velocity’ is peculiar to money and neither has nor can have any
analogue in the world of commodities. 6

bank notes plus demand deposits minus the reserves of all banks. Similarly, T may
mean all transactions, or only the transactions incident to production and distribution,
or only the transactions consisting of income payments and income expenditure on
consumers’ goods — the last being the definition adopted by Briscoe. Second, in the
case of V, there is a distinction of a different kind to be made that is of the utmost
importance. On the one hand, we may put V = PT/M by definition. If we do this,
then the equation of exchange must evidently hold always and under all circumstances.
It is, as we say, a mere tautology or identity and should really be written MV =PT.
But we need not do this. We can also define V independently of the three other
magnitudes, for instance, by the number of times a dollar can on the average be
paid to an income receiver in the institutional arrangements of a given society.

5 Still more obsolete was, of course, a similar equation published in 1771 by H.
Lloyd in his Essay on the Theory of Money. Of this essay I only know the Italian ab-
stract appended to Verri’s Meditazioni in Custodi’s Scrittori Classici.

6 1 have taken space I can ill afford to spare to explain this matter in its most ele-
mentary aspect because it is essential for the reader to realize how it presented itself

316 II: BEGINNINGS TO ABOUT 1790

Perception of this fact and its insertion into the analytic engine was mainly
the achievement of three men — Petty, Locke, and Cantillon. Its importance
warrants an inquiry into the manner in which the ‘discovery' was made.

Neither Petty nor Locke proceeded in the logical way, that is to say, by
deducing the phenomenon of velocity from the nature of money — the way
adumbrated above. They ran up against it in the course of their attempts to
answer a practical question which they thought important. This question was:
what is the quantity of money that a given country needs? Hume (‘Of Money'
in Political Discourses , 1752) seems to have been the first to show clearly and
explicitly that on the level of pure logic this question has no meaning — on the
one hand, any quantity of money, however small, will do in an isolated country;
on the other hand, with perfect gold currency all round, every country will
always tend to have the amount appropriate to its relative position in interna-
tional trade. But in the sixteenth century people thought differently, and prac-
tical sense may in fact be imparted to that question by adding: at the prevail-
ing level of prices. Thus amended, the problem was to determine the require-
ments of internal circulation under given conditions of time and place with a
view either to support up to a point or to combat beyond that point the ‘mer-
cantilist' policy of enforcing gold and silver imports.

The task was primarily of a statistical nature. Petty tackled it from the angle
of income payments, that is to say . . . [unfinished; the two following para-
graphs are taken from the brief early treatment on money described in the
appendix and hence do not connect exactly with what precedes.]

There is one more point. From the standpoint of the theorist it is always a
‘major event' when an important concept is made explicit and workable, al-
though it was — this is the usual case — implicitly present in previous arguments..
The shadow of Velocity of Money may be detected in Davanzati. But it did
not acquire substance until the last decades of the seventeenth century. This
was a purely English achievement. We know already of Sir William Petty's
exploit in the field. The other sponsor was Locke (in Some Considerations,
1692)., He approaches the phenomenon by way of the cash balances which'
various classes of people are under the practical necessity of holding. The ef-
fects of variations in the velocity on prices are not pointed out directly, though
they may be said to come in indirectly through the action of the rate of inter-
in the beginnings of analysis: every further step leads into mist, ambiguity, difficulty,
but that first one is perfectly clear and simple. I take the opportunity to add two
points to our knowledge about the equation of exchange. Look again at our example:
a definite number of coins settling by payment in specie the commodity transactions
of the twelve market days. Now, first, these twelve market days represent a social
custom, an institutional arrangement that individuals are powerless to alter. No coin
can, under our assumption, have a greater velocity. But what if holders of some of
the coins, on any given market day, refuse to spend all the coins they hold? We may
then say, of course, that the coins that are not spent on any given market day or are
not spent on any of them have a smaller velocity or even the velocity zero. But we
may also say ... . [note unfinished].

VALUE AND MONEY

3*7

est on idle balances. 7 Cantillon, who, so far as I know, was the first to speak
of vitesse de la circulation, was also the first to state in so many words that
increase in the velocity of money was equivalent to increase in its quantity. He
also drew the conclusion that measures calculated to decrease velocity will
counteract the effects of inflation. Neither Hume nor Smith added anything of
importance.

It will be seen that the concept evolved from the first on both the lines
that were followed in its later development. Petty and Locke used the cash bal-
ance approach, Cantillon the turnover approach. Locke and Cantillon clearly
envisage not only velocity in the strict sense but also the rate of spending.
Owing to the prominence that the related concept of Propensity to Consume
has gained in connection with the multiplier analysis, it may be interesting to
add two examples to show that this concept, too, was perfectly familiar to the
economists of that epoch. As we already know, Boisguillebert ( Dissertation sur
la nature des richesses) pointed out that a coin in the hand of a very small
trader is spent much more promptly than a coin in the hand of a rich man
who is more likely to shut it up in his coffres— the hoarding rich are evidently
no discovery or invention of the last ten years. And Galiani (in the second
Dialogue sur le commerce des bles ) drew a distinction between the propensity
to consume of the farmer, who saves and hoards, and of the artisan who
promptly spends ( dissipe ).

5. Credit and Banking

We know that the late scholastics were familiar with practically all the es-
sential features of capitalism. In particular, they were familiar with stock ex-
changes and money markets, with lending and banking, with bills of exchange
and other instruments of credit. 1 So far as the phenomena to be interpreted
are concerned, the bank note is the only one that was added in the course of
the sixteenth century — thrusting into the background for about two centuries
the oldest form of what came to be called ‘bank money/ the transferable de-
posit: even Hume, as late a? 1752, spoke of 'this new invention of paper/ Yet
the bank note, at least in one of its early forms, should not have struck him as
a novelty: the note that was a goldsmith’s receipt for gold actually deposited
was really nothing but a device for increasing safety and convenience in han-
dling one’s money, and fitted in perfectly with older ideas. New, however, were
the practices of which the bank note became the chief vehicle, and the im-
portance it acquired in consequence. Daniel Webster, in 1839, made note issue

7 On this point as well as on this subject as a whole, see M. W. Holtrop, ‘Theories
of the Velocity of Circulation of Money in Earlier Economic Literature/ Economic
History, Supplement to the Economic Journal, January 1929, and Professor Marget’s
Theory of Prices, vol. 1, passim .

1 See above, ch. 2. The reader’s attention is once more called to Professor Usher’s
book there mentioned ( The Early History of Deposit Banking in Mediterranean Eu-
rope, 1943). Also see Van Dillen, History of the Principal Public Banks (with ex-
tensive bibliography), 1934.

31 o II: BEGINNINGS TO ABOUT 179O

the defining trait of a bank. These practices and the phenomena attending
them quickly produced an interesting analytic development.

The point to grasp is this. When beholding the nascent institutions of capi-
talism, the scholastic doctors and their laical successors did not experience any
difficulty in interpreting them and in fitting them into their metallist theory of
money. This analytic task was facilitated by their command of the conceptual
apparatus of the Roman law. Observing sales contracts that provided for de-
ferred payment, they, readily analyzed them into a sale proper and a loan of
money. The deposit of money, being a depositum irregulare, conferred owner-
ship on the receiver of the deposit: the scholastic fathers might even have de-
duced that the receiver was not bound in law or morals to keep deposits of this
nature in a vault, because he owed only tantumdem in genere, that is, as much
of the same kind as he had received. Moreover, if a business connection made
A the debtor of B and concurrently B the debtor of A, they might — within
limits — 'compensate/ and were to be held responsible only for the difference;
and this principle might then be extended to multilateral and interlocal clearing
of debts without the use of actual cash. The upshot is that for the scholastics
neither lending in the usual sense of the word nor the giving or receiving of
credit in the course of commodity trade or any other transactions had really
anything to do with the monetary system and its working: these things involved
the use of money, no doubt, but in no other sense than does buying for money
or making a gift in money or paying taxes in money.

But this of course is not so. 'Credit' operations of whatever shape or kind do
affect the working of the monetary system; more important, they do affect the
working of the capitalist engine — so much so as to become an essential part of
it without which the rest cannot be understood at all. This is what economists
discovered in the seventeenth century and tried to work out in the eighteenth:
it was then that capitalism was analytically discovered or, as we may also say,
discovered or became analytically conscious of itself. Let us see how this dis-
covery came about and how far it went. Two lines of advance are distinctly
visible.

[(a) Credit and the Concept of Velocity: Cantillon .] The first of these might
have been taken by the scholastic doctors themselves, had scholastic econom-
ics developed from its own bases throughout the seventeenth and eighteenth
centuries. That is to say, a strictly metallist conception of money invited, if it
did not absolutely enforce, the attempt to draw a sharp dividing line between
money and the legal instruments that embody claims to money and operations
in money, and to bring the latter into the picture by means of auxiliary con-
structions for which the legal concepts alluded to above offered suggestions. To
some extent such a course is always possible , 2 in our case even more so than

2 To quote two instances of incomparably greater importance: the so-called Ptole-
maic system of astronomy was not simply 'wrong.’ It accounted satisfactorily for a
great mass of observations. And as observations accumulated that did not, at first
sight, accord with it, astronomers devised additional hypotheses that brought the re-
calcitrant facts, or part of them, within the fold of the system. Again, classical physics
accounted satisfactorily for all the known facts until it received a severe jolt through

VALUE AND MONEY

319

usually. The auxiliary construction that is needed consists in an extension of
the concept of velocity. The banker who issues notes in excess of his cash
holding is not thought of as creating or increasing means of payment, let
alone 'money/ All he does is to increase the velocity of that cash, which by
proxy, as it were, effects many more payments than it could settle by going
from hand to hand; and the same applies, of course, when he directly lends
part of the cash deposited with him. The clear perception of the truth that a
bank note and a checking deposit are fundamentally the same thing is in fact
one of the strong points of this theory. Thus money remains very strictly de-
fined. Credit, particularly bank credit, is merely a method of using it more
efficiently. I cannot stop to show, but the reader may easily see for himself,
that most phenomena that go under the heading of credit can be described
in this way. Government paper money may then either be included with full-
weight coin in the total of the quantity of money or else construed as a govern-
ment debt — that is, as a promise to pay in coin at some time or other. The
latter view predominated, and throughout the nineteenth century there are in-
stances of governments issuing notes with the legend: ‘This note is part of the
government’s floating debt,’ suggesting an analogy with treasury bills, espe-
cially when the notes carried interest, as they not infrequently did.

The outstanding authority for this theory is Cantillon, who carried it out in
detail and with as much common sense as brilliance. His bankers are essen-
tially intermediary lenders of other people’s money. They lend the deposits
they receive, and by so doing speed up things and lower the rate of interest.
The logical difficulties that lurk in this apparently simple statement are some-
what reduced by his emphasis upon the case in which bankers only lend what
depositors, for the time being, do not need — the case of time deposits, as we
should say — so that a given sum of money only does one service at a time.
Moreover, we must not forget that Cantillon lived in an environment where,
wholesale trade apart, payment in specie was the overwhelming rule, so that
people incessantly fetched and brought bags of coin to and from the bank;
and where it was as usual to acquire a deposit by actually depositing coin as it
is now to acquire one by borrowing or by transfer from another borrower. At
any rate his teaching stands at the fountainhead of what remained . official
banking theory practically up to the First World War. Galiani and Turgot —
independently or not — held the same doctrine. So did innumerable minor
lights, such as Justi, and 'business economists/ such as Marperger.

But, to say the least, this is not the only way of interpreting the facts of
banking practice. Even the banker who lends by paying out actual money de-
posited with him does more than collect it from innumerable small puddles,
where it stagnates, in order to hand it to people who will use it. He lends

the negative result of Michelson’s experiment (1881). But this did not induce physicists
to abandon the classical system at once. Instead, the Michelson effect was built into it
by means of a special hypothesis ad hoc (H. A. Loren tz, 1895); and this hypothesis
satisfied the profession until the emergence of Einstein’s theory about a quarter of
a century after Michelson’s experiment. Si licet parva componere magnis. . .

320 II : BEGINNINGS TO ABOUT I79O

the same sums over and over again before the first borrower has repaid: that
is to say, he does not merely find successive employments for the sum en-
trusted to him, but many employments which that sum then fills simultane-
ously. If he lends by paying out notes — or by crediting the sum lent to the
borrower in a checking account — for which his cash holding acts merely as a
reserve, the same fact stands out still more clearly. And so it does if he lends
coins he received as a deposit, which the depositor proposes to use exactly as
he would have used the coins had he kept them . 3 There surely must be other
ways of expressing these practices than by calling these bank notes embodi-
ments of velocity of circulation — a velocity so great that it enables a thing to
be in different places at the same time. More important than this terminological
inconvenience is the fact that the velocity of circulation in the technical sense
of the word is not increased at all: the banker’s loans do not alter the 'stations’
through which a unit of purchasing power has to pass, or abridge the time it
takes in passing them, or — in themselves — affect people’s habits of holding
certain amounts of what they consider to be ready cash. Therefore it may,
perhaps, seem more natural to say that bankers increase not the velocity but
the quantity of money — or of those means of payment that, within limits, serve
as well as money if one wishes to reserve this term for coin or coin and gov-
ernment paper. This accords perfectly with practice — borrowers do feel that
they get additional liquid means that are normally just as good as money.
Banks are no longer said to 'lend their deposits’ or ‘other people’s money,’ but
to ‘create’ deposits or bank notes: they appear to manufacture money rather
than to increase its velocity or to act — which is a completely unrealistic idea —
on behalf of their depositors. In any case, it is clear and actually beyond dis-
pute that what the banker does with money cannot be done with any other
commodity — or, as some of us would prefer to say, with a commodity — for no
other commodity’s quantity or velocity can be increased in this way. The only
answer to the question why this is so is that there is no other case in which a

3 Professor Rist ( History of Monetary and Credit Theory from John Law to the
Present Day, 1940, ch. 1), who may be cited as, perhaps, the leading modem exponent
of the Cantillon view, rightly insists that there is no ‘mystery’ about credit and that
talking about the ‘mystery of credit’ is often indicative of hazy thinking. But there is
a question of interpretation and there is a point requiring elucidation. Suppose it oc-
curs to the check-room attendant of a restaurant to rent out the coats deposited with
him while their owners are having their meal. This may, upon occasion, cause a diffi-
cult situation for the attendant, but there is no logical difficulty about it. But suppose
he is a wizard, and performs the feat of making it possible for two people — the owner
and the hirer — to wear the same coat at the same time. Surely this would stand in
need of explanation — and this is exactly what happens in the case of banking, if bank
notes and bank deposits are really, as Professor Rist says, nothing but ‘material embodi-
ments of the velocity of circulation.’ May I use this opportunity to add that, so far
as any implications as to policy are concerned, I quite agree with him; that personally
I feel nothing but admiration and gratitude for the brilliant services he has ren-
dered in more than one country to the cause of what, like him, I believe to be sound
finance? I hold no brief for land-bank schemes or any of their modem counterparts.
I am interested in a mere point of theory and, at most, a few points of past history.

VALUE AND MONEY

3 21

claim to a thing can, within limits to be sure, serve the same purpose as the
thing itself: you cannot ride on a claim to a horse, but you can pay with a
claim to money. But this is a strong reason for calling money what purports to
be a claim to legal money, provided it does serve as means of payment. As a
rule, an ordinary bill of exchange does not so serve; then it is not money, and
belongs to the demand side of the money market. Sometimes, however, certain
classes of them do; then, according to this view, they are money and form part
of the supply on the money market. Bank notes and checking deposits emi-
nently do what money does; hence they are money. Thus credit instruments,
or some of them, intrude into the monetary system; and, by the same token,
money in turn is but a credit instrument, a claim to the only final means of.
payment, the consumers’ good. By now this theory — which of course is capable
of taking many forms and stands in need of many elaborations — may be said
to prevail.

[(b) John Law: Ancestor of the Idea of a Managed Currency.] Manufacture
of money! Credit as a creator of money! Manifestly, this opens up other than
theoretical vistas. The bank projectors of the seventeenth century, especially
the English land-bank projectors and Law, who was one of them originally, had
glimpses, varying in degree of distinctness, of the theory adumbrated above.
But they fully realized the business potentialities of the discovery that money
— and hence capital in the monetary sense of the term — can be manufactured
or created. Their reputation, at the time and later, suffered greatly from the
failure of their schemes — Law’s schemes in particular — just as, in the nine-
teenth century, the reputation of fundamentally similar ideas suffered from
association with wild-cat banking and with the failures of schemes that turned
out badly without being fraudulent or nonsensical, such as the Credit Mobilier
of the brothers Pereire. But since there is a far cry from an economic principle
to a banking project, these failures are not evidence in the court of theory.

Interpretation of John Law’s theoretical position in matters of money and
credit (on his theory of value, see above, sec. 2) presents difficulties quite apart
from the fact that some of his arguments may have been no more than tactical
moves. From the way in which he deduces the phenomenon of money — which,
in the first instance, makes money a commodity — it seems that he must be
classed as a theoretical metallist. This diagnosis derives support from' his an-
tagonism to debasement or devaluation — which he called an unjust tax, on
the doubtful ground that it tends to hurt poor people more than the rich —
and also from his practice, for he kept up redemption of his notes as long” as
he could. Since this seems to clash rather badly with the rest of his views,
historians have brushed aside this evidence. But it is quite possible to arrive
from the metallist principle at conclusions that seem to violate it, as the
American example of our own time suffices to show. Law’s argument admits
of the following reconstruction: he first observed — a clear gain to analysis —
that the use of a commodity as a means of circulation affects its value; from
this it follows that the exchange value of the monetary commodity as money
can no more be explained by its exchange value as a commodity than the latter
can be explained by the former — although, of course, so long as the monetary

^22 II: BEGINNINGS TO ABOUT 179O

commodity can freely move between its monetary and its industrial uses, the
two must be equal; therefore he explained, quite logically, the exchange value
of silver as money on the lines of the quantity argument ( abondance of money
as compared with abondance des produits ); but since silver that serves as
money has no other use than to buy goods, it might just as well be replaced
by a cheaper material, in the limiting case] by one that has no commodity
value at all, such as printed paper, for 'Money is not the Value for which Goods
are exchanged, but the Value by which they are exchanged’ [J. A. S.’s italics].
This, however, cuts the cable that so far [has tied money to a commodity
having] 'intrinsic’ value. Now he draws the conclusion that there is an ad-
vantage other than cheapness and absence of worry about how to get and
keep [an adequate supply of money] — it is that the quantity of money is fully
manageable.

[The preceding paragraph was unfinished with notes at the end which were filled
in by Arthur W. Marget.]

This, then, seems to have been the work that gave birth to the idea of
Managed Currency, which was subsequently lost to the large majority of econo-
mists until it forced itself upon them after 1919. The evident importance of
the event makes it worth our while to stay for a moment to consider it. First,
the relevant passages in Law’s tract (Money and Trade Considered . . .
1705) acquire additional meaning by his practice, or rather by one aspect of
it. We are not concerned with his particular schemes, from that of the Banque
Generate (1716), which looks so innocuous and almost orthodox, to those of
the Compagnie des Indes (1719), which look more and more visionary, and
finally those of 1720, which were the ultimate resort of the strong swimmer in
his agony. But one great plan was behind all this, in fact well advanced on the
road to success: the plan of controlling, reforming, and leading on to new
levels the whole of the national economy of France . 4 This is what makes Law’s
'system’ the genuine ancestor of the idea of managed currency, not only in the
obvious sense of that term but in the deeper and wider sense in which it
spells management of currency and credit as a means of managing the eco-
nomic process. And this is what interprets and glorifies the modest passages of
the tract . 5

6 . Capital, Saving, Investment

The word Capital had been part of legal and business terminology long be-
fore economists found employment for it. With the Roman jurists and their
successors, it denoted the 'principal’ of a loan as distinguished from interest

4 The failure was not due to this idea. . . [Footnote incomplete.]

5 It is not suggested that Law had no forerunners. First, the idea of managed cur-
rency lurks in the reasoning of most of the bank projectors who preceded him. How-
ever, the case seems to be one of those in which it is right to link ‘priority’ with fullness
and depth of comprehension. Secondly, in a sense every currency is always managed.
Moreover, currencies had been tampered with for ages. But this is not what I mean . . .
[breaks off, unfinished, at this point].

VALUE AND MONEY

323

and other accessory claims of the lender. In obvious relation with this, it later
came to denote the sums of money or their equivalents brought by partners
into a partnership or company, the sum total of a firm’s assets, and the like.
Thus the concept was essentially monetary, meaning either actual money, or
claims to money, or some goods evaluated in money. Also, though not quite
definite, its meaning was perfectly unequivocal, and there was no doubt about
what was meant in every particular case. What a mass of confused, futile, and
downright silly controversies it would have saved us, if economists had had
the sense, to stick to those monetary and accounting meanings of the term
instead of trying to ‘deepen’ them! Before the eighteenth century, however, they
hardly used it at all. Waiving such questions as whether or not St. Antonine
of Florence evolved a capital theory, we merely note that in the seventeenth
century terms like Wealth, Riches, Stock were often , used where we should
use Capital, and that throughout the eighteenth — and even in the first decades
of the nineteenth — Stock was favored for use in the nascent capital theory.

Stock, more or less in the sense of either durable or productive wealth —
the latter exemplified by Child’s stock of tools and materials — was, of course,
the object of attention and of recommendations. But when I said that econo-
mists were late in finding employment for it, I meant employment in articu-
late analysis involving a ‘theory’ of the nature and functions of capital. Of this
there were only rudiments before Cantillon and the physiocrats. It may sur-
prise the reader to find Quesnay credited with laying the foundations of a
capital theory, considering his emphasis on the role of natural agents. We
must, however, go further than this and simply recognize the presence of one
of those cases — they are as frequent in science as they are in politics — where a
man achieves if not the opposite of, yet something quite different from, what
he intends to achieve: the physiocrats were even responsible for one of the
later theories of the productivity of capital. The whole process described by
the tableau starts from given ‘advances’ and, moreover, runs on in terms of the
annual advances. These advances are goods — to live on or to produce with —
though their quantity may be expressed in terms of money, and they are pre-
cisely what capital means in one of the many senses of the word. This idea is
so important for the general character of any theoretical scheme that adopts it
that we may well form a group of all the schemes that do so and call it ‘ad-
vance’ economics . 1

This point was almost immediately seized upon by Turgot, who sketched
out the corresponding theory of capital. He emphasized — one may almost say,
he ‘rubbed in’ — that wealth other than natural agents ( richesse mobiliere
amassee d’avance) is a prealable indispensable for all production ( Reflexions ,
liii), which amounts to offering his shoulders for future attempts to treat
capital in this sense as a factor of production. In his own way, A. Smith did

1 The reader will observe, of course, that for a theoretical schema to qualify for in-
clusion in that group it is not sufficient to recognize the trivial facts that in order to
produce, one must have tools and materials and that producing takes time — just as,
in order to accept Newtonian physics it is not sufficient to recognize that, if severed
from its branch, an apple will fall to the ground.

324 II: BEGINNINGS TO ABOUT I79O

the same thing. But one of the reasons for believing that he did not know the
Reflexions (publ. in the ftphemerides, 1769-70) is that his exposition, though
infinitely more prolix, falls far short of Turgot’s. It looks to me as if Chapter 1
of Book n of the Wealth represents what he himself made of Quesnay’s sug-
gestion. The 'advance’ idea is there and so is a hint of the productivity
(necessity) of capital,, but instead of a theory of interest, as in the case of
Turgot (see below, sec. 7), only a ‘taxonomy’ of capital comes from it —
Quesnay’s primitive advances may have suggested the concept of 'fixed capi-
tal,’ Quesnay’s annual advances may have been transformed into 'circulating
capital,’ and A. Smith then proceeds to enumerate the various categories of
goods that form the one and the other and to discuss what should and what
should not be included in each category. It has often been pointed out that,
owing to his different confusing points of view, this taxonomy is not quite
satisfactory. We need not go into this. All that matters is that a physical or
'real’ capital concept — which, however, included money, the 'acquired and
useful abilities of all the inhabitants,’ and also, though this is not obvious
from Smith’s catalogue, the means of subsistence of 'productive’ laborers —
was handed down to the theorists of the nineteenth century and, with but
minor criticisms, accepted and further developed by most of them.

And so was the Turgot-Smith theory of saving and investment. With tre-
mendous emphasis, A. Smith lays it down (ch. 3 of Book n) that 'parsimony,
and not industry, is the immediate cause of the increase of capital’; that 'it puts
into motion an additional quantity of industry’; that it does so 'immediately’
(without lag) for 'what is annually saved is as regularly consumed as what is
annually spent,’ that is, the saver spends as promptly as the prodigal, only he
does so for different purposes and the consuming is done by other people,
that is, 'productive’ laborers; and 'every frugal man is a public benefactor.’
Turgot, only with a lighter touch, had written all this before. 2 But not Ques-
nay, nor Cantillon, nor Boisguillebert. Turgot evidently broke away from an
anti-saving tradition established in his circle. Nor do I know of any earlier
French economists — with the possible exception of Refuge — who could be
credited with genuine ‘predecessorship.’ Among English economists only Hume
had any claim. No doubt a host of writers, in the seventeenth century and
before, declaimed against luxury (and the mischief of idleness),’ especially
against imports of luxuries, called for or approved of sumptuary laws, and com-
mended economy, at least for the bourgeois and the workman. 3 Among Span-

2 In comparing the Wealth and the Reflexions, some doubt may assail us concern-
ing the value of the indication previously mentioned about Smith’s independence. For
Turgot also says that, at least in the case of entrepreneurs, savings are converted into
capital sur-le-champ (his italics). But Smith’s 'immediately' certainly is the exact trans-
lation of sur-le-champ. And this is not unimportant; on the contrary, as will be seen
in a moment, it is an essential feature of both theories and indeed their most serious
shortcoming. That such a slip should occur independently in two texts is indeed quite
possible; but it is not likely.

8 To some extent, the confusing and confused mass of contradictory opinions on
luxury may be straightened out, first by discarding, as not relevant to our subject, how-

VALUE AND MONEY

3 2 5

ish and English economists this was, in fact, quite a fashion. The latter in
particular held that inadequate propensity to save was one of the reasons that
made it so difficult for Englishmen to oust the Dutch — for whom they felt
so much resentful admiration and who were supposed to be so frugal — from
their leadership in international trade. But this linked up with a conception
of saving and investment that stopped in most cases at the accumulation of
stocks of durable goods, gold and silver in particular, and at a favorable balance
of trade — the mercantilist angle to be considered in the next chapter. No-
body saw, or at any rate bothered about, the modus operandi of saving and
capital formation per se. Turgot, then, must be held responsible for the first
serious analysis of these matters, as A. Smith must (at the least) with having it
inculcated into the minds of economists.

Two points should be noted for future reference. First, in the face of fre-
quent criticism, Turgot’s theory proved almost unbelievably hardy. It is doubt-
ful whether Alfred Marshall had advanced beyond it, certain that J. S. Mill
had not. Bohm-Bawerk no doubt added a new branch to it, but substantially
he subscribed to Turgot’s propositions. Second, the theory was not only swal-
lowed by the large majority of economists: it was swallowed hook, line, and
sinker. As if Law — and others — had never existed, one economist after another
kept on repeating that only (voluntary) saving was capital creating. And one
economist after another failed to look askance at that word ‘immediately.’

ever interesting from other standpoints, opinions that are (a) primarily morally mo-
tivated, in which case a writer may be ‘against luxury’ even if his economic argument
leads him to attribute ‘favorable’ effects to it, (b) clearly traceable to bourgeois re-
sentment against ‘high living/ especially in the ‘aristocratic’ stratum; second, by dis-
tinguishing the different meanings that were attached to the word. During the eight-
eenth century, the plural Luxuries came more and more exclusively to denote non-
necessary commodities, the necessary ones including ‘not only the commodities which
are indispensably necessary for the support of life, but whatever the custom of the
country renders it indecent for creditable people, even of the lowest order, to be with-
out’ (Wealth of Nations, Book v, ch. 2), so that luxury would be consumption exceed-
ing what was later called the ‘social minimum of existence.’ Appraisal of opinion on
the effects of luxury in this sense is complicated by two types of considerations ex-
traneous to the fundamental problem: (a) so far as these luxuries were imported they
come in for vituperation on balance-of-trade grounds (see below, next chapter); (b) so
far as consumption of these luxuries presupposes relatively high wages, it was held by
many writers, especially English ones, to be a handicap in the struggle for foreign
markets, an argument that runs parallel to (a) and merges into the more general argu-
ment on wages that has been touched upon already. Apart from these two types of
considerations, however, luxury in this sense was primarily viewed from the high-level
consumption standpoint discussed in the text (above, sec. 1), even by later writers, who
emphasized the role of saving, such as Hume, who added also the argument that in-
dustries producing luxury goods may prove a ‘store of labor’ for government to draw
upon in emergencies. ‘Vicious’ luxury was commended by Mandeville as an important
motive force and, though with qualification, by Hume. Typical for this line of thought
was Butel-Dumont ( Theorie du luxe, 1771). There is very little truth in the wide-
spread belief that either A. Smith’s own contemporaries or the economists of the
seventeenth century needed his reminder that ‘consumption is the sole end and pur-

326 II: BEGINNINGS TO ABOUT I79O

But in effect — whatever else benevolent interpretation might make of it — this
came to mean that every decision to save coincides with a corresponding de-
cision to invest so that saving is transformed into (real) capital practically with-
out hitch and as a matter of course or that, to put it differently, saving practi-
cally amounts to supplying (real) capital. The reader need not strain his
imagination unduly in order to realize what a difference it would have made
to doctrinal history if the possibility and, in depressive situations, likelihood
of the occurrence of hitches had been pointed out from the first — of hitches
that may paralyze the mechanism described by Turgot and cause saving to be-
come a disturber of the economic process, hence possibly a destroyer instead
of a creator of industrial apparatus. Not only would such an admission have
broken off the spearhead from modern attacks upon the theory but it would
also have made it a more effective analysis within the situations for which it
is quite true. There was the less excuse for refusing to recognize the necessary

pose of all production’ (Book iv, ch. 8). The reader should observe that, with Smith,
this statement is no more than a platitude and entirely stripped of any connotation
hostile to saving. But this meaning of luxury was not the only one.

Besides, there was a meaning in which luxury was associated with unproductive con-
sumption. There were, from the middle of the seventeenth century on, several discus-
sions on the latter, which, as we know, also greatly preoccupied A. Smith. The two
elements that this meaning combines are exceedingly difficult to disentangle and space
forbids us to enter into this^— not very interesting — matter. Then there was the
meaning in which luxury is the opposite to parsimony — luxury in this sense (Hume
would have called it 'excessive’ luxury) was bemoaned already by Thomas More, and
this meaning, more or less distinct, runs through the whole literature on the subject;
it was to be reasserted by Malthus. Again, there was the meaning that has perhaps
more right than any other to be called the original one, viz. luxury as a style of life
above one’s station. The wish to protect distinctive class standards — spiced with the re-
sentment of poor magnates against rich financiers — was an important factor in the
policy that produced sumptuary laws (though there were others, such as the wish to
compel people to reserve means for military uses). Since we shall not expect this point
of view to play any great role in our literature, it is not uninteresting to note that
some slight indication of it is to be found in the Wealth of Nations. Finally, there
is the meaning that associates luxury with ruinous expenditure (dissaving). The wish
to prevent people and in particular leading aristocratic and bourgeois -families from
ruining themselves was another important factor that made for the passing of sump-
tuary laws. In societies that center in a court and whose style of life derives its pattern
from the 'magnificence’ of the feudal household, fashion is much more compelling—
for all except for the poorest classes — than it is in bourgeois society. And sumptuary
laws, if effective, are perhaps the most obvious way of excusing the courtier or the
leading officer of state from having to live beyond his means, and of preventing the
rising merchant from setting a compelling example. This also explains why many
Consultant Administrators who otherwise argued on the lines of Becher’s principle,
thought themselves in duty bound to frown upon luxury in this sense. From the large
literature of the subject, it will suffice to mention: Juan Sempere y Guarinos (1754-
1830) Historia del luxo y de las leyes suntuarias de Espaha (1788). [J. A. S. was in
doubt as to where to place this note on luxury. On the last page of the ms. of
sec. 1 appeared the question: here * luxury?]

VALUE AND MONEY 327

qualifications because they could have been taken from earlier as well as con-
temporaneous economists, especially from Quesnay's Maximes.

If saving is allotted such a part in the drama, the 'prince’ (that is, public
expenditure, hence public debts) cannot be expected to escape the role of the
villain, or one of the villains, of the piece. The topic of public debts, though
interesting from the standpoint of economic sociology and also from the stand-
point of financial technique, is of little moment for us, because judgment and
advocacy greatly prevailed over analysis. Therefore it will suffice to say that
many authors tried hard to discover desired effects that might be attributed
to public borrowing. Some indeed went so far as to make them a factor in
national prosperity. 4 The opposite tendency prevailed, however — votaries of
ideological interpretation are welcome to trace this to the increasing influence
of the bourgeois mind, which in fact had more reasons than one to dislike
cavalier finance. It was strongly sponsored by Hume and Smith. From their
theory of saving — embryonic in Hume, developed in Smith — it follows indeed
that public (or any) borrowing for nonproductive purposes spells setback in the
growth of wealth. It is less easy to see why both should have been of the opin-
ion that the public debts of their time were crushing burdens likely to produce
bankruptcy and ruin. They hardly did more, however, than to express current
opinion on the subject. The English public was in fact so nervous that the
Pitt government in 1786 resumed, on a larger scale and more seriously, the
policy of paying an annual sum into a Sinking Fund. 5

7. Interest

The most significant development to notice in the interest theory of the
period is the emergence, and all but universal acceptance, of the propositions
(1) that interest on business loans is nothing but normal business profit trans-
ferred to lenders, and (2) that normal business profit itself is nothing but the
return on the physical means of production, labor’s means of subsistence in-
cluded. So essential is it for us to grasp the full importance of this development
which was to shape the subsequent history of interest theory that, in order
to make it stand out clearly, we shall neglect side issues and cross currents as
far as possible. In particular, we shall neglect discussions of interest on loans
for purposes of consumption: for this . . . [incomplete].

4 This was done, e.g., by Isaac de Pinto, Traite de la circulation et du credit , 1771.
But this line of thought had many adherents, especially in France.

5 The plan adopted is usually attributed to the suggestion of Richard Price (1723-91;
An Appeal to the Public on the Subject of the National Debt, 1772; The State of the
Public Debts and Finances in 1783). The idea itself must be distinguished from the
bold claim put forth by Price for his plan, according to which 'a State may, without
difficulty, redeem all its debts by borrowing for this purpose,’ which brought upon
him much undeserved ridicule. Sir Nathaniel Gould (An Essay on the Publick
Debts . . . 1726) had published similar views before. Both publications produced lively
controversies into which we cannot — and need not — go.

328 II: BEGINNINGS TO ABOUT 179O

[(a) Influence of the Scholastic Doctors .] We start again from the work of
the scholastic doctors and their Protestant successors to which the reader had
better refer before perusing this section. Their influence asserted itself in two
ways. On the one hand, they provided one of the main topics of discussion:
the controversy on the legality of charging and paying interest went on. In the
second half of the eighteenth century, it flagged but it did not quite die out,
and even Turgot wrestled, in his tract, Memoire sur les prets d’ argent, with the
Aristotelian position. Into this we need not go again. But a cognate point de-
mands our attention. In most countries the moral issue was partly ousted by
a purely economic issue, which turned not on the old question of principle,
but on the question of the expediency of reducing the rate of interest by legis-
lation. English merchants especially, looking with resentful admiration on com-
mercial conditions in the Netherlands, embraced the theory that will natu-
rally occur to the untutored practitioner, namely, that one of the causes, per-
haps the main cause, of the flourishing state of Dutch trade in the seventeenth
century was the low rate of interest that prevailed there, and they insisted that
legal regulation could confer the same advantage upon England. It will suffice
to mention Child as the most eminent among the many exponents of this
theory and to glance in the footnote below at what seems to me to be the
better part of the ensuing controversy from which the opposite theory, namely,
that a low rate of interest is the consequence and not the cause of wealth,
emerged victoriously — not to be seriously challenged again until our own time . 1
From this it does not follow, of course, that legal regulation of the rate of in-
terest can have no sense at all. In fact, neither Locke nor A. Smith went so
far as this. But in the end this view prevailed . 2

On the other hand, scholastic doctrine also provided the theoretical (ex-
planatory) ideas about interest from which the analysis of the seventeenth and
eighteenth centuries started. Neglecting minor points, we shall concentrate
upon these two: the monetary conception of interest and the proposition en-

1 Child may be said to have argued on the lines first worked out in a presentable
manner in Sir Thomas Culpeper’s Tract against the High Rate of Usurie, 1621 (en-
larged ed., 1641). This tract, together with another not printed before, was reprinted
and prefaced by his son, another Sir Thomas (1668). The latter also published in

. 1668 what is the classic treatment of this side of the controversy: A Discourse shewing
the many Advantages which will accrue to this Kingdom by the Abatement of Usury
together with the Absolute Necessity of Reducing Interest of Money to the lowest
Rate it bears in other Countreys. The opposite view is well stated in a pamphlet
entitled. Interest of Money Mistaken, Or, a Treatise, proving that the Abatement of
Interest is the Effect and not the Cause of the Riches of a Nation that appeared in
the same year and in Thomas Manley’s Usury at Six per Cent Examined . . , (1669).
To this Culpeper junior replied with The Necessity of Abating Usury Re-asserted . . .
(1670). Petty, North, Locke, and Pollexfen, with varying degrees of emphasis, are the
principal names associated with the victory over the Culpeper-Child position.

2 The first economist of real authority who held that view was Petty. The next to
go even further was Turgot. The one to make it prevail definitively, Bentham. But it
was held also by Justi, at least in principle.

VALUE AND MONEY

3 2 9

shrined in Molina’s pithy saying that 'money is the tool of the merchant’s
trade/ The scholastics did not indeed restrict the concept of interest to inter-
est on loans of money, but the latter naturally commanded their attention
more than anything else; they never agreed on or developed the idea that pro-
spective profits are the source of the demand for business loans, but some of
the most eminent of them adumbrated it with unmistakable clearness.

During the seventeenth century and far into the eighteenth, the large ma-
jority of economists looked upon interest — as many of us do again now — as a
monetary phenomenon. In particular, this is true of the Culpepers, Manley,
Child, Petty, Locke, and Pollexfen, not to mention any continental writers.
In the case of Petty, direct scholastic influence is not inconceivable, since he
had received part of his education at a Jesuit college. Looking, quite in the
spirit of the scholastic fathers, for a special reason independent of, and addi-
tional to, the mere act of transferring money to the borrower, that would ex-
plain a premium, he hit upon, or rather resuscitated, the 'inconvenience’ (a
damnum ) suffered by the lender who bound himself not to call for his money
during a stated time. In any case — and in spite of the fact that he related this
inconvenience to the rent of so much land as the same sum would buy — -it is
always money he is thinking of, and it is the quantity of money which is held
to determine the rate of interest without there being any indication of the
ceteris-paribus provisoes that would be required in order to make this true.
Locke goes somewhat deeper than this. Owing to his clumsy way of expressing
himself, it is extremely difficult to do him justice, but if I have caught his
meaning, he may be credited with having introduced explicitly - and having
developed the second of the two ideas mentioned above. Again interest is a
price for money lent. But the 'supply’ on the money market must be seen in
relation to the debt situation and the state of trade — high profits raising, low
profits reducing, the rate. Though we cannot stay to prove it, still less to con-
sider objections, I think that, at a push, this may be interpreted as an em-
bryonic form of what is now known as the Swedish loanable-funds theory: in-
terest is explained and determined by a demand proceeding from expected
profits and meeting a supply of 'loanable funds/

[(b) Barbon: ‘Interest is the Rent of Stock.’] But further development did
not take this line. There is no bridge between Locke and the monetary inter-
est theories of today. Instead, there was a new departure, which was to be so
successful that even now we find it difficult to be as surprised at it as we ought
to be. There are, so far as I know, only the most elusive indications of it be-
fore 1690, when Barbon ( Discourse of Trade) wrote the momentous state-
ment: 'Interest is commonly reckoned for Money . . . but this is a mistake;
for the Interest is paid for Stock,’ it is 'the Rent of Stock, and is the same as
the Rent of Land; the First is the Rent of the Wrought or Artificial Stock;
the Latter, of the Unwrought or Natural Stock/ 3 If the reader is to under-

3 Locke, also, compared interest to rent but in a quite different sense, which adds
nothing to the monetary view of interest and is without deeper meaning: the lender of
money, according to him, receives interest as the landlord receives rent.

33 ° II: BEGINNINGS TO ABOUT 1790

stand the history of interest theory during the nineteenth century, and some
part of it even during the first four decades of the twentieth, it is absolutely
necessary to realize fully what this means.

At first sight, Barbon’s statement might well sound trivial: of course, the
borrower does not normally want the money in order to look at it; what he
really wants, if we neglect the purpose of refinancing other obligations, are
the goods and services that he actually buys with it. Neither do we want, for
its own sake, the knife with which to cut our food, and yet it does not follow
that the price we pay for the knife is ‘really’ paid for the food. For certain pur-
poses we may indeed, for instance by means of the theory of imputation (dis-
cussed below. Part iv) adopt such a view of the matter. But it would be a
most astounding as well as important result if it were permissible to adopt it
for all purposes. Granting even that business loans are normally used for pur-
chasing or hiring real capital in the sense of producers’ goods and services, it
does not follow that the interest paid for the former is ‘really’ an element of
the price of the latter: interest may bear a particular relation to ‘money’ as
distinct from the goods that are bought with it, or it may be a price for some-
thing else — the sacrifice involved in saving, for instance — that cannot be sim-
ply identified with ‘real capital.’ To aver that it is possible to brush aside the
monetary element without losing anything essential in the process is there-
fore an extremely bold step — which neither the scholastics nor Petty nor
Locke thought of taking, though the triviality above cannot have been un-
known to them; in particular, it was the decisive step toward the ‘real’ analysis
of the nineteenth century, according to which money was just a ‘veil’ that it
was the business of analysis to lift, which is precisely the center of the ana-
lytic difficulties created by Real Analysis.

In addition to the service or disservice that Barbon rendered by the impulse
he gave in the direction of Real Analysis, there is another aspect to his per-
formance that is hardly less important. If interest is the return on ‘wrought
stock’ — produced means of production — exactly as rent is the return on ‘un-
wrought stock’ — natural agents of production — then it is goods of some kind
or other that the lender ‘really’ possesses. As a matter of fact, it is the manu-
facturer or trader who possesses such goods, and he gets them either by pro-
ducing them himself or by buying them from other producers and not from
the capitalist or lender. To neglect this and to reason as if the latter lent goods
is another stroke of analysis, the boldness of which is hidden to us only by our
familiarity with it. But then the return on these goods materializes in the
hands of the businessman who uses them and constitutes the main — and
theoretically basic — part of his profit, at least if we choose to make light of
his ‘trouble and risk.’ Thus we easily slip into a position that may be charac-
terized by the equivalent propositions that the business firm earns interest or
that the lender receives profit — not, as would seem more natural to the un-
prejudiced mind, an income sui generis of which, profit is merely the most im-
portant source.

[(c) Shift of Analytic Task from Interest to Profit.] For the whole of the
nineteenth century and beyond, this shifted the analytic task from interest

VALUE AND MONEY

33 1

to profit. With the partial exception of abstinence and psychological-discount
theories, the phenomenon to be explained was* the net surplus of business,
which, in turn, was essentially a surplus arising from the use of an assemblage
of certain physical goods; that this surplus,, cleared of accessories such as com-
pensation for trouble and risk, had to be handed to some other person, if this
person and not the business manager was its real (though not legal) owner,
hardly required independent explanation. This applies also to Bohm-Bawerk
and Wicksell, though the latter made the first step beyond this theory and
must even now be kept in mind when we compare such a theory as Keynes’s
with other interest theories: the object of analytic endeavor is different.

It is not too much to say that this was to be the dominant feature of the
theorist’s general picture and even of economic sociology for everyone: the
businessman became the ‘capitalist. 7 Fundamentally his income was income
from ownership of goods, an impersonal return.

[The two preceding paragraphs were on a single page with notes (both shorthand and
longhand) to indicate how the argument was to be continued. This section on interest
was more fragmentary than any other part of this unfinished chapter. It was obviously
an outline that would have been filled in and completed, had the author lived.]

A. Smith substantially accepted this theory of interest and of the capitalist
process. The nineteenth century in turn accepted it from him. However, before
considering the precise form which he gave it, we must glance briefly at its de-
velopment between 1690 and 1776.

Barbon’s Discourse , on this point at all events, did not meet with success.
The tract seems indeed to have been forgotten very soon. Thus, Barbon’s fun-
damental idea remained in abeyance until 1750, when it was again expounded
— for all we know, independently rediscovered— by Massie, 4 whose analysis
not only went further than Barbon’s but also gathered force from its criticism
of the views of Petty and Locke. Two years later, in his volume entitled Politi-
cal Discourses, Hume published two essays (‘Of Interest’ and ‘Of Money’)
that do not seem to have received due tribute from recent historians. It is in-
deed true that, on the surface, we see little more than synthesis and effective
re-exposition of ideas that had been put forth before. This impression is par-
ticularly strong with authors who attend primarily to certain practical results
he drew from his analytic set-up, such as that interest is not simply a function
of the quantity of money, that low interest is a consequence and not a cause
of wealth, that it cannot be determined by legislation, that it is correlated
with profits in a relation of mutual interaction, and that it is a ‘barometer of
the state,’ low interest being ‘an almost infallible sign of prosperity’ (which,
of course, is not true in every sense of ‘prosperity’) — none of which were novel.
But the analytic set-up with which Hume backed all this, though sketchy, can
be called synthetic only in the sense in which synthesis may transcend co-
ordination and be creative. It amounts to accepting Locke’s explanation of the
demand for loans — definitely loans this time, not ‘money’ — by the needs of

4 Joseph Massie, Essay on the Governing Causes of the Natural Rate of Interest
(1750).

332 II: BEGINNINGS TO ABOUT I79O

spendthrift landowners and by the profit expectations of businessmen, and to
replacing Locke’s supply of money by the supply of savings. This allows for
the close relation between profit and interest without identifying them, and
admits the monetary aspect — particularly as regards short-run effects of varia-
tions in the quantity of money on the rate of interest that were also recognized
by Ricardo — without making it dominant In short, we have here a schema that
need only have been worked out in order to produce a much better and more
complete theory of the interest phenomenon than can be found in either
Ricardo or Mill. But precisely the most valuable points were lost.

[(d) Turgot’s Great Performance.] Turgot’s 5 contribution is not only by
far the greatest performance in the field of interest theory the eighteenth cen-
tury produced but it clearly foreshadowed much of the best thought of the
last decades of the nineteenth. Like Hume, Turgot argued that the quantity
of money does not determine the rate of interest, very nicely emphasizing the
conceptual independence of the two meanings of the phrase Value of money’
— its value in the money market and its value in the markets of commodities —
and even going so far as to assert that an increase in the quantity of money
that raises commodity prices might conceivably increase the rate of interest.
Also like Hume, he substituted supply of savings for supply of money. And
there are other points that Hume made before him. But his theory goes much
deeper than all that and is quite different in content as well as in background.

5 As in the case of Hume, critical analysis does not seem to have done full justice to
the essential point in Turgot’s performance. This applies in particular to by far the
most eminent of his critics, Bohm-Bawerk ( Capital and Interest, Book i, pp. 61-9 of
English trans. of 1932), who pinned him down to a ‘fructification theory’ of interest,
an interpretation that does not do justice even to the letter, let alone the spirit, of
Turgot’s treatment. Cassel’s analysis ( Nature and Necessity of Interest, 1903) is much
more satisfactory. This ‘fructification theory’ was, in fact, quite frequently used in the
eighteenth century and even before in order to counter the Aristotelian argument about
the sterility of money: since it is possible to use money for the purchase of land,
which does yield a net return, therefore money will yield — most authors would have
said: therefore it is ‘just’ that money should yield — a net return, whatever the pur-
pose for which it is lent. Hutcheson argued like this, and Petty might perhaps be
accused of having done so. It is obvious that this reasoning, as an explanation of
interest, is, or at least may be, circular, because the value of land itself depends upon
the rate of interest. But Turgot, though he stated the equilibrium proposition that a
sum of money will be equivalent in value to a piece of land that produces the same
net revenue ( Reflexions , lix), was so far from treating this fact as a datum from which
to start, in explaining interest, that he made an elaborate attempt to determine the
exchange ratio between land and richesses mobilieres (un et seq.) and to deduce from
it the value of lands in terms of money.

[The reader’s attention is called to the fact that the numbering of the sections of
the Reflexions in the Oeuvres edited by G. Schelle (1913-23) differs from the original
numbering in the 1 Gphdmerides. For example, xxi, xxii, and xxiii became xxi in the
Schelle edition and lxxiii in Schelle had been entirely suppressed in the itphemerides.
Apparently J. A. S. used the original numbering in the Rphemerides (1769-70), which is
also the numbering used by Dupont de Nemours in vol. v of his edition of the Oeuvres
de M r . Turgot (1808-11).]

VALUE AND MONEY

333

Canonist influence, as we might expect, is much in evidence — though, of
course, scholastic ideas are sometimes made to serve exactly opposite practical
conclusions — and one essential feature of Turgot’s scheme, the identification of
capital with 'advances/ goes back to Quesnay or Cantillon. The homines in-
dustrieux share their profit with capitalists who supply the funds (Reflexions,
lxxi). The share that goes to the latter is determined like all other prices
(lxxv) by the play of supply and demand among borrowers and lenders
(lxxvi), so that the analysis is from the outset firmly planted in the general
theory of prices. At first blush and on the surface, interest is the price paid
for the use of money (lxxh, lxxiv). But why does the use of money command
a price or, to put it differently, why does the mechanism of supply and de-
mand work out in such a way as to produce normally a premium on present
as compared with future money? Turgot realized that it is not enough to an-
swer that money lent is money saved. His answer was that the fonds supplied
by the capitalist represent richesse mobiliere or advances, which are an indis-
pensable prerequisite of production (Lrn): capital yields interest because it
bridges the temporal gap between the productive effort and the product (ltx,
lx). By now, this idea has become as stale as a quotation from Hamlet. More-
over, many of us have ceased to believe in its explanatory value. For both rea-
sons, the reader may find it difficult to admire as he should the brilliance of the
stroke by which Turgot, exploiting Cantillon’s or Quesnay’s conception of
capital, tied the phenomenon of interest to a most elementary fact about pro-
duction. The propositions that the rate of interest is the thermomdtre of the
(relative) abundance or rarity of (real) capital (Lxxxvin) — in other words, that
the rate of interest is negatively correlated with the rate of saving— and that
it measures the extent to which production can be carried (lxxxix) also ac-
quire additional meaning in the light of this theory. The first remained practi-
cally unchallenged until our own time, the second stands unchallenged even
now.

As has been stated before, A. Smith stereotyped the doctrinal situation. But
in doing so he dropped precisely the most promising suggestions proffered by
Hume and (if he knew the Reflexions) by Turgot — still more those that he
might have found in Locke- — so that his successors started from a formulation
that was much more Barbonian than that of any of these writers. In the
Wealth, the monetary aspect of the interest problem is definitely reduced to
a matter of form or technique. ‘What the lender really supplies ... is not
the money but . . . the goods which it can purchase’ (Book n, ch. 4), and
there is nothing in the views of ‘Mr. Locke, Mr. Law, and Mr. Montesquieu’
that an increase in the quantity of gold and silver lowers the rate of interest
(ibid.). The tendency of interest to fall he explained in exactly the same way
as the tendency of profit to fall (Book r, ch. 9, which really deals with the same
topics as Book 11, ch. 4), both of which A. Smith seems to accept — with a
qualification about ‘acquisition of new territory or of new branches of trade’ —
as unquestionable facts. And this is quite logical for, as should be clear by
now, they are, in A. Smith’s schema, really one and the same thing. A. Smith
does distinguish them: profit also includes compensation for ‘trouble’ and

334 n: beginnings to about 1790

‘risk/ whereas the lender receives his interest without such trouble and risk.
But these are relegated to a secondary position. Essentially, profit is ‘profit of
stock/ and interest which goes to the capitalist employer is received for ‘stock’
(goods) lent. Whether the stock be his own or borrowed from some other per-
son, to supply the workmen with stock is the businessman’s basic function.
First and foremost, he is the ‘capitalist’ and as capitalist he is the typical em-
ployer of labor, whose basic function it is to supply this stock to the workmen
though that capitalist employer need not always do the employing himself, in
which case . . .

[This paragraph was written on a yellow sheet still adhering to a pad and was ob-
viously unfinished. The page, which was crowded with notes in Austrian shorthand
and in English longhand, is reproduced in the Appendix.]

CHAPTER 7

The ‘Mercantilist" Literature 1

[1. Interpretation of the 'Mercantilist 7 Literature] 335

[2. Export Monopolism] 338

[3. Exchange Control] 340

[4. The Balance of Trade] 345

[(a) The Practical Argument: Power Politics] 346

[(b) The Analytic Contribution] 347

[(c) The Balance-of -Trade Concept as an Analytic Tool] 352

[(d) Sena , Malynes, Misselden, Mun] 353

[(e) Three Enoneous Propositions] 359

[5. Analytic Progress from the Last Quarter of the Seventeenth Cen-
tury: Josiah Child to Adam Smith] 362

[(a) Concept of the Automatic Mechanism] 365

[(b) Foundations of a General Theory of International Trade] 367

[(c) General Tendency toward Freer Trade] 370

[(d) Benefits from Territorial Division of Labor] - 373

Questions of international economic relations loomed so large on the hori-
zons of all the authors of. this epoch that we have already had to refer more
than once to their propositions about these problems. It is nevertheless neces-
sary to return to the charge and to examine some of these propositions more
closely in order to introduce another batch of writings and to extract from them
what contributions to analytic economics they may contain. I shall group those
propositions under the headings of Export Monopolism, Exchange Control,
and Balance of Trade. Doctrines concerning the second and third, particularly
the third, are usually considered the core of that imaginary organon, the 'mer-
cantilist system’ of traditional teaching. To many economists, they mean in
fact the whole of it. This tradition was established by Adam Smith, whose
famous attack upon what he called (following, perhaps, the lead of the physio-
crats) the Commercial or Mercantile System ( Wealth , Fourth Book) centered
in an argument about the balance of trade, although he was not blind to
other aspects.

[1. Interpretation of the ‘Mercantilist’ Literature]

The reader presumably knows that these specifically ‘mercantilist’ doctrines
have given rise to a controversy among historians of thought on which it is Jf
worth while to comment before embarking upon our task. This will not only

1 [This chapter, though completed and typed at an early date (June 1943), had only
a tentative title and no section titles. In reporting on the progress of the Flistory in
1946 or 1947, J. A. S. told me that this chapter could be published substantially as it
stood but that a good deal of work remained to be done on other chapters in Part 11.]

336 II: BEGINNINGS TO ABOUT 1790

clarify the issues involved but also afford an interesting illustration of the
principles of interpretation outlined in Part i.

The opinions the 'mercantilist’ writers held about those topics — so far as
they can be said to have held uniform opinions at all 2 — came to be looked
upon not only with disapproval but also with contempt by the large majority
of the economists of the nineteenth century. They could see nothing but error
in them and, in dealing with their predecessors, developed a practice accord-
ing to which it was all but sufficient for putting a work out of court to attach
to it the slightest tinge of 'mercantilism/ This can be verified, in an almost
amusing way, by consulting the relevant articles in Pdgrave’s Dictionary of
Political Economy . 3 Next, an opposition to this free-trade view arose; voiced
mainly though not exclusively by German writers, it went practically to the
other extreme. This opposition also succeeded in establishing a tradition,
though a less general one, which of late seems to have elicited a reaction that,
joining forces with the surviving elements of the 'liberal' tradition, in turn
bids fair to overshoot the mark. Professor Jacob Viner’s monograph may per-
haps be cited as an instance . 4

Now the first thing to observe about this prolonged campaign is that both
the antimercantilists and the promercantilists were primarily interested in
mercantilist practice and that the opinions of both hence were and are pri-
marily a matter of political preference. The English critics were out of sym-
pathy with what had been done in the mercantilist age. The German sympa-
thizers were not in favor of all the aspects of mercantilist practice, but they
were in favor of some measure of national autarky, of state management, and
above all of state building. All this is completely irrelevant to our purpose, and
the only thing that needs to be said about it is this: Both critics and sympa-
thizers were victims of the belief, so dear to that rationalist epoch, that their
opinions about policy were scientific inferences from premises that had been
laid down in a scientific spirit. Especially the English utilitarians, such as John
Stuart Mill, looked upon their recommendations concerning policy as an engi-
neer would look upon his recommendation about the construction of an en-
gine. Their present was invariably 'this enlightened age/ Hence practical and
theoretical 'error' was for them equally definite and indeed the same thing.

2 This is in fact the first issue involved.

3 Let us notice, in passing, that for the same reasons exactly the same thing is
happening now to the economists of the liberal epoch.

4 Jacob Viner, 'English Theories of Foreign Trade before Adam Smith,’ republished,
in revised form, as chs. i and z of his Studies in the Theory of International Trade
(1937). I wish to acknowledge my indebtedness to this excellent piece of work. In
perusing it I have sometimes wondered, however, whether Professor Viner is prepared
to pass the same peremptory judgments on certain measures and arguments of our
own time that are exactly similar to those of the mercantilist age. Another book that
must be mentioned here is The Theory of International Prices by James W. Angell
(1926; chs. 2 and 8). See also Viner’s review of this book in The Journal of Political
Economy , October 1926.

THE ‘MERCANTILIST* LITERATURE

337

This standpoint, which partly accounts for their pontifical attitude, is of
course wholly untenable as we need not stay to prove once more.

Second, the promercantilists held what the antimercantilists by implication
denied, namely that mercantilist policies were not only understandable in the
sense in which everything is, crime and folly included, but also in the much
more significant sense that, taking account of the circumstances and oppor-
tunities of the times, they constituted adequate means for securing what with
the same proviso were rationally defensible ends. Here, as previous argument
suffices to show, the promercantilists score, though not to the extent they
themselves believed . 5 At all events, this must be admitted by all those who
are not willing to condemn modern commercial policies of a similar type,
which in fact enjoy the support of many who know all about their Smith, their
Ricardo, and their Marshall. For the sake of future reference, let us call this
the Practical Argument . 6

6 In the thicket of ‘mercantilist’ measures it is easy to find many that did not serve
the ends their promoters had in view or that produced other effects besides those
that were desired, which would have prevented their being taken if they had been
foreseen. Adam Smith’s common sense revelled in instances of this (Book iv, ch. 8),
which might easily be multiplied. It is however possible to separate off ‘mistakes’ and
to carry the discussion up to a plane of principle on which they may be assumed
away, though it must not be forgotten that any system of management is prone to
produce a goodly crop of them. This in fact would have been Smith’s defense if some-
body had accused him of unfairly using ‘mistakes’ in a discussion of ‘principles.’

6 At this point, a sideline branches off which we see immediately if we reflect that
both the ends to be served by a policy and the means to be considered rational, in
other words, the questions concerning the wisdom or unwisdom of a policy, are relative
to schemes of value that are themselves relative not only to the national situation,
but also to the kind of men who face it and thus, among other things, to the class
structure and to group interests. The statement in the text that, to some extent, mer-
cantilist policies admit of rational defense (which, mind, never amounts to ‘justification’
in any absolute sense) must be understood to imply this. Many policies of the mer-
cantilist age may in fact be traced to the interests of, or to the pressure exerted by,
groups that can be definitely identified and from whose standpoints they may acquire
a character of rationality that would otherwise be lacking. Adam Smith had an eye
for this as he showed in Book iv, ch. 8. I will emphasize again that this has nothing
to do with the truth or value of any given proposition or line of reasoning. The most
stubborn class interest may induce true and valuable analysis, the most disinterested
motive may lead to nothing but error and triviality. I hope I have made this quite
clear in Part i. Also, I want to repeat that considerations of the class now envisaged
do .not per se entitle us to attribute conscious or even subconscious interested motive
to any individual. Apart from the fact just mentioned, viz. that motive has nothing
to do with the objective nature of a proposition, it is unsafe to talk about individuals’
motives. The only mind accessible to us is our own. In talking about motives of in-
dividuals we may be revealing nothing but our own propensities. Wheeler was secre-
tary to the Merchants Adventurers. Mun and Child were connected with the East
India Company. Milles was a disgruntled bureaucrat. Perhaps none of them has a
claim to be included among the Consultant Administrators. But little more than trivial-
ity results from stressing this.

338 II : BEGINNINGS TO ABOUT 179O

But, third, this does not prove anything for the analysis, the results of which
have been used in order to defend those policies. A man may do what, from
his standpoint and in his circumstances, is for him the right thing and yet do
it for reasons that are complete nonsense . 7 The promercantilists, in particular
the German ones who cared little and knew less about economic theory, were
therefore wrong in thinking that they had proved anything for what they con-
ceived to be mercantilist doctrine when they had succeeded in making out, in
the sense defined above, a partial case for mercantilist practice. Moreover, it
should be borne in mind that it is not enough to show that a proposition we
find in a mercantilist pamphlet makes sense to us , that is to say, that we can
prove it to be correct. For many modern propositions bear a striking surface
resemblance — let us hope that the resemblance does not go below the surface
— to quite primitive ones which can be easily disproved. To read our meaning
uncritically into old texts amounts to betrayal of the historian's duty as much
as does overemphasis on every mistake in formulation. This class of considera-
tions we shall, for purposes of reference, call the Theoretical Argument, Armed
with these distinctions we now proceed with our task.

[2. Export Monopolism]

To begin with, the practical argument is strongly in favor of those writers
of that age who held that monopoly and quasi-monopolistic co-operation, no
matter what their effects may have been on domestic industry and trade,
filled an essential function in foreign commerce. This is what I mean by ex-
port monopolism. At all times people have judged differently monopolistic
practice that was directed against foreigners. Thus, the American Congress,
otherwise so hostile to anything that may be made to look like monopoly, was
easily persuaded to relax antimonopolist legislation for the benefit of export
trade by the Webb-Pomerene Act. The proposition involved is as simple as it
is — so far as it goes and if only immediate effects are considered — correct:
monopoly gains from foreign trade are net gains to a nation because the items
that would have to be subtracted if these gains were made in the domestic
market are equated to zero. Moreover, until the middle of the eighteenth cen-
tury and in many parts of the world until much later, trading was only pos-
sible within protective ad hoc arrangements that the traders had largely to pro-
vide themselves. This did not necessarily involve monopolistic action. But it
spelled organization and co-operation that could easily extend to price and
general business policy, not only to facilitate exploitation but also to regulate
it and to defend standard practice against substandard connationals. Of this,

7 The reverse is also true — particularly in economics — in the sense that it is possible
to reason correctly on a model constructed in an unexceptionable way and yet to arrive
at wrong diagnoses concerning a reality that fails to conform to the model. We shall
encounter instances of this. To top it all, scientifically interesting theories may be
associated with quite uninteresting practice, interesting practice with uninteresting
theories.

THE 'MERCANTILIST 7 LITERATURE 339

the Society of Merchants Adventurers affords a telling example. 1 Finally, it
seems too obvious to require explicit statement but is surprisingly often left
out of account by critics of 'mercantilist theories 7 that that age was the age
of buccaneering imperialism and that trade was associated with colonization,
with uninhibited exploitation of the colonies founded, 2 with private warfare
for which the governments, especially the English, frequently declined re-
sponsibility, and with conditions permanently verging on. war. The classic ex-
ample of all this is the East Indian; the only modern instance, the Rhodesian
case. This explains many things perfectly rationally that were bound to vanish
under the influence of different conditions, even if there had not been any
progress at all in the grasp of the logic of economic phenomena: in fact this
progresss presumably had very little to do with the change in practice.

The two main sources of the large stream of literature on the subject of
export monopolism — including colonization — flowed from the one fact that
the policies of the great companies affected domestic interests also, and from
the other fact that their success aroused the envious hatred of both the squire
and the common man against the 'nabobs. 7 Attacks elicited replies, of which
it may be worth while to notice the best example that has come to my notice:
John Wheeler’s defense of the Merchants Adventurers — among other things
against the bureaucratic spokesmen for regulation who know nothing about
business ( tout comme chez nous). This work mentioned before in Chapters
3 and 6, entitled A Treatise of Commerce, Wherein are shewed the Com-
modities arising by a well ordered and ruled Trade, such as that of the Societie
of Merchants Adventurers is proved to be: Written principally for the better
Information of those who doubt of the Necessarinesse of the said Societie in
the State of the Realme of England (1601), was also written, as we may add,
with impending hostile legislation in view. In my opinion Mr. Wheeler did
extremely well, and his argument successfully disposes of some of the points
that are invariably raised in discussions about monopoly. His economics is not
a bit below the level that we observe in similar popular or political or forensic
arguments today. But he contributes nothing to our collection of scientific
tools. His analytic economics was, on the whole, not wrong. There was very

1 It is hardly possible to understand the circumstances that conditioned the eco-
nomic thought of that period and in particular to appreciate the points made — and
to be made — in the text without a pretty extensive command of the relevant chapters
of economic history. Let me therefore again recommend a study of Professor Eli F.
Heckscher's volumes: Mercantilism (first publ. in Swedish, 1931; German ed., 1932;
English trans. by Mendel Shapiro, 2 vols., 1935).

2 The lack of inhibition displayed by Spaniards, Frenchmen, and Englishmen alike
is a very important element of the case. The economic reasoning about colonies runs
on completely different lines and may, without involving contradiction, lead to com-
pletely different results according to the practice visualized by different men. Warren
Hastings 7 practice — to wit: shameless robbery — is one thing. William Bentinck’s prac-
tice — to wit: benevolent administration — is another thing. And the economic advan-
tages differ accordingly. A rough dividing line can be discerned by studying the evolu-
tion of the attitude toward the slave trade.

340 II : BEGINNINGS TO ABOUT 1790

little of it, however. Because of its prominence, the East India Company at-
tracted the lion's share of public attention and hostility. This accounts for a
large part of the literature in question. So far as I can see, however, there is
nothing in it to interest us except the arguments and counter-arguments about
the company’s exportation of monetary metal and about the competition
which — though harassed by legislation and administration — it offered to Eng-
lish woolens by its imports of Indian wares. However, these arguments and
counter-arguments enter into the general discussion concerning the balance
of trade (see sec. 4). Attention is invited to the footnote below. 3

[3. Exchange Control]

Next let us see how the practical argument stands in the matter of Ex-
change Control. War, as we know from experience, inevitably induces govern-
ment control of economic life and, not less inevitably, creates bureaucracies to

3 Monopolistic policies were related to, though of course not congruent with, the
Staple ( jus emporii ), which will be touched upon in connection with the two other
topics we have singled out for discussion. But it is convenient to make its acquaintance
right now. For our purposes we must carefully distinguish three different aspects of it.
First, corporatively organized traders sometimes hit upon the device of making certain
towns centers or entrepots of their trade in order the better to regulate it. The Mer-
chants Adventurers may again serve as an example. John Wheeler in fact argued the
advantages of 'mart towns.’ Second, the towns themselves, which were in a position
to do so or to prevail on their territorial governments to help them to such a position,
tried to exercise staple rights, that is to say, to force traders to pass through them, to
offer their wares for sale, and to submit to other restrictions that were, or were thought
to be, profitable to those towns: here the foreign traders did not engineer the staple,
but were the victims of it, sometimes in ways that to us look like the acme of irra-
tionality and vexation. This is the type that is usually associated with the term Staple.
It spread in the thirteenth century and after— all over Italy (Genoa and Venice being
the most powerful centers of it) and then over the rest of Europe, including Russia.
It also spread to England, as Edward Ill’s Ordinance of the Staple shows. Professor
Heckscher’s statement to the contrary is not quite understandable to me. From this
arose, third, the practice of forcing international trade into prescribed channels for
the real or putative benefit of a country as a whole and for the purpose of injuring
the foreigner. It is this type that was mainly discussed in the English literature. Eng-
land — improving on the Spanish example — in fact developed it beyond all precedent.
Her participation in the staple policy of the second variety practically ceased, of course,
with the loss of Calais in 1558, whereas, e.g. in Venice, it continued to exist until
Napoleon’s conquest of that city. But her staple policy of the third type was then in
its beginning and a whole century had still to elapse before its legislative bases were
completed by the Navigation Act of 1660 and the Staple Act of 1663. The statement
one meets 'so often, to the effect that, so far as England is concerned, the staple
system died in 1558, is therefore misleading and a serious bar to the understanding
of a considerable part of the mercantilist literature. Of course, the system gradually
shaded off into ordinary protectionism in the modern sense, but this does not justify
us in overlooking its peculiar features that were so important a part of the politico-
economic scene of those times.

THE ‘MERCANTILIST’ LITERATURE

administer it which then not merely cling to their powers but automatically
strive to expand them. Imports, exports, and foreign exchanges are obviously
among the most important of the things to be controlled. The argument for
control also applies to conditions permanently verging on war. Moreover we
must take into account the spirit induced by war and the incessant threat of
, war, the frame of mind in which injury to a foreign nation is almost as wel-
come as gain to one’s own, or, to put it differently, in which the policy of
international economic relations merges with a policy of economic warfare and
becomes just one of the weapons in the perennial game of power politics. If
it be conceded that all this holds true for that epoch, the rationale for its
practice in the matter of foreign exchange should be obvious, especially if we
do not lose sight of the expansive tendency inherent in all bureaucratic prac-
tice. Embargoes on coined and uncoined gold and silver we simply subsume as
a necessary complement under exchange control, although in more primitive
cases they were the main measure to be taken or even all that it was possible
to do . 1

It may be useful, however, to present that rationale in a more general form,
that is, without reference to the particular conditions of war economy. In doing
so I shall consider perfect exchange control only, that is, the case in which a
public authority, holding an effective monopoly of exchange transactions, can
requisition and allocate foreign exchange as it pleases. Then, this authority
can (a) tide over temporary shortages of foreign exchange which,, if not at-
tended to, may produce disproportionate consequences, especially through
cumulative processes; (b) facilitate the orderly discharging of debts in situa-
tions in which automatic adjustment is impossible owing to inhibitions in the
functioning of the international market; (c) prevent or defeat bearish specula-
tion in an exchange market that lacks its normal resilience; (d) prevent unde-
sired (depressive) effects of automatic adjustment that may ensue even where
such automatic adjustment is possible; (e) prevent certain imports or exports
and encourage others and thus powerfully influence national production; (f)
improve a country’s terms of trade within limits, which may be widened by
complementary restrictions, by introducing a monopoly element into its trans-
actions with foreign merchants.

1 The practice of exchange control, as well as the discussion about it, was at the
highest level in England. But the former reached its culmination much before the
latter, viz. in the reign of Elizabeth in which, under the influence of a persistently
favorable course of events, the decline set in also. It then consisted of a control over
transactions in foreign exchange, administered by a special public officer, the Royall
Exchanger, and was supplemented by an embargo (lifted definitively, after various ups
and downs, in 1663 for everything except English coins) and by the Statute of Em-
ployment, 1390, which, a member of quite a family of similar measures enacted in
many countries, attempted to enforce importers to employ the proceeds of their sales
in purchasing English goods. After the First World War there were instances of
similar measures in several European countries, e.g., Austria. The Royall Exchanger
of course has found plenty of successors in present-day Europe whose practices no
doubt differ from his in technique but do not differ at all in principle.

342 II: BEGINNINGS TO ABOUT 179O

Two points remain to be added. First, in order to prove itself the sharp
weapon it is capable of being, exchange control not only requires attention to
the net. result of all the transactions that cross a country’s frontier or to the
net results of a country’s transactions with every other country taken sep-
arately — the bilateral trade principle of today — but it also requires attention
to the transactions in every individual commodity and of every individual
trader. This is particularly necessary if full advantage of the discriminatory
possibilities of the method is to be reaped. Second, in order to be fully ef-
fective as a tool of comprehensive planning, exchange control (plus embargoes
on monetary metals) must be implemented by other controls that act directly
on the individual transactions themselves. Many such controls have been used
at various times but that epoch had a specificum of its own, the institution
of the Staple. 2 It is obviously much easier to control exchanges when trade is
already controlled by being forced into prescribed channels; and the staple
towns with, their apparatus of mints, comptrollers, and hostelers (practically
jailers of foreign merchants) offered unrivaled administrative opportunities for
controlling the exchange market. It should be borne in mind, however, that
the two policies while primarily complementary were also to some extent
capable of being substituted for one another. 3

Now, whatever we may think of the more remote effects of any such policy,
especially if practiced by all countries, and whatever we may think of the way
in which it was actually worked — legislation was (and is), of course, at all
times a highly irrational heap of contradictory measures — it was not simply
nonsense in principle and no writer who advocated it under the conditions
of that time can be accused of having stood for nonsense. This certainly holds
so far as the practical argument is concerned and hence for the practitioners,
among whom Sir Thomas Gresham (1519-79) stands out without a peer. 4 John

2 See footnote 3.

3 There is thus nothing astonishing, and especially no contradiction, in the fact
that some writers advocated both the staple system and exchange control and others
exchange control instead of the staple system. Let us note in this connection that,
roughly up to 1600, Free Trade as a program meant developing the staple system and
fettering or even breaking up the merchants’ companies. After 1600 it meant forcing
the doors of those companies so as to make it possible for every trader to enter them.
In both cases free trade meant a sort of 'trust busting.’

4 He was a type that can no doubt be found everywhere but of which the English
specimens are to this day so much more frequent and so much superior that it may
well be called English: the businessman who is just as much a public servant as he
is businessman and who, though perfectly successful in looking after his own advan-
tage, serves the state in ways that are beyond the competence of the mere public
servant. As a businessman he was a mercer, banker, entrepreneur (paper-milling), and
public benefactor. As a public servant he was first ‘factor’ (fiscal agent) for the English
crown in the Netherlands — keeping up its credit, managing the course of the English
exchange, negotiating loans, acting as buyer of war materials, getting hold, by hook
or by crook, of bullion to ship to England, and so on — and then, at home, exchange
dictator (Royall Exchanger) and financial expert to Elizabeth — among other things,
forcing merchants to lend to the crown by methods that were akin to holdups yet

iiii

THE MERCANTILIST LITERATURE

343

Stuart Mill himself could not have suggested a workable alternative, and if
he rose from the dead to deny this, we should reply that he did not know
enough about the conditions of the time and that it was he who laid himself
open to the charge of erroneous reasoning by denying it. But this does not
alter the fact that those defensible practical views are generally believed to be
associated with inadequate or even downright nonsensical theories. However,
the question arises whether there was any theoretical argument at all.

In fact practically all the writers who discussed the possibilities of protecting
the national exchange and securing an influx of gold and silver money or
bullion without reference to the balance of trade or of payments should not
be credited or charged with any theory . 5 Precisely in order to be just to them,
we must realize how innocent they were of analysis. This will clear them of
some accusations which it has become a tradition to direct at them for no
better reason than that we take their utterances too seriously and insist on
pinning them down to theories these utterances seem to imply. But they did
not analyze at all. They had no conception of any but the most obvious rela-
tions between economic phenomena. Living at a time when nations braced
themselves to match their fighting power, they impulsively resented imports
of unnecessary luxuries — that does not imply considered rejection of Adam
Smith’s grand commonplace that consumption is the ‘sole end and purpose

were so handled as to enhance instead of annihilate public credit: the interested reader
should refer to J. W. Burgon’s The Life and Times of Sir Thomas Gresham (1839).
[See also Raymond de Roover, Gresham on Foreign Exchange (1949).]

We may use this opportunity to notice the two analytic achievements that have
been placed to his credit. First, he described correctly enough the rules that apply
to the movements of the rate of exchange with reference to the specie points, and
he holds priority over Davanzati, who however did a much better job in 1582. To
make scientifically articulate a piece of business practice, however well known in the
business community, is a service that always deserves recording. Second, there is
Gresham’s Law, the proposition that if coins containing metal of different value enjoy
equal legal-tender power, then the ‘cheapest’ ones will be used for payment, the better
ones will tend to disappear from circulation — or, to use the usual but not quite correct
phrase, that bad money drives out good money. This phrase occurs in .the Royal
Proclamation ‘decrying’ base silver coin in 1560, when Gresham is known to have
been the government’s chief adviser in such matters. There is also a memorandum
of his (1559) which argues this case. The so-called ‘law’ can be found in many earlier
writings. Considering its trivial nature, the question of priority is, however, without
interest.

5 It would be apt to call them Primitives (Richard Jones, ‘Primitive Political Econ-
omy of England,’ Edinburgh Review , 1847), provided we bear in mind that the primi-
tivity was in the analysis rather than in the practice. The usual term is Bullionists,
which I want to avoid because it suggests — as well as do others that have been offered
(see E. R. A. Seligman, article ‘Bullionists’ in the Encyclopaedia of the Social Sciences
— -that there were doctrinal nostra by which to identify them as a distinct group.
They were not really a group. Such views as they had in common are also to be
found, on a somewhat higher level, among writers with whom nobody would include
them.

344 11 : beginnings to about 1790

of all production.’ They looked at the antics of exchange rates and attributed
them to the machinations of speculators — exactly as the politicians and the
public did in France and Germany after 1919. They felt it was nice for a na-
tion as well as for individuals to have money — and said so without thinking
any more about it. They were staunch nationalists — and the foreigner, of
course, was an object of aversion and distrust. They were most of them what
may be termed naively critical of business and of the doings of merchants — as
public opinion always was and is. The reader will have caught the point and
will excuse me from going on with this argument. Nor would it serve a useful
purpose to present examples. 6

There were, however, exceptions. 7 The only one to call for specific attention
is Malynes 8 whom we have met before. Behind his recommendations — mainly
higher import duties, prohibition of bullion exportation, the staple system,
and resurrection of the office of Royall Exchange for the purpose of fixing
exchange rates officially — there is more serious theory than has been admitted
by a long series of critics who have treated his views with contempt. That he
does not merit this, is proved by the fact that, as we shall see, during the
whole of that century no other writer surpassed him in clear and full under-
standing of the international mechanism of foreign exchanges that works
through price levels and gold and silver movements — the ‘automatic mech-

6 The reader who feels any inclination of this kind is referred to the articles by
R. Jones and Professor Seligman quoted in the preceding footnote and to Professor
Tawney’s introductory essay in his edition of Thomas Wilson’-s Discourse upon Usury
(1925). Still it may be well to mention one name at least: Thomas Milles, the customs
official, who like a good bureaucrat craved for the regulated trade of the staple, which
he describes as the 'first steppe towards heaven/ and .for the import of bullion, which
he describes as the sun, the pilot, and the ‘chylus’ of economic life. His least immature
work: The Mysterie 0/ Iniqiiitie (1611).

7 Such were Marc’ Antonio De Santis ( Discorso intomo agli effecti che fa il cambio
in regno , 1605), who owes survival to Antonio Serra’s attack upon his theory (see T.
Fomari, Studi sopra Antonio Sena e Marc ’ Antonio De Santis, 1880); Sir Thomas
Culpeper, who in his Tract against Usurie (1621), which has been mentioned already,
approached exchange transactions per analogiam of usury as did others and as the
scholastic writers had done; the anonymous author of 'Cambium Regis: or, the Office
of His Majesties Exchange Royall (1628); Miguel Caxa de Leruela ( Restauracion de
la antigua abunddcia de Espaha, 1631); and quite a number of other Spanish writers.
None of these, however, went below the surface or beyond the mere mechanics of
the regulation of exchanges.

8 Gerard de Malynes (fl. 1586-1641): A Treatise of the Canker of England’s Com-
monwealth (1601); Saint George for England, Allegorically described (1601); England’s
View, in the Unmasking of two Paradoxes: With a replication unto the answer of
Maister John Bodine . . . (1603) — a contribution to the controversy between Bodin
and Malestroit, in which without really attacking Bodin’s argument, Malynes reasserts
the importance of his argument about 'overballancing.’ Mainly these three publications
(and, perhaps his big compilation of legislative material, Consuetudo, vel. Lex Merca-
toria., 1st ed., 1622) are of importance at the moment, but I may just as well add the
two by which he crossed swords with Misselden: The Maintenance of Free Trade . . .
(1622), and The Center of the Circle of Commerce (1623).

THE ‘MERCANTILIST’ LITERATURE 345

anism’ to be discussed presently under the heading Balance of Trade. In the
Second Part of his treatise. Canker of England's Commonwealth , he nicely
explains how, if a country’s currency falls below its mint par and coin flows out
in consequence, then prices will fall in that country and rise abroad ‘where
our mony concurring with the monies of other countries causeth plenty,
whereby the price of forreign commodities is aduanced.’ This is a considerable
theoretical contribution. We must go to the eighteenth century in order to
find the argument carried to the conclusion to which it points. Why then
did Malynes fail to draw this conclusion himself? I think because he was
much more impressed with the shortcomings of that mechanism than he was
with the mechanism itself. In particular he complained that, in the small and
inhibited markets of his time, operations in exchange so worked out for Eng-
land that she was selling her goods more cheaply and paying for foreign goods
more dearly than was necessary — that is, that her terms of trade were unneces-
sarily unfavorable — -‘wherein chiefly consisteth the . . . overbalancing.’ He
perceived the possibility of improving those terms by exchange control (our
point (f) above), and further proof that he reasoned correctly upon the matter
is provided by the fact that, in considering the objections to his plan ( Canker
of England's Commonwealth, Third Part), he mentions first the effect on sales
that might be expected from better terms of trade and promptly replies ‘how
necessarie our commodities are and what request thereof is in all places’ —
which means that, in his opinion, foreign demand for English goods was in-
elastic. Now he may have been wrong in his factual appraisal of the situation.
It is even certain that he overestimated both what speculation in exchange
can do to harm the interest of a country and what exchange control can do to
further it. Overstatement of his point is obvious in the controversy with
Misselden. But that is not the point. We are not concerned with the question
whether England ‘should have’ accepted his advice. We are concerned with
his reasoning. And this, though of course not above criticism, must be primarily
listed as a contribution. If we label him a ‘bullionist,’ then the balance of the
theoretical argument is not clearly against bullionism. Nor is it true that, so
far as his theoretical position is concerned, he was dislodged by Misselden.

[4. The Balance of Trade]

Turning, finally, to the third topic, the proposition that a favorable balance
of trade 1 (excess of exports over imports) is a highly desirable or even neces-

ir rhe term turns up during the first decades of the seventeenth century (Francis
Bacon used it in 1615; see Spedding’s ed.. Letters and Life, 1872, vol. vi, pp. 22-3,
a reference I owe to Professor Seligman’s article; see also W. H. Price, ‘The Origin
of the Phrase “Balance of Trade,” ’ Quarterly Journal of Economics, vol. xx, Novem-
ber 1905, p. 157). In Italy it seems to have been used before; see C. Supino, ‘La
scienza economica in Italia della seconda meta del secolo XVI alia prima del XVII’
(Memorie della Reale Accademia delle Scienze di Torino, 1888). However, there were
several synonyms in use before that. The earliest instance of the concept’s playing any
role in an argument occurs so far as I know in the important tract (to which reference

346 II : BEGINNINGS TO ABOUT I79O

sary thing at which to aim, we first observe that, as regards the practical
argument, much of what has been said before applies with equal force to this
case. This is as true if we look at the commercial policies of that age, merely
under the aspect of protectionism as it is if we choose to emphasize specifically
the balance-of-trade aspect. For, as has been stressed sufficiently, I hope, the
war-economy and the power-politics elements in those policies would in them-
selves be quite sufficient to remove any tinge of irrationality from a wish to
secure as large as possible an influx of universally acceptable money. There-
fore the only question to raise is the one concerning the theoretical argument.
Let us split it into two parts: (a) how far did the ‘mercantilist’ economists
themselves take account of that association of both their recommendations
and their arguments with the conditions of their time which imparts logically
defensible meaning to the latter, though it does not of course — never forget
this — ‘justify’ them in any other sense; and (b) what did they contribute to
economic analysis or else what provable errors did they commit in their
reasoning?

[(a) The Practical Argument: Power Politics .] There cannot be any doubt
concerning the first question. ‘Mercantilist’ writers — least of all the Italians,
of course — were keenly alive to the power-politics element, as in fact they
could not have helped being. In England in particular, the City from which
most of the leading writers hailed was a pillar of aggressive foreign policy
which, as is abundantly clear from what has been said before, suited the busi-
ness interests to perfection even where it was not directly inspired by them.
Of course this is not always explicitly stated. Imperialist urges rarely are. But
it lurks behind the concern of our authors about the wealth of the king, be-
hind their talk about the decay of the English power , 2 behind their fears for

will be made again): ‘Polices to Reduce this Realme of Englande unto a prosperus
Wealthe and Estate' (1 549), publ. in Tudor Economic Documents, ed. R. H. Tawney
and E. Power, Vol. hi (1924), p. 311 et seq. The term used is ‘overplus.’ Professor
Viner, op. cit., p. 9, mentioned also several others; but I do not think that Malynes'
‘overballancing’ refers to the same thing. How could it, since Malynes, when con-
fronted with it in the controversy with Misselden, thought it an innovation and a
valueless one to boot?

A difficulty should be mentioned here. Balance of trade in many instances stands
for balance of commodity trade. Very early however, as will be explained in the text,
a full list was produced of all the items of the balance of payments and it is safe to
say that much of the reasoning of those authors referred to the latter. They were
surprisingly slow, however, in inventing a separate term — Sir fames Steuart has ‘bal-
ance of payments’ in 1767, though Pollexfen has ‘balance of accompts’ in 1697 (see
Viner, op. cit. p. 14) — and meanwhile often spoke of balance of trade when they
meant balance of payments. We shall always assume this when the argument requires
it. There is a special reason why we may do this: under the circumstances of the time,
the balance of trade was the most important item and also the one most amenable
to management. Hence an author whose real concern was the balance of payments
may well have concentrated on the balance c)f trade.

2 Complaints about that decay were so frequent as to constitute a most interesting
phenomenon of political psychology. Little of what we may term social psychoanalysis

THE ‘MERCANTILIST' LITERATURE

347

England’s safety, behind the attitude that Hume was to criticize in his essay
Of the Jealousy of Trade (1752), behind their insistence on the vital impor-
tance of the navy and, in connection with it, of shipping and shipbuilding.
Of special interest, however, are those cases in which the power (or safety)
argument is not only put forth unmistakably but is also opposed to the profit
argument: for whatever we may think of this from other angles, it marks prog-
ress in economic insight. Two well-known examples will suffice. In his Dis-
course about Trade (1690) Child defends the policy of the Navigation Acts by
the power argument while admitting that, from a purely economic point of
view, there may have been a strong case against them. In his Discourses on
the Publick Revenues and on the Trade of England (1698), Davenant goes
further still. 3

[(b) The Analytic Contribution .] To answer the second question — the one
about contributions to, and errors in, analysis — is not so easy. Some contribu-
tions there are. They will present themselves in the proper light if we look
at them, as it were, ex ante, and not, as critics invariably do, from the stand-
point of later analysis for which it was the most important contribution of
the ‘mercantilist’ writers to have paved the road and which in fact grew out
of their work. But as soon as one dives into that literature, one cannot fail
to be struck by two things.

is required in order to understand what it meant. Parallel with them went complaints
about a wholly imaginary economic decay — in the mind of the merchant class, power
and prosperity were of course inextricably associated — which were characteristic of a
large group of writers: Fortrey, Coke, ‘Philanglus,’ Bellers, and Pollexfen may be men-
tioned as examples.

3 The nature of that antagonism between power and profit does not seem to have
been always understood. Some critics, especially those who see nothing in the writings
of the English 'mercantilists’ except ‘special pleading’ for class or even personal in-
terests, have argued that the power argument can only have been introduced to
camouflage the profit interest and that the scribbling merchants must therefore have
believed in the balgnce-of-trade argument independently of the power element. I think
that this is bad sociology — we only impair our diagnosis by shutting our eyes to the
fact that the imperialist urge is a stark reality that roots in other soil than that of
the economic self-interest of the individual. But even disregarding this, we must dis-
tinguish two quite different things within the argument inspired by business interest:
power and profit may conflict as regards immediate results and yet power may even-
tually lead to still higher profits, especially in an age of buccaneering imperialism.
Hence there is no contradiction between the perception that the balance-of-trade argu-
ment, on the first plane of reasoning, needs support from the power argument, and
the proposition, on the second plane of reasoning, that the power argument issues
in another profit argument in the long run. I can see no point in sneering at Child’s
formula: ‘foreign trade produces riches, riches power, power preserves our trade and
religion’ (with Louis XIV on the other side of the channel), but the argument can,
if critics so wish, be made purely economic and still remain tenable, with the balance
of trade in no other role than that of an intermediate link. [A long essay by J. A. S.,
‘Zur Soziologie der Imperialismen’ ( Archiv fur Sozialwissenschaft und Sozialpolitik,.
1919), bearing on this subject, is now available in English: Imperialism and Social
Classes (ed. with introd. by Paul M. Sweezy, 1951).]

34^ II : BEGINNINGS TO ABOUT I 79 O

First, though pieces of genuine analytic work can be found occasionally and
attempts at analysis more frequently, the hulk of the literature is still essen-
tially preanalytic; and not only that, it is crude — the work of unprofessional
or even uneducated minds that frequently lacked the rudiments of the art of
exposition: much of that literature was popular in the most distressing sense of
the word. Perception of this fact, of which some of those writers were them-
selves painfully aware, should not only teach us forbearance, particularly with
respect to individual dicta — on the strength of which an author should never
be condemned until we have satisfied ourselves that he actually makes im-
proper use of them — but should also warn us that we are in constant danger,
reasoning from our own sublime heights, of misunderstanding what those
simple fellows really wanted to say. To be sure there are a considerable number
of writers to whom this does not apply. But this only leads up to another
difficulty. If we want to be just to the age, we must clearly separate substand-
ard chaff from valuable wheat. How will the economics of our own age come
off two or three hundred years hence, if critics take it into their heads to judge
it by everything that has been written on economic subjects during the last
decade? But what, beyond a rather small group of performances on which we
may all agree, is the wheat? Here, every one of us must rely on his personal
evaluations of analytic quality — the only kind of value judgments that are both
permissible and unavoidable in a history of scientific economics — a matter in
which often the only agreement attainable will be the agreement to differ.

Second, we have had ample opportunity already to observe that the views
of the economists of that period — if indeed it be permissible to speak of econo-
mists at all for a period in which the profession was in process of emergence
but had not really emerged as yet — were as uniform as are those of the econo-
mists of any other period but that they were not more so: individuals and
groups differed from one another, in fundamentals and in details, as much as
economists always have, and they fought one another’s views and methods ac-
cordingly. The widespread opinion to the contrary has resulted in another in-
justice. The critical historian, after having set up a ‘uniformed’ man of straw,
misses the fact that much of what is most objectionable from the standpoint
of later analysis (or politics) had been rejected or corrected within the period.
The historian has indeed a method of dealing with this fact when it stares
him in the face: those who took what to him seems to be a more correct
view are either visited with more lenient strictures or else they are excluded
from that imaginary unit under the heading of heretics or forerunners. But
this method is a doubtful one to say the least.

We have noticed, and tried to understand, the protectionist current of the
times; we have also encountered the opinions that a number of writers held
on the subject of protection. We shall naturally expect the writers we are
considering under the heading of Balance of Trade to have completed the list
of protectionist arguments. This expectation is not disappointed. We find the
infant-industry argument, which, excepting perhaps the case of English wool-
ens, must in the circumstances of the period be assumed to underlie any rec-
ommendation of protection to domestic industry that is not expressly motivated

THE 'MERCANTILIST' LITERATURE 349

in a different way. We find the military, the key-industry, and the general-
autarky arguments. We find the employment argument. We find the argument
that today has come into such prominence in connection with the multiplier
approach, namely, that so far as protection succeeds in producing an excess
of exports it will stimulate the business process by increasing domestic expendi-
ture. Foreign investment plays no role, or next to none, in their analysis ex-
cept in a short-run sense: some of them pointed out that a temporary export
of coin may be a necessary link in a series of transactions that eventually nets
an export surplus. English instances — we shall confine ourselves to English
ones although the Continent would also furnish a crop — are given below.
They will also add to our modest collection of names.

As we should expect, the infant-industry argument turns up in the times of Eliza-
beth, when England experienced her first industrial boom, and pervades the literature
under discussion to the end, that is, to the threshold of the industrial revolution, when
Sir James Steuart put considerable emphasis on it. We are primarily interested in cases
where protection is recommended only for a limited time or where the element of 'in-
fancy’ is otherwise stressed in such a way as to remove any possibility of doubt about
the character of the argument. Thus, Arthur Dobbs in An Essay on the Trade and Im-
provement of Ireland (1729-31), Part 11, expressly stated that 'premiums are only to be
given to encourage manufactures or other improvements in their infancy’ and that
further help would be in vain 'if after their improvement they cannot push their own
way.’ Yarranton ( England’s Improvement by Sea and Land , to Outdo the Dutch with-
out Fighting, to Pay Debts without Moneys, to Set at Work all the Poor of England
. . . 1677, 2nd part, 1681) recommended protection to linen manufacture but only for
a period of seven years. Andrew Yarranton found a biographer enthusiastic enough to
call him 'the genuine founder of political economy in England’ (see P. E. Dove,
Elements of Political Science, 1854, App.). Although this is of course absurd, it was
perhaps a healthy reaction against the neglect that had fallen upon his name. Yarranton
was a versatile man of many trades and cannot, in some of the lines of his activity,
agricultural technique in particular, be rated higher than as a popularizing projector.
But in economics he was more than that. Though there are no analytic conquests to
his credit, many of his suggestions and many of his comments on German and Dutch
conditions imply a theoretical schema; so does the fact that, even in his most daring
flights, he consistently stops short of nonsense. He paid little court to the balance of
trade. He believed that the prosperity of neighboring countries was a gain to. England.
Improvement of credit facilities would reduce the rate of interest from 6 to 4 per cent
(observe the limits which guard the statement against an indictment that without them
would be dangerously near at hand). Employment and cheap food (the latter being
sure to make cheap products [he says 'cloth’]) are the goals to aim at. In fact we can
herewith quote him as an authority for all the arguments mentioned in the text, as we
have quoted him and shall quote him on other topics.

The military argument has been dealt with already. The key-industry argument is
present in the discussion on foodstuffs and the production and exportation of wool.
The general-autarky argument was developed in Germany rather than in England (for
France, see J. Nowak, LT dee de Vautarchie economique, 1925).. For the employment
argument we have just had an example in Yarranton. It occurs from the first (see
Clement Armstrong, ‘A Treatise Concerning the Staple and the Commodities of this
Realme,’ c. 1519 35, Tudor Economic Documents, hi, pp. 90 et seq., especially p. 112;
see also John Hales, Discourse of the Common Weal, 1549?). Protectionist legislation.

35° II : BEGINNINGS TO ABOUT I 79 O

motivated by the unemployment argument, is of course still older by at least a hundred
years and is rarely absent from the more considerable books. Malynes, Misselden, Child
(who makes it the criterion of the advantage that accrues to the mother country from
colonies), Barbon, Locke, Petty — all have it. Let us notice, in addition: John Cary,

Essay on the State of England . . . (1695), which to judge from its being reissued a
number of times and from Locke's commendation must have been a considerable suc-
cess; John Pollexfen, whose whole case for prohibiting the exportation of wool and the
importation of manufactured goods is based upon the employment argument; John
Bellers, Essays About the Poor, Manufactures, Trade . . . (1699); and 'Philanglus’

(W. Petyt), Britannia Languens or A Discourse of Trade (1680). Some of the ‘mer-
cantilist’ writers went to surprising, in fact to Keynesian, lengths. There is nothing star
tling in Sir William Petty’s saying that it is better to produce useless things than not
to produce at all: this only shows his concern about the conservation of the efficiency
of labor. But others sometimes expressed themselves as if they thought that the na-
tional advantage to be reaped from foreign trade consists exclusively in the employment
it gave. And this in- turn logically led to that position which looks so absurd when
judged from the assumptions of the nineteenth-century ‘liberals,’ and has in fact been
called absurd by Professor Viner (op. cit. p. 55; the reader finds examples on the two
preceding pages), namely, that a trade is the more advantageous to a country the
higher is the total labor cost of the exports as compared with the total labor costs of
the corresponding imports. To one aspect of this we shall return.

The employment argument was not only advanced per se, but also in its indirect
form, via the stimulus which inflowing cash will give to business. Here we are not
concerned with all those writers who considered the possibility of imparting this stim-
ulus by the creation of papei money, but only with those who thought of lubricating
the wheels of business by means of the importation of coin and bullion. If the reader
observes how very popular this idea is and always has been with the man in the street,
he will expect that it is practically ubiquitous, so much so that it often is implied rather
than explicitly stated. The only obstacle to its absolute sway was the treasure aspect of
bullion importation — the idea that the imported bullion should be hoarded against the
requirements of war. Malynes and Misselden, the two antagonists, may however both
be quoted as instances of this ‘lubrication argument.’ Both saw the stimulus in connec-
tion with rising prices, Malynes’ shade — after having been, for three centuries, the ob-
ject of practically universal vituperation — drawing applause from Lord Keynes ( General
Theory of Employment , Interest, and Money, p. 345) for being aware of ‘the fallacy
of cheapness’ and the danger of ‘excessive competition’ and for having associated in-
creasing sales with rising, instead of falling, prices. But, as we have seen, other writers
did not stress this relation of the stimulus with rising prices: they either looked upon
higher rising prices with misgivings or else they believed that bullion importation would
stirriulate trade without raising prices. That it is by no means foolish to hold the latter : i

opinion will be shown later in a footnote.

Child, Mun, and others afford examples of the proposition that foreign investments
are inevitable in the short run — if they said so from interested motives, what of it? — |

but I am unable to quote instances of arguments in favor of permanent investment
abroad before Sir James Steuart and, what is more, neither is Professor Viner (op. cit.
p. 16).

So far as these arguments are concerned, there is little serious error to
record. Considering the pattern to which they were to apply, they were all
more or less capable of logical defense — more, in some respects, than are the

THE 'MERCANTILIST’ LITERATURE

35 1

similar arguments of today. Moreover, certain weaknesses should not be judged
too severely. It is true, for instance, that most of those writers do not seem
to have been aware of the extent to which the validity of their arguments, at
least of the purely economic ones among them, depended upon the condition
of underemployment or underdevelopment of productive resources . 4 But the
reverse reproach may be addressed to their critics and successors in the nine-
teenth century, in part even to Marshall himself . 5 Finally we shall see that
many of the necessary qualifications and many of those counterarguments that
are complementary rather than competitive were worked out not by a few
isolated 'heretics/ but by the 'mercantilist’ writers themselves.

But neither is there much analytic merit to Tecord. Whether right or wrong,
those arguments were in most cases put forth on the strength of their com-
mon-sense appeal. The common man at all times believed in them as a matter
of course, and the economists of that age believed in them along with him.
They tried to rationalize the practice of their time, both in the sense that
they tried to voice what they conceived to be the aims and needs of their
times and countries, and in the sense that they tried to put some logical order
into the irrational heap of actual measures and practices. But they did not

4 Compare, however, Arthur Young, Political Essays concerning the Present State
of the British Empire (1772), who (p. 533) explicitly refers to 'unemployed poor and
unpurchased commodities.’ I owe this reference to Professor Viner (op. cit. p. 54).

5 Marshall, and also Pigou, did relax on the 'absolutism’ of traditional free-trade
doctrine, especially in their contribution to the controversy about Joseph Chamberlain’s
tariff-reform proposals. But they hardly made it sufficiently clear to others, and may
not have sufficiently realized themselves, that the usual propositions about free trade
are only valid under conditions that often fail to be fulfilled or, alternatively, only
on a high level of abstraction.

We may use the opportunity to touch upon another point that has been made.
It has been held that, as is indeed obvious, the ‘mercantilist’ writers presented short-run
views and it has been admitted ‘that some of the mercantilist doctrine would not be
quite so absurd if appraised from the short-run point of view’ (see Viner, op. cit. p.
111). But there is no ‘evidence that the mercantilists intended their analysis and pro-
posals to be regarded as holding true for the short run only, and there is abundant
evidence that they were ordinarily not aware of any distinction between .'. . desir-
able . . . practice to meet a temporary situation . . . and . . . permanent policy.’
(ibid.) This is hardly fair. The distinction alluded to is a result of prolonged analytic
work; it would be easy to mention examples of its violation from later and even from
modern work. The mercantilist writers wrote for the situation that confronted them
much as did Lord Keynes. This was, to be sure, not a temporary situation in the
narrow sense — it was the situation of an age which was a sequence of emergencies and
in which analysis of long-run equilibria could have interested only the purest of pure
theorists. But they did not talk about any ‘permanent’ policy either. They were too
practical-minded to believe in any such thing or rather this idea had not entered their
heads at all. Apart therefore from passages (e.g. in Thomas Mun’s England’s Treasure,
to be quoted later) which indicate that some of them did have an inkling of the
fact that, as we should say, their argument did not apply in the longest run, let alone
to a state of long-run equilibrium, it should be enough for us to judge their argument
as it stands, whatever their own opinion of its methodology may have been.

352 II: BEGINNINGS TO ABOUT 179O

probe below the surface to depths where the need for analytic technique as-
serts itself. They posited their arguments and hurried on to specific recom-
mendations, for example, as to which industries were the most promising
ones to foster — for England, they suggested fishing or iron or linen or the
improvement of waterways or the development of crown lands — and how the
government should go about fostering them: many of their works are just
full of projects — Yarranton’s are a good example. But as a rule they did what
our own planners mostly do: they left off where analysis begins. This is what
I meant when I said that the bulk of that literature was pre-scientific, which
from our point of view is much more important than whether we like or dis-
like ‘mercantilist’ policies and their nationalist spirit. How very pre-scientific
the reasoning of most writers was can be seen most clearly where they did
make attempts at analysis and nowhere better than in the way they handled
the one analytic tool that hostile historiography has singled out for criticism,
the balance-of-trade concept.

[(c) The Balance-of -Trade Concept as an Analytic Tool.] The first thing
to observe about this concept is that it is in fact an analytic tool. The balance
of trade is not a concrete thing like a price or a load of merchandise. It does
not obtrude itself upon untrained eyes. A definite analytic effort is required
to visualize it and to perceive its relation to other economic phenomena, how-
ever insignificant that effort may be. The history of theoretical physics shows
that achievement of this kind is difficult and takes much more time than we
should expect: ideas have for centuries been within what to us seems easy
reach, and they have even been uttered in some sterile form from time to
time without really coming fully within anyone’s grasp. If we reflect upon this
difficulty we shall cease to make light of that particular achievement.

Nor does the concept lack importance. The balance of payments in the
sense defined in the footnote below 6 is an important datum in the diagnosis

6 1 take it that the kind of statement that we refer to by this term (Balance of Pay-
ments) is familiar to the reader and that he properly distinguishes it from the balance
of indebtedness. But there is one point about it on which it may not be superflous to
comment. The statement might be drawn up according to ordinary bookkeeping prin-
ciples. In this case, there is for every item that enters the balance sheet another item
that will balance it as a matter of bookkeeping technique. Such a balance would always
‘balance/ not only necessarily, but tautologically. But even if we simply confront the
sum total of credit items with the sum total of debit items, the two totals must
eventually be equated somehow, if necessary, by carrying forward, or defaulting on,
the difference. In this sense the balancing is still necessary though it is no longer
tautological. There is, however, a third sense in which credit and debit need not bal-
ance in either of these two meanings, but are made to balance by forces which their
failure to do so will automatically set into motion — so that (but in a third sense) we
may still say that they will balance ‘necessarily.’ The households and firms of coun-
tries A and B, which for simplicity’s sake are now both assumed to be on a perfectly
free gold standard and to have no other dealings except sales and purchases of com-
modities, may send out orders to each other that will at any given point of time sum
up to different amounts. But as these orders are being carried out and paid for, any
such difference will, in the absence of credit arrangements, have to be settled in

THE ‘MERCANTILIST’ LITERATURE

of the economic condition of a country and an important factor in its business
processes. In the seventeenth and eighteenth centuries the balance of trade
in commodities and services may well have been the operative part of the
balance of payments and, thus, have had all the importance that may be at-
tributed to the latter. The trouble with it is that, as a tool of general economic
analysis, it does not work by itself: if we know nothing except the figures of
exports and imports (always including figures for services), we cannot make
any inferences from them. Thus, an ‘unfavorable’ balance may be the symp-
tom of increasing wealth but also of a process of impoverishment; a ‘favorable’
one may mean prosperity and employment, but just as well the reverse. It is
only in connection with other data that the balance of trade acquires both
its symptomatic and its causal meaning. This should perhaps be qualified by
the admission that, even taken by itself, the net of the balance of current
debits and credits — which sometimes may be approximately indicated by the
current net of the balance of trade — is an important factor in the monetary
processes of a country, hence an important factor in the decisions of monetary
authorities. But broadly speaking, reasoning as well as action that turns on
nothing or next to nothing but the balance of trade cannot be correct except
by accident. These considerations will help materially in appraising both the
contributions and the errors of the ‘mercantilist’ writers. Let us keep in mind,
however, that now we are not concerned with a plank in an economic platform
but with the handling of an analytic tool.

[(d) Serra, Malynes, Misselden, Mun .] This analytic tool has a long pre-
history into which we need not go . 7 Credit for having had a clear conception

specie, and this flow of monetary metal will (or would eventually, if there are abso-
lutely no hitches, if prices are flexible, etc.) so act upon prices and incomes (to neglect
everything else) — and these variations in prices and incomes will in turn so affect the
orders, hence the commodity flows — as to bring about ‘automatically’ equality of debit
and credit items and a distribution of the gold that will be adequate to support the
prices resulting from the process. This primitive schema represents what we mean by
the Automatic Mechanism, which was, as we have seen, described — partly at least —
by Malynes and which will presently be used as one of the guiding stars in our travel
through part of the ‘mercantilist’ literature. If we have sufficient confidence in its
strength — miraculous though such confidence would be in people who have been
witnesses to the world depression — we may be so little impressed with the danger of
its failure to function as to hold that it will always insure that equality. This may
then be expressed by saying (rather misleadingly) that balances of payment will ‘neces-
sarily’ balance if we include the balancing gold flow. Note, for the time being, that
in the text the term balance of payments should be understood to exclude this (or
any other) balancing item, so that there is no need for debits and credits to balance.

7 An instance of its use at the middle of the sixteenth century has been given in
footnote 1, at the beginning of this section. Other instances could be mentioned even
from much earlier times. Thus in 1381 an official of the name of Richard Aylesbury
expressed the opinion that no money would flow out of England if not more ‘strange
merchandise’ were allowed to enter England ‘than to the value of the denizen mer-
chandise which passes out of the realm.’ He also supported the policy of prohibiting
exportation of coin (and importation of debased foreign coin) and, displaying aware-

354 n : BEGINNINGS TO ABOUT 179O

of it and for having been the first to use it fully and, in substance, correctly
belongs to Antonio Serra . 8 It is not only that he paid due attention to the
invisible items, in which he seems to have anticipated all writers of his own
century; or that he fully realized the nature of exchange-control policies; or,
as it is usual to put it, that he 'refuted the bullionist doctrine of the exchanges’;
or that he expounded (as had Laffemas before him) the views about the pro-
hibition of gold and silver exports which in England were to become general,
at least among the writers of first rank , 9 as the century drew to its close; or
that he introduced the quantity-theory element into the discussion concern-
ing the proposal to stop the outflow of gold and silver by devaluation — al-
though these were important contributions. Nor should we allow ourselves to
be too much impressed by the fact that, though not the first to see the rela-
tion between gold and silver movements and the balance of trade (or pay-
ments), he was the first to elaborate it. For though this does carry analysis
one step further, in itself it does not mean more than a rather obvious ob-
servation, which moreover is just as likely to suggest wrong or at least in-
adequate inferences as it is to suggest true ones. The really important point
is not that he explained the outflow of gold and silver from the Neapolitan
Kingdom by the state of its balance of trade, but that he did not stop at this
but went on to explain both the outflow and the balance of trade by the
economic conditions of the country. Essentially, the whole treatise is about
the factors on which depends the abundance of commodities — natural re-
sources, the quality of the people, the development of industry and trade,
the efficiency of the government — the implication being that if the economic
process as a whole functions properly, the balance of trade will take care of
itself and not require any specific. In this schema monetary phenomena are
consequences rather than causes, and symptomatic rather than important in

ness of the importance of the invisible items of the balance of payments, further sug-
gested that the payments to Rome should be effected in kind rather than in money —
the same suggestion that was to some extent adopted in the case of German reparation
payments in and after 1919. All this is (contrary to M. Beer’s opinion in Early British
Economics ) perfectly in keeping with sixteenth-century views. Source of quotation:
'Opinions of Officers of the Mint on the State of English Money’ in Bland, Brown,
and Tawney, English Economic History, Select Documents, pp. 220 et seq., a most
helpful compilation, perusal of which cannot be recommended too strongly.

8 Breve trattato delle cause che possono far abbondare li regni d’oro e argento dove
non sono miniere, con applicazione al regno di Napoli (1613). The title, as will be
seen from my comments, is somewhat misleading and the exposition of what I con
ceive to be his fundamental idea is somewhat impaired by this concentration on the
narrow polemical purpose of refuting De Santis’ exchange-control views (see above,
sec. 3, n. 7) in which, if we judge him from the standpoint of present-day views, he
also went too far. (On Serra, see above ch. 3, sec. 5.)

9 For the benefit of some historians of economics, it may be well to add that Serra
was not a director of the East India Company, but a poor devil who wrote his tract
in a Neapolitan prison.

THE MERCANTILIST LITERATURE 355

themselves. 10 And the author (in his discussion of the case of Venice, ch. x.
Part i) brushes against, though he does not explicitly state, the proposition
that a prosperous country — that is to say, a country whose economic process
is not disintegrating — can have all the gold and silver money it may require. 11
From this, however, the way should not have been very far to Hume.'

There are two reasons why this has never been adequately recognized. First,
Serra stopped short of pointed formulation, and there were no immediate
successors to develop his analysis. Second, the vision of critics, whether friendly
or hostile, has been so blurred by slogans about 'mercantilism’ that they hardly
bothered to ask what precise role a man’s protectionism played in his schema
of thought and in what sense the balance of trade seemed important to him
— though, from the standpoint of economic analysis, these questions are much
more interesting than is the question how far removed that man may have
been from free trade.

In England, a controversy not dissimilar to that between De Santis and
Serra arose between Malynes and Misselden. We have already glanced at it
from the side of Malynes. To a lesser extent, Edward Misselden (fl. 1608-54) 12
is entitled to credit on a par with Serra. He did not fail to state the proposition
that exportation or importation of bullion is in the last analysis to be ex-
plained by the 'plenty or scarcity of commodities’ and therefore cannot be
accused of having missed the point entirely. 13 Nor is it as easy as generations
of critics believed it to be to convict him of erroneous reasoning if, on the

10 The first sentences of the first chapter of Part 1 of Serra’s Breve trattato cannot
be adduced against this statement, because they are amply accounted for by the oc-
casion and by the wish of the author to be read by the captain general, who was just
then worrying about the state of the exchanges and the drain of money. I do not
think that anyone who considers the book as a whole will wish to disagree.

11 It is one of the weaknesses of 'mercantilist’ literature that it never — not even at
its peaks, such as Petty — got beyond the idea of a required amount of money, any
excess or deficit being in the nature of a disadvantage. Serra did not even get as far as
that, but merely speaks of 'abundance.'

12 At first, that controversy was in the nature of a family quarrel between exponents
of different monetary policies, for in his first publication, Free Trade: or the Meanes
to Make Trade Florish (1622), Misselden expounded views not entirely different from
those of De Santis (the meaning of Free Trade, as pointed out before, had little to
do with the meaning the term acquired in the eighteenth century). Misselden meant
no more than the removal of certain monopolistic restrictions, especially by the great
companies, including the Merchants Adventurers to which at that time he belonged
himself. But he developed, and in 1623, published his attack upon Malynes, in which
he not only used the term balance of trade but placed the concept in the center of
his argument: The Circle of Commerce; or the Ballance of Trade . . . 1623. On Mis-
selden, see particularly E. A. J. Johnson, Predecessors of Adam Smith (1937).

13 The reader will however recall what has been said above on behalf of Malynes.
To that extent, commendation of Misselden must be tempered, as it must in Serra’s
case, by taking account of the fact that he entirely overlooked the elements of truth
in his opponents’ argument.

356 II : BEGINNINGS TO ABOUT 1790

one hand, we fully allow for inadequacies of exposition and, on the other
hand, for whatever may be said in his favor from the point of view of recent
theories. Unquestionably, however, he came much nearer than did Serra to
those definite errors which stand out so glaringly in Mun’s book , 14 perhaps
only because there the argument is more fully developed.

Mun’s book is generally looked upon as the classic of English 'mercantilism/
This prominence is unfortunate, but it is not wholly unmerited. In fact we
already have had to mention it several times. A wide variety of questions —
from fishing to the gold and silver embargo — are dealt with sensibly (though
without particular depth or originality) in its spacious frame, the connecting
thread being what in Professor Johnson’s felicitous phrase we may call con-
cern for 'generating productive power .’ 15 This aspect is, however, covered by
previous comments, particularly on the protectionist argument. It is only in
order to avoid misunderstanding that I wish to emphasize once more that the
economics behind Mun’s arguments on practical questions was, if primitive,
yet substantially sound — which statement, to risk another repetition, has noth-
ing to do with approval or disapproval of imperialist goals or any other 'ulti-
mate standpoints .’ 10 Those arguments are in fact very little affected by the
analytic errors to be mentioned. Even the particular emphasis placed upon
the export surplus is, as we know, in itself not incapable of defense. Finally,
not only are the erroneous propositions removable, but they are in most cases,
and especially in Mun’s, associated with others that qualify and sometimes
even contradict them. The two most important instances in his case are his
recognition of the necessity of occasional gold and silver exports , 17 and his

14 Sir Thomas Mun (1571-1641) was a prominent businessman — as modern critics
never fail to emphasize, he was, among other things, a member of the committee of
the East India Company — who by virtue of his ability and force of character acquired
considerable authority that reached far beyond the business community. If in this
book we were interested in doctrines and policies for their own sake, we should have
to rank him very high. Let us note his Discourse of Trade from England unto the
East Indies . . . (1621; an important contribution to the controversies about the East
India Company, reprinted by the Facsimile Text Society, 1930) and the book men-
tioned in the text: England’s Treasure by Forraign Trade: Or, The Ballance of our
Forraign Trade is the Rule of our Treasure, an imperfectly systematized collection of
papers written presumably about 1630, and posthumously published by his son, John
Mun, in 1664. There were several reprints, one in Ashley’s Economic Classics (1895).

15 E. A. J. Johnson, Some Origins of the Modem Economic World (1936), p. 98.

16 It should perhaps be explained why, in apparent contradiction to my program-
matic explanations in the First Part, I constantly refer to policies and recommendations.
I shall do so less and less as we go on. But in the case of the ‘mercantilist’ writers
recommendations and 'practical’ arguments offer the only possibility of probing into
an embryonic fund of theoretical knowledge.

17 This, of course, critics found it easy to dispose of by pointing out that all he
thought of was to defend silver exportation by the East India Company. It is more
to the point, however, that his argument about this exportation — based as it is on
re-exportation of imports from India and other factors which would tend to reverse
the flow, possibly more than reverse it — does not amount to more than a qualification

V,<- ''-C

THE "MERCANTILIST’ LITERATURE

357

recognition — which seems to have escaped some critics — of the fact that in
the end of ends a policy aiming at persistent export surpluses must defeat
itself through the rise in domestic prices it would eventually produce. 18

The errors in question all center in a single proposition, which may, how-
ever, be stated on three different levels: (1) that the export surplus or deficit
measures the advantage or disadvantage a nation reaps or suffers from its inter-
national trade; (2) that the export surplus or deficit is what the advantage or
disadvantage from international trade consists in; {3) that the export surplus
or deficit is the only source of gain or loss for a nation as a whole.

All three statements have been made. None of them is defensible. The idea
that a certain quantity measures another quantity that cannot be measured
directly is not one that occurs readily to the untutored mind. Therefore, we
shall not expect to find explicit instances of proposition (1) and I have in-
serted that statement only because it affords a mitigating interpretation, jus-
tifiable in some cases of what really reads like (2). Fortrey and Coke 19 may,

that leaves the principle intact. We also know that the analytic progress involved was
anticipated by Laffemas and Serra.

18 Thus, Mun used the quantity theory fully as much as was requisite for his pur-
pose. In the face of this and of what I said before in connection with Malynes’ work,
nothing more need be said about the indictment (which does hold for the Spanish
politicos of the first half of the seventeenth century) that the English 'mercantilist’
writers as a group, Bodin notwithstanding, had not yet discovered that theory. It is
also interesting to note that, unlike some of the nineteenth-century economists who
felt so superior to them, the 'mercantilists’ were aware of the importance of that time
interval during which increase in liquid means would assert its stimulating influence
on business activity without as yet raising prices. An explicit statement about this
may be found in a tract which it is not possible to commend in any other respect:
J. Hodges, Present State of England (1697), passim.

19 Samuel Fortrey, a thoroughly insignificant writer, attracted much attention by
his pamphlet: England’s Interest and Improvement . . . (1663), in which he pub-
lished (quite spurious) figures about England’s trade with France according to which
England had exported to France to the extent of £1,000,000 and imported to the
extent of £2,600,000. This he called a 'loss’ to England of £1,600,000, which we may,
I think, take as a fair example of (1) — provided that any clear idea can be attributed
to that author. But even a writer of very different caliber, who will be mentioned
again, Roger Coke (the works most important for us are A Discourse of Trade . . .
1670, and England’s Improvements . . . 1675), allowed himself, in an unguarded
moment and scared by Fortrey’s figures, to make the same statement, viz., that 'where
consumption of things imported, does exceed in value the things exported, the loss
will be as the excess is.’ Of course, the error in question must not be assumed in
every instance of the occurrence of the words 'loss’ and 'gain.’ For, first, they may
have no other meaning than they have when we say, e.g., that the Bank of England
'suffered a loss of gold.’ This is especially likely to be the case where gain and loss
expressly refer to 'treasure,’ which term often, though not always, means only gold
and silver. Second, it should not be forgotten that, though our proposition is not
valid in general, there are particular cases and meanings in which it is valid or in
which the error involved is not very serious. In this connection it is especially impor-
tant to bear in mind that the 'mercantilist’ writers, more than their successors, actually
did have particular situations in mind.

358 II : BEGINNINGS TO ABOUT 1790

however, be quoted by way of illustration. The second statement — which of
course we must not suspect behind .every proposition about the advantages,
real or fancied, of an export surplus- — is not very easy to find in writers who
count. Both Misselden and Mun seem to be among them, however: — perhaps
even Petty if we choose to take at face value a certain most infelicitous
passage. With the small fry, such utterances as that all exports are gain, all
imports are loss, are almost as common as they were with protectionist United
States senators in the nineteenth century and even later. The third statement
is the worst. Since no fair-minded person will lightly attribute such nonsense
to any writer who displays any traces at all of ability to reason, and since
inadequate formulation may easily make it indistinguishable from the harm-
less assertion that expansion of her foreign trade was, for seventeenth-century
England, an important avenue to greatness (purely rhetorical overstatement
was much more usual in the times of Euphuism, Marinism, and Gongorism
than it is today), it would be tempting to deny the existence of convincing
cases. The reason why this is not possible does not so much lie in the fact
that some instances would prove rather refractory to benevolent interpreta-
tion, but rather in the fact that such attempts at analysis as were undertaken
would, if they had been successful, have established the third statement along
with the two others.

The most common of these attempts proceeded by way of analogy. Its most
influential, though not its first, sponsor was Mun (and it was repeated by
Cary). If an individual adds part of his annual income to the ready money in
his chest — provided, so we must add, the others do not do the same thing —
he will grow richer every year; if a nation realizes an export surplus and draws
it in gold and silver, it is doing the same thing; ergo the nation will be en-
riched by the exact amount of this surplus. Let us remove some of the most
obviously objectionable features of this piece of reasoning by choosing a some-
what different analogy. Suppose we look upon a nation as a business concern.
A private firm may be said to grow richer or poorer every year by the amount
of the profit or loss item of its balance sheet. Suppose further that the balance
of payments is for the nation what the ordinary balance sheet is for the in-
dividual firm, so that its net corresponds to the latter's profit-and-loss item.
If the balance of payments contains nothing except the elements that make
up the balance of trade, the nation would grow richer or poorer every year
by the amount of its export or import surplus. Two things are clear: first, that
there is no sense whatever in this argument; second that, if it be taken seriously,
then all three of our statements would follow and not only the first two. 20

20 Attention should be called to the fact, overlooked by at least one critic, that
the phrase 'a nation is not enriched by what is purchased for consumption at home'
does not necessarily involve statement (3). For it may mean no more than this: if A
buys from his connational B some goods for his own consumption, then, in a central
bookkeeping agency of the nation, A would be debited and B would be credited with
equal amounts; if however B sells the goods to the foreigner C, then B would still be
credited but there is no compensating debit — a triviality which may invite, but does
not in itself spell, error.

THE 'MERCANTILIST' LITERATURE

359

Even if not explicitly stated, some such confusion must be suspected when-
ever the favorable-balance element is stressed in the absence of a special mo-
tivation, such as the argument about monetary stimulation of the business
process. There is, however, another line of reasoning that may lead up to
the first two statements and even entangle an author in the third. Several
authors of high ranlc, such as Coke and Petty , 21 adopted it, but it was most
clearly developed by Locke . 22 If we define national advantage to mean in-
crease of the relative share of a nation in the world’s real wealth, and if we
suppose that all countries use an unfettered silver standard, the total amount
of silver in existence being approximately constant, then the nation’s relative
share in the world’s wealth will tend to be proportional to, or represented by,
its relative share in the existing stock of silver. 'Riches do not consist in having
more Gold and Silver, but in having more in proportion than the rest of the
World,’ which is why a certain quantity of silver, if acquired by means of a
favorable balance of trade, increases the riches of a nation more than would
the same quantity if newly mined. Disregarding the latter possibility, we may
even say that a favorable balance of trade is the only means of increasing
that share in the world’s wealth or, for any nation, the only possible source
of additional 'relative wealth,’ a proposition that is not worse than many that
are taught today. It is strikingly illustrative of the ways of the human mind
that Locke of all men should have committed himself to this argument. That
Colbert 23 should have been addicted to it is much less surprising.

[(e) Three Erroneous Propositions .] Before we go on, it is necessary to
touch briefly upon three points of minor importance. First, if the argument
just presented were acceptable, it would provide a rationalization for the idea
that one nation’s gain is another nation’s loss. In fact this idea would simply
follow from it. However, much as we stand in need of such a rationalization
of an idea that was current at that time and has never been absent at any
time, we are under no compulsion to assume that it was rationalized in that
way. Bearing in mind the primitivity of all the economic reasoning of the
period, we may perhaps more plausibly connect that idea with its counterpart
in the realm of individual economics, the idea that in every exchange one man’s
gain is another mail’s loss. From Aristotle on, philosophers refined upon it by
defining more precisely what the gain was that thus came under a ban, namely,
the surplus above the just price. But however it was defined, the people al-
ways felt, as they do now, that the kind of gain that made the merchant rich
resulted from their being somehow cheated or exploited. In the writings of
the Consultant Administrators of all types, symptoms abound both that they
more or less subscribed to that view and that gradually they were getting rid
of it. Few subscribed as explicitly as did Montchretien, who states it as an

21 1 do not think, however, that Petty (’ Verbum Sapienti, ch. x) meant anything
to which very strong objection need be taken.

22 Some Considerations . . . (1692), see above, ch. 6, sec. 2. He also uses the
analogy just discussed.

23 See Heckscher, op. tit. vol. 11, p. 27.

360 II : BEGINNINGS TO ABOUT 179O

axiom (Heckscher, op. cit. vol. n, p. 26); few got over it as completely as did
Barbon: the bulk of the literature is between these extremes. This slow dis-
integration of one of the oldest elements of popular economic thought is one
of the most important points to remember concerning the history of analysis
in the seventeenth century.

Now, if we take hold, on the one hand, of the principle that 'one man’s
gain is another man’s loss’ and, on the other, of the habit of the period of
reasoning on national trading by analogy with individual trading, we arrive
immediately at another faulty rationalization of the belief that one nation’s
gain must be another nation’s loss.

Second, from this follows immediately a possible explanation of another
erroneous proposition that may be suspected behind many versions of the
balance-of-trade argument. If we identify the gain that is somebody else’s loss
with profit in the businessman’s sense, then all such gains will cancel out in
a combined balance sheet of all firms and households in the country, except
the gains that are made in foreign trade. These will not cancel out, because
foreigners’ losses do not count. Making the further wild assumption that these
gains add up to the export surplus, we may cap a pyramid of nonsense by
asserting that the latter represents the sum total of net — that is, uncompen-
sated — private profits in a nation.

But I am not prepared to charge this to the account of any of those ‘mer-
cantilist’ writers who were on a level sufficiently high to warrant the discussion
of their views, even if some of them did come dangerously near to saying or
implying it. My reason is that the Consultant Administrators did not primarily
write — whatever they may have thought — about individual profits. Even when
they used terms such as 'profits’ from international trade, they meant national
advantage. And this national advantage was not identified with the profit in-
terest. Nor was it held that individual action on the profit motive, necessarily
or normally, promotes the social or national interest. This laissez-faire proposi-
tion was at first quite foreign to their scheme of thought. They used the prin-
ciple that business behavior turns upon profit — for instance, their recommen-
dations mostly aim at influencing profit expectations — but they not only ad-
mitted the possibility of clashes with the public interest, they even considered
clashes to be normal and concordance to be exceptional. This is precisely why
most of them took the necessity of government regulation for granted and
only discussed the aims and methods of it. It is true that they slowly worked
their way toward a different point of view — as we shall see presently, one of
their achievements consists in this. But fundamentally they were planners,
planning precisely in order to avoid what they conceived to be the antinational-
ist effects of unregulated enterprise, irrespective of how profitable such enter-
prise might be to individuals: when they recommended that the importation
of currants via Venice should be stopped, they did not bother about the
profits that might be destroyed by so doing. Under these circumstances it is
hardly necessary to insist on fastening upon them the responsibility for that
particular analytic miscarriage.

Third, nothing has been said so far about the famous ‘confusion of wealth

THE 'MERCANTILIST’ LITERATURE

361

(or riches) with money/ None of the errors of analysis that have been men-
tioned amount to, or imply, any such confusion. Moreover there is, so far
as I know, no proposition to be found in 'mercantilist’ writers that cannot
be explained — however erroneous it may be — without assuming that they
thought that wealth was the same thing as money or bullion or 'treasure/ or
that they confused money with what money can buy. We have thus little
reason to waste space on a completely uninteresting question. But readers
may feel entitled to a comment on what has become a standard topic in the
historiography of economics ever since Adam Smith, by his unintelligent
criticism of the 'commercial or mercantile system/ 24 set the bad example.

As early as 1 549, an anonymous author, 25 setting out to 'declare the means
and polices howe to reduce this Realme to a prospems and floreshing state/
finds it necessary to define in what this flourishing state consists. In his judg-
ment, it consists ‘eheifly in being stronge against thinvasion of eneymies [that
this comes first is interesting to us from another standpoint, J. A. S.J, not
molested with cyvile warres, the people being wealthie [author’s italics] and
not oppressid with famyn nor penury of victualles/ the last words being
clearly intended to illustrate the 'wealthie.’ Yet he wants an export surplus in
order to get an import of bullion. Of seventeenth-century authors, Serra, Mis-
selden, Mun ('riches consisteth in the possession of those things which are
needful for a civil life’), Child (‘many tools or materials’), Cary, Coke, Yarran-
ton, and of course, Barbon, Davenant, and Petty, not to mention the advocates
of paper money and of bank schemes, can all be cited in support of the thesis
that, whatever their shortcomings may have been and however much they may
have overstressed the importance of an increase in ‘treasure/ wealth was defined
— explicitly or by implication — much as we define it ourselves. A locus classicus
occurs in a tract signed by Papillon: 26 'It is true that usually the measure of

24 'Wealth of Nations, Book iv, ch. 1. Adam Smith’s criticism is open to a still
more serious indictment. Obviously conscious of the fact that this particular charge
cannot be made good, he does not strictly speaking make it, but he insinuates it in
such a way that his readers cannot help getting the impression, which has in fact
become very general. Excluding writers, German writers especially, who might be called
either postmercantilists or neomercantilists, we may date the beginning of the reaction
to it by W. Cunningham’s article, ‘Adam Smith und die Mercantilisten/ Z eitschrift
fur die gesamte Staatswissenschaft (1884).

25 We have met him before. 'Polices to Reduce . . . / Tudor Economic Docu-
ments, vol. hi, p. 313.

26 Thomas Papillon, The East-India Trade a Most Profitable Trade to This King-
dom (1677), quoted from Heckscher, op. cit. 11, p. 191. I have not read the book.
Professor Viner (op. cit. pp. 17-18) offers a list of quotations to establish his con-
tention that confusion actually existed ‘between quantity of money, on the one hand,
and degree of wealth, riches, prosperity, gain, profit, poverty, loss, on the other/ In
justice both to the writers whom he quoted and to Professor Viner himself, it must
be pointed out that he aims at a wider target. Nevertheless it is significant that, as
the reader can easily satisfy himself, not a single one of the quotations establishes
confusion (or identification) of wealth with money or bullion, though some of them
suggest the presence of other errors such as we have embodied in our three statements.

362 II: BEGINNINGS TO ABOUT 1790

Stock or Riches is accounted by Money, but that is rather in imagination than
in reality: A man is said to be worth Ten thousand pounds, when possibly
he hath not One hundred pounds in ready Money; but his Estate, if he be a
Farmer, consists in Land, Corn, or Cattle, and Husbandry Implements . .

Yet turns of phrase like Wealth is Money do occur frequently . 27 Sometimes
they can be easily disposed of as fagons de parler. Why, Milles even says that
‘Though money were the beames and exchange the very light, yet bullion is
the sonne’ (quoted by Seligman in his article, ‘Bullionists’). Shall we infer that
he thought bullion and the sun were the same thing? In other cases, it may
be necessary to remember that, while we are dealing with pieces of analysis or
attempts at analysis, we are dealing with primitive analysis, the methods of
which differ but little from, and on the lower levels readily shade off into,
those of the popular mind that still harbored vestiges of the cult of hoards
of gold and silver, though the British navy had already ousted the protecting
dragon from the place he used to hold. But this is all.

[5. Analytic Progress from the Last Quarter of the Seventeenth
Century: Josiah Child to Adam Smith]

Let us return to the main road which, as we already know, rose sharply in
the second half, especially the last quarter, of the seventeenth century. Bearing
in mind what has been said before about other aspects of the analytic work
of those decades, we shall now add what remains to be said about the specifi-
cally ‘mercantilist’ aspect. The work that remains to be noticed under this
heading is much more important than that of the preceding decades and con-
sisted largely in a critical revision of the latter — a revision which constitutes
the main analytic effort of the mercantilist writers. It seems to me that credit
for having given the lead must go to Child . 1 Of other names it will suffice to

27 The reader who wishes for instances can find a little collection in Heckscher,
op. cit. n, pp. 186 et seq., which even includes Bodin. Of particular interest is his
discussion of Britannia Languens (1680), quoted before, because the case of its author
differs from the usual case in which such turns of phrase appear occasionally and
which we can leave out without changing anything in the argument. He insists again
and again that wealth is not goods but only treasure and that poverty is nothing but
lack of treasure. Even in the face of this, however, it is necessary to insist (a) that his
arguments, or some of them, make sense independently of it; (b) that the book is
a poor performance not up to the standard of Mun’s or Child’s; (c) that, though I
defer to Professor Heckscher’s authority, my own experience of the literature would
not justify me in considering it as 'entirely typical’ (Professor Heckscher qualifies this,
it is true, by adding: ‘of a large part of mercantilist literature’ and therefore may
mean what I should not' deny); (d) that allowance must be made for the tendency
of prevailing schemes of thought to produce freaks — for which thesis the economic
literature of the last ten years provides ample verification.

1 Sir Josiah Child (1630-99) was no systematic writer. His contributions are so
scattered over a great many topics that it is easy to miss their combined import. In
fact, it has been missed. The additional misfortune of having been a prominent busi-
nessman and very rich seems to have sealed his fate as an economist. More than anyone

THE ‘MERCANTILIST’ LITERATURE

3 6 3

mention Barbon, Cary, Coke, Davenant, Petty, Pollexfen, 2 Yarranton, and one
which I expect some readers will be shocked to find in this list— North, the
free trader! 3 The main points to note are these.

First, Child — and others about the same time but mainly after him (chief
instance, Pollexfen) — drew the consequence of his theory of money, that
money, being a commodity like ‘wine, oil, tobacco, cloth or stuff’ may often
be exported as much to the national advantage as any other commodity. 4 This,
if properly developed, knocks the bottom out of any position that attaches
primary importance to the balance of trade per se. Child .did not however
proceed to frontal attack, which was, so far as I know, left to Barbon. But he
made it inevitable. Similarly, he led up to the two corollaries of his proposi-
tion, but failed to state them. The one, that if exportation of gold and silver is
nothing to worry about, their importation (the increase in the supply of money)
is nothing to exult about, was also developed by Barbon. The other, that the
importation of bullion does not add any more to the wealth of a nation than
does the importation of raw materials, or even less (observe, however, that
this is not in every sense above question), was developed, though somewhat
post festum (1696) by Cary. The process of analysis- that these instances illus-
trate also did away with the errors discussed before. This may be said to have
been accomplished by the end of the seventeenth century. It is true that they
were shaken off rather than explicitly renounced, which accounts for the fact
that turns of phrase suggestive of them continue to occur even with such

else he has been voted ‘a special pleader’ whose views may be interesting as ‘evidence
of contemporary business life and opinion/ but have no place in a history of scientific
economics. This appraisal may be found in a most typical form in the article ‘Child,’
in the Encyclopaedia of the Social Sciences. The author, Henry Higgs, should really
have known better.

2 John Pollexfen, A Discourse of Trade, Coyn, and Paper Credit, and of Ways
and Means to Gain and Retain Riches (1697) and England and East India Incon-
sistent in their Manufactures (also 1697). The titles of the relevant publications of
the others have all been given before.

3 Sir Dudley North (1641-91), Discourses upon Trade (1691), ed. J. H. Hollander
(1907). It is interesting to note how acutely he was conscious of the difference be-
tween results of analysis and ‘ordinary and vulgar conceits, being meer Husk and
Rubbish’ (preface); but he was a merchant and, later on, a public servant — no pro-
fessor.

. 4 This must not be confused with the apparently similar argument of Mun’s that
has been mentioned before. Child’s proposition not only went further, but it meant
something entirely different. It was not, as it was in the case of Mun’s, exclusively
motivated by the possibility that such exportation would eventually result in stiff
larger importation. On the other hand, we must guard against a possible misinterpre-
tation: one might read into that passage an anticipation of the principle of gold
movements that was sponsored by Ricardo — gold will flow if it is the relatively cheapest
commodity. But Child does not envisage the element of commercial advantageousness
of gold or silver exports, but only states that the national interest will not suffer if
gold and silver are exported. (On Child’s monetary theory, see above, ch. 6, sec. 2b and
sec. 7a,)

364 II: BEGINNINGS TO ABOUT 1790

writers as Cary, Davenant, Petty, Yarranton, and later ones, such as Harris,
who in substance were quite free from those errors . 6 It is also true that, on
what has been referred to as the lower levels, all this lived until it was re-
placed by 'liberal’ slogans — which, on those levels, were of no better grain
intellectually . 6

5 It is amusing to note that the 'mercantilist’ writers became- so alive to the dangers
of overemphasis on money that they began themselves to use the slogan about the
identification of wealth and money. Thus, in a pamphlet that has been ascribed to
Davenant, Pollexfen was attacked on this ground, although in the Discourse he clearly
defines wealth in terms of goods and although in England and East India he con-
demns the import trade of the company merely on the ground of the frivolous nature
of those imports, which he does not believe were re-exported to a degree to justify
Davenant’s (and others’) argument for that trade. This, whether good or bad eco-
nomics, has nothing to do with that identification. The same Pollexfen was arraigned
by Professor Viner (op. cit. p. 18) for having said that 'gold and silver is the only
or most useful treasure of a nation.’ But why should this mean more than that gold
and silver are ‘stores of value,’ and best fitted for that role, a statement one can read
in the majority of nineteenth-century textbooks on money? This interpretation is en-
tirely adequate to take care of the meaning of his text: of course, as far as that store
of value goes, only bullion can make up for loss of bullion.

Pollexfen, serving as he does as one of the standard instances for the views ex-
pounded in the text, should be cleared of what I conceive to be unjustified aspersions.
We may refer to another point in which he was so unfortunate as to give umbrage
to free-trade critics. He ‘still’ held that it is meaningful to balance trade with each
individual country, a standpoint that, to the relief of those critics, Child and Barbon
and even Mun had at last abandoned. But provided one does want to regulate and
plan — the rationale of wishing to do so is another matter — Pollexfen’s opinion is, as
has been pointed out in our discussion of Malynes, perfectly sensible as is also his
recommendation to set an upper limit to the export of money to India. There is
hence no reason whatever to wonder at the survival of this or cognate ideas: anon..
Short Notes and Observations in Point of Trade (1662) was, from the planner’s stand-
point, perfectly justified in denouncing the importation of vain and unnecessary com-
modities; and so was Ralph Maddison (E nglands Looking In and Out, 1640) in holding
that control should be extended to ‘every particular trade.’

6 By way of illustration, both of the statement made in the text and of the rationale
of our method of appraising and ‘placing’ mercantilist (and also other) writers, let me
give a late example of the occurrence of what most people will consider typically
mercantilist errors. L. A. Muratori, in his Della pubblica f elicit d (1749), ch. xvi, lays
it down as the principal maxim that ought to govern economic policy that as little
money as possible be let out of the state {fare, che esca dallo Stato il men Danaro,
che si pud) and that as much of it as possible be imported (e che ve ne s’introduca
il piu che si pud), a conclusion which was soon (1751) attacked by Galiani. See also
A. Graziani, Le Idee economiche degli scrittori emiliani e romagnoli (1893). Now I
do not try to palliate this by an ‘understanding’ interpretation. I should agree with
every one of Professor Viner’s crisp epithets if they were to apply only to cases like
this. But I think it essential for a proper grasp of the history of economics to em-
phasize their low level (which of course is relative to dates). The case derives addi-
tional illustrative value from the fact that Muratori was a very eminent man in other
fields. Even as an economic historian he stands high. But he did not know how to

J yl

I 11

I si

THE 'MERCANTILIST’ LITERATURE 365

[(a) Concept of the Automatic Mechanism .] Second, we have seen that the
conception of the Automatic Mechanism — the mechanism which, if allowed
to work and if conditions are not too much disturbed, may be held to guaran-
tee in the long run an equilibrium relation between the money stocks, price
levels, incomes, interest rates, et cetera of different nations 7 — was not entirely
outside the range of vision of any of the 'mercantilist’ writers one cares to
quote: Serra saw much of it, Misselden and Mun, a little, Malynes, nearly the
whole of it. The contributions that have just been discussed above, so one
might think in retrospect, should have made the full-fledged theory of that
mechanism an easy matter of co-ordinating and amplifying restatement. But —
as the history of any science again shows: a particularly good instance is af-
forded by thermodynamics — such definitive formulation is surprisingly difficult
to achieve and the first attempts at it are always likely to be failures. None
of the authors mentioned did achieve it. North tried. He saw that there is
such a mechanism as a result of which every country will draw to itself a
'determinate sum’ of money that will just suffice to carry on its economic
process (at, and after adjustment to, the appropriate level of prices, a qualifica-
tion which, however, he does not add). But he went off the rails completely
in his attempt to describe it. Locke was more fortunate. He even used the
device later on adopted by Hume of trying to describe what will happen, if
half of the money in existence in a country be suddenly removed, and realized
that this will restrict imports and increase exports, and yet he does not draw
the conclusion that to us seems obvious (or seemed so until twenty years ago).
But in order to get things into the right historical perspective, it should be
realized that this fortress, though it was not completely reduced before the
middle of the eighteenth century, was eventually entered, not by means of a
new attack from a different side or by a new method of attack, but simply by
pressing on through the breach that the 'mercantilist’ writers had made. This
can be easily shown by a brief survey of subsequent developments, which will
at the same time serve the purpose of carrying us not only to the Wealth of
Nations but beyond it to the threshold of discussion raised by the suspension
of specie payments (Bank Restriction, 1797).

The next substantive advance was made by Gervaise. 8 He added the propo-

wield the kind of analytic apparatus the evolution of which is the subject of this
book, and hence he wrote commonplaces or nonsense when he touched subjects that
cannot be successfully treated without it. And this nonsense was not typical of the
works of those writers of his time who had command of such analytic apparatus as
there was. It would only serve to blur the picture if his views on such subjects were
allowed to figure in it.

7 With regard to this mechanism, see the footnote on the balance of payments
(above, sec. 4, n. 6).

8 I have not mentioned Simon Clement, A Discourse of the General Notions of
Money , Trade , and Exchanges . . . (1695), whose contribution has been strongly
commended by Angell (op. cit. pp. 21 et seq.). But there was little merit in describing
the specie-point mechanism that had been perfectly well understood more than a
hundred years before. There was, however, merit in Clement’s correct description of

366 II I BEGINNINGS TO ABOUT I79O

sition, never before stated with unmistakable clearness, that an increase in
‘credit’ (say, banknotes) will increase income and consumption, hence de-
crease exports and increase imports, and thus produce, just as would an in-
crease in the quantity of the monetary metals, an outflow of these metals that
will eventually enforce credit restriction — an' important contribution, particu-
larly meritorious in its emphasis upon the ‘income approach.’ Of course this
proposition implies full understanding of the fundamental mechanism we are
talking about, since it merely develops a particular consequence of it. But
Gervaise’s actual account of the automatic mechanism, though superior to any
that had been published before, is yet far from satisfactory. It would, however,
be sufficient to insert a few passages from Malynes in order to make it so. Suc-
cessive marksmen, however, came nearer and nearer to hitting the bull’s-eye of
the old target. Of those who did hit it, the most eminent were Cantillon and
Hume . 9 The fact that Hume’s essay aroused some opposition testifies to his

the sequence of events that devaluation will produce as long as domestic prices do
not respond to it: bullion will flow, exports increase, imports decrease. He was not
the first to see that, but his is the first compact statement, so far as I know, of the
particular piece of mechanism, made with a full sense of its importance. The same
claim may perhaps be made for the book as a whole, and if we add it to the con-
tribution of the authors under discussion, it becomes still clearer that all the elements
for what was to become a 'classical’ theory were worked out before 1700.

Isaac Gervaise, The System or Theory of the Trade of the 'World. Treating of the
Different Kinds of Value. Of the Ballances of Trade. Of Exchange. Of Manufactures.
Of Companies. And Shewing the Pernicious Consequences of Credit, and that it
Destroys the Purpose of National Trade (1720). This remarkable little book, the
merit of which is only slightly impaired by slips and clumsinesses (for instance,
Gervaise lets the precious metals be distributed among countries according to their
population, but meets the obvious objection by a fairly satisfactory explanation), has
I believe been discovered by the late Professor Foxwell, who called it 'one of the
earliest formal systems of political economy, and stating one of the most forcible
practical arguments for free trade.’ It will be Professor Viner’s merit, however, if
henceforth these 34 pages take the place in the history of our science that belongs
to them (see Viner, op. cit. pp. 79 et seq.).

I take the opportunity to call attention to Professor Viner’s section on ‘The Self-
regulating Mechanism of Specie Distribution’ (p. 74), which, the best part of an ex-
cellent work, is not only much richer in material than my exposition but also one of
the most interesting essays ever written on the fascinating theme of how a theory
struggles into existence. It is a pity that, in this section as well as in the other parts
of his work, he failed to distinguish between progress in analysis and progress toward
free-trade opinions, or to put it somewhat differently, between what an author under-
stood of economic processes and what he thought of them. The same common con-
fusion we shall presently encounter again when dealing with the general theory of
international trade.

9 R. Cantillon, E ssai sur la nature du commerce en general, which, as has been men-
tioned before, was written (and circulated) about 1730 but did not appear in print
until 1755. D. Hume, 'Of the Balance of Trade’ in Political Discourses (1752), in-
cluded in Essays, Moral, Political and Literary (ed. 1875, vol. 1, pp. 330 et seq.). Com-
parison with other writers, who may also be said to have hit the bull’s-eye, only serves

THE ‘MERCANTILIST’ LITERATURE

THE ‘MERCANTILIST’ LITERATURE 367

merit as do the further facts that he added several points which were new, as
far as I know, and that, unlike some economists of the nineteenth century,
he did not trust the automatic mechanism unconditionally, though he failed
to emphasize the frictions and disturbances that may attend its working. Es-
sentially, however, his achievement consisted in shaking off the dust of mis-
takes from pieces of the ‘mercantilist’ inheritance and in assembling these
pieces into a neat and well-rounded theory . 10 And this is all. Nothing of major
importance was added during the rest of the century. In the Wealth of
Nations, Adam Smith did not advance beyond Hume but rather stayed below
him. In fact it is not far from the truth to say that Hume’s theory, including
his overemphasis on price movements as the vehicle of adjustments, remained
substantially unchallenged until the twenties of this century.

[J. A. S. left note: 'please leave rest of page’ and added in pencil as a reminder the
three names Melon, Dutot, Galiani.]

[(b) Foundations of a General Theory of International Trade.] A third
point remains to be noticed about the work of our group of writers. Just as
they paved the way toward the theory of that automatic mechanism of gold
and silver movements, so they also paved the way toward the theory of the
automatic mechanism of commodity movements. In other words, they pulled
out of that prescientific stage in which the protectionist arguments had no
theoretical basis, rather than a faulty one, and began to lay the foundations
of the general theory of international trade, that was to take shape in the last
decades of the eighteenth and the first decades of the nineteenth centuries.
Logically, though not historically, we may distinguish two steps in their
advance.

The first step consisted in the qualification and elaboration of the primitive
arguments. They perceived the fact that the immediate and visible advantages
that protectionist measures aim at securing are never net advantages or, as we
may also put it, that there is to every proposition about those advantages a

to make his merit stand out still more clearly. Two may be mentioned: Jacob Vander-
lint, who preceded him (Money Answers all Things, 1734, p. 15 of the new ed. in
J. H. Hollander’s reprints) and Joseph Harris ( Essay upon Money and Coins, 1), who
followed him, at least if we go by date of publication, 1757. That these two sound
but certainly not first-flight men should have also ‘done the trick’ seems to strengthen
the thesis of the text.

10 No one who knows anything about the history of science in general will suspect
me of a wish to underrate the importance of an achievement of this kind. Moreover,
the performance may have been quite original ‘subjectively’ in the sense in which,
e.g., Menger’s was (see below, Part iv, ch. 5, sec. 1), all the forerunners notwith-
standing. All major discoveries have to be repeated again and again. Finally, there is
room for fair difference of opinion concerning the question how far the authors of
the seventeenth century had really advanced. In any case, there is no justification for
Professor Angell’s statement that Hume ‘at a single stroke wrecked the balance-of-
trade theory’ (op. cit. p. 26). This only amounts to repeating an old nineteenth-century
error.

368 ii : beginnings to about 1790

counterproposition about ulterior or invisible effects, many of which are in the
nature of costs. Such complementary propositions are implied in Cary’s argu-
ment about the importation of raw materials or Coke’s argument about the
importation of both raw materials and manufactured goods, or Coke’s and
Yarranton’s argument on cheapness and plenty, or Yarranton’s argument about
the advantages that accrue to a nation from its neighbors’ prosperity, or
Barbon’s argument — it occurs frequently, but it was not, I think, definitely
set on its legs before Barbon — that regulations and restrictions always destroy
some element of potential wealth. It is, or was, the common practice of critics
to say that by introducing such arguments our authors contradicted or partially
recanted their ‘mercantilist’ views, or that they became ‘eclectics.’ But what-
ever may be true from other standpoints, from ours those arguments and the
qualifications they implied are simply the inevitable consequence of increas-
ingly successful attempts to see more than one side of the case.

Similar conquests were made by continental writers of the same type. It will
in particular not surprise us to learn that the Dutch were in the van of ad-
vance. The two outstanding examples are Graswinckel and Pieter de la Court. 11

Thus, additional and less obvious aspects were gradually revealed, though in
a wholly unsystematic manner. But among the disjointed pieces of economic
reality that were being unearthed, there was one of sufficient power to co-
ordinate all the others and to support the structure of a comprehensive theory
of international trade or even trade in general. Child seems to have been the
first to arrive (1668-70) at a clear idea of the explanatory value of the simple
fact that commodities tend to seek the most advantageous market. To use the
phrase of Davenant, who worked out the idea in the nineties, there are defi-
nite ‘channels’ which, under the stimulus of profit expectations, trade finds of
itself; or, to put it still differently, the profit motive supplies a regulatory prin-
ciple for ‘unregulated’ business activity, international and national, and pro-
duces results which we may like or not but which are determined and not
chaotic. Propositions that imply this discovery or even expressly refer to that

11 Dirck Graswinckel, Placaetbook op het stuk van de Leeftocht (Compilation of
regulations concerning foodstuffs, 1651), the second part of which contains a critical
analysis of the policies represented by the legislative material compiled in the first.
Graswinckel’s views on the harm done by prohibiting the exportation of grains, a
practice which had become practically universal in the eighteenth century, were not
new in 1651 — we have encountered similar views in the Discourse of the Common
Weal, and they cannot have been strikingly novel even then. But Graswinckel had
a keener sense of the price mechanisms involved, especially of the function of fore-
stalling. Pieter de la Court, Interest van Holland . . . (1662; 2nd ed. under the title:
A anwysing der heilsame politike Gronden en Maximen van de Republike van Holland
en West-Vriesland, 1669; English trans.. Political Maxims . . . falsely attributing the
work to John de Witt, 1743; I know only the latter), presents mainly an argument for
industrial freedom plus moderate duties — comparable and in some respects superior to
Coke’s of 1670 and 1675 — the merit of which consists chiefly in its freedom from
errors of reasoning. Both authors would have to be ranked very high in a history of
economic thought or policy. Concerning their contributions to analysis, however, it
is hardly possible to say more than this.

THE 'MERCANTILIST' LITERATURE

369

principle in particular cases occur in the sixteenth century and earlier. It was
of course quite familiar to the scholastics. On the other hand, it was not fully
developed until Leon Walras. But the mercantilist writers helped to place it
in its key position in the theory of international trade.

Neither Child nor Davenant proceeded very far with it. Barbon, however,
understood the mechanism sufficiently well to adumbrate the theory of equi-
librium in international commodity trade, at least in the form of the propo-
sition — stated without the necessary qualifications — that restrictions on im-
ports will restrict exports to a corresponding amount. Much more than this I
cannot find in any seventeenth-century author. In particular very little was
made of the argument about territorial division of labor. In its most primitive
form it cannot, of course, have ever been unknown to anyone. Armstrong and
Hales in the sixteenth century based international trade on the fact that dif-
ferent nations, living under different conditions, produce different commodi-
ties, the superfluous parts of which may be exchanged with advantage to all
parties concerned. Even North thought of international trade in quite the
same spirit as the 'exchange of superfluities/ much as had Grotius (1625).
Recognition of the much more interesting fact that this exchange will alter the
economic organisms of the trading nations is, to be sure, implied in many
practical suggestions, especially on the economic relations between England
and Ireland and also in more general considerations of Davenant’s (e.g., in
his Essay on the East-India Trade, 1696), but nobody seems to have realized
fully its significance as a starting point of analysis or to have had any inkling
of the principle of comparative costs. North in particular did nothing but sum
up, incompletely but effectively, the contribution of the ‘mercantilist’ writings
to 1691.

But none of the others were thoroughgoing free traders. North alone was.
And to interpreters of the history of economic analysis who were interested
in nothing but free trade and knew of no canon of criticism except the dis-
tance that separates an author from free trade, this was of course the all-
important fact. For them, there is, on the one side, the darkness of 'mer-
cantilist’ error and, on the other side, the eternal light of 'liberalism’; the
light rose against the darkness and dispelled it so thoroughly that there was
nothing left of it except the pious wonder of liberals how anyone could ever
have been so benighted. Now this way of looking at the history of that time
under the aspect of a sharp antithesis is totally wrong. And it is so essential
for a proper understanding of the evolution of our science to grasp this that we
must stay for a moment, even at the risk of some repetition, in order to clarify
the nature of the confusion from which that view arose.

Even if we were studying the history of political doctrines, it would be nec-
essary to point out that free-trade forces did not simply assemble outside of the
mercantilist citadel and storm it — this is only true of the agrarian Tory com-
ponent, which at that time was strongly antagonistic to big business and pro-
tection — but to a much greater extent formed up inside it. This should appeal
to Marxists, for the decisive support of English free trade came after all from
the same bourgeois class that had previously supported protection. But the ad-

370 II: BEGINNINGS TO ABOUT 179O

vance of analysis that alone interests us here was not a matter of free trade
and nascent liberalism at all. It could have occurred without anyone’s being
converted to free trade and liberalism, and free trade and liberalism could have
gained their political victory without any help from that advance. Of this we
can satisfy ourselves by the reflection that, for example, none of the old pro-
tectionist arguments listed above is affected by the later analysis that, in the
hands of liberals, was made to serve free-trade policy. That analysis only estab-
lished the existence of an 'automatic mechanism.’ Knowledge of this mech-
anism is indeed not irrelevant for practice. When fully developed, it will pre-
vent people from embracing protectionism or free trade for erroneous reasons.
But beyond this it is. not the master but the servant of the decisions we ar-
rive at. It can serve— and rationalize — protectionist decisions just as well as
free-trade decisions, but it does not in itself suffice to enforce either.

It is easy to apply this to the particular case of North. His allegiance to the
Tory party had probably much more to do with his free-trade opinions than
had his analysis. So far as the latter is concerned, in order to realize that he
might have arrived at 'mercantilist’ conclusions without any error dr incon-
sistency, we need only, suppose that he adopted one of those protectionist argu-
ments or simply that he saw that an individual nation may gain by a well-
devised system of protective duties. Therefore, we can discard his free-trade
convictions as irrelevant in an appraisal of his analytic apparatus. But if we
look at the latter, we have no difficulty in recognizing, first, its affinity to
Barbon’s 12 and, second, the fact that for the rest it is made up of quite old
elements: wealth consists of whatever satisfies wants; money is a commodity of
which there may be too much as well as too little; there is no sense in pro-
hibiting its exportation or in taking any measures in order to secure an ade-
quate supply of it; sumptuary laws blunt the spurs to trade; and so on. Clearly
it is more correct to say that his analytic work grew out of that of the 'mer-
cantilist’ than to say that the relation was one of head-on clash.

[(c) General Tendency toward Freer Trade.] Let us again follow develop-
ments to the publication of the Wealth of Nations. It will be convenient to
distinguish sharply the development of free-trade policies and free-trade doc-
trines from the development of analysis that was associated with both.

If due account be taken of all the obstacles that stood in the way, a general
tendency toward freer trade is, I think, discernible. In England this tendency
had already asserted itself in the growing opposition to the Navigation Acts
and other 'mercantilist’ measures, for example, in the Committee on Trade of
1668. Much more significant was the assault on the system that the Tories,
under Harley and St. John, made in 1713: the eighth and ninth clauses of the
peace treaty of Utrecht went a long way toward free trade with France. The

12 The only point in which North definitely goes beyond Barbon is the proposition
already mentioned on another occasion (see above, ch. 6, sec. 7) viz. that low interest
is not the cause but the consequence of increasing wealth. Perhaps his rudimentary
theory of gluts should also be mentioned. But it is so very primitive that there is no
point in insisting on it.

THE ‘MERCANTILIST’ LITERATURE

371

assault ended in defeat. The Tories failed to carry those clauses and the subse-
quent Whig regime (Walpole first, the Pelhams after) kept strictly on the pro-"
tectionist tack. The governments from Bute’s to North’s had other worries,
but Shelburne and especially the younger Pitt led the way toward fewer and
lower duties — the latter’s crowning achievement being the commercial treaty
with France, 1786. Further progress was checked for nearly thirty years by
the revolutionary and Napoleonic wars, after which Pitt’s policy was resumed
in the twenties of the nineteenth century (by Huskisson). As we can see from
this, France moved substantially in step. Only, there were two additional prob-
lems: even internal free trade was not achieved until the Revolution, though
successive administrations tried to establish it, and the agrarian situation
brought to the fore the particular question of free trade in grains, especially
free exportation of grains. 13 In the German and Italian states we see at first
glance nothing except further development of the ‘mercantilist’ system. But
its rationalization led in many instances to a reduction of the burdens on inter-
territorial trade, especially in !i raw materials and semifinished products. In the
Netherlands, as we should expect, a much more definite tendency toward freer
trade already had asserted itself in the seventeenth century.

Doctrine moved more quickly. Free-trade conviction began to spread as part
of a general laissez-faire code. With the bourgeois public, the operative im-
pulse was simply surfeit with bureaucratic overadministration, which became
so strong that even direct self-interest failed occasionally to counteract it. With
the writers, or some of them, a similar impulse took on a philosophic flavor:
free trade was increasingly considered as a part of the autonomy of the indi-
vidual, which was held to imply a ‘natural right’ to trade as he pleased. This
argument, which had been used already by Hugo Grotius and can be followed
through the various natural-law groups, including the physiocrats and even the
English utilitarians, is of course perfectly devoid of scientific meaning. 14 But it
is relevant for us, first, because it was practically always associated with posi-
tive statements about economic effects, which do have scientific meaning and
must be considered independently of it; second, because we have here (scien-
tifically speaking) an illegitimate influence which blunted the edge of the
critical faculty and imparted a bias to the economic reasoning of the best
writers.

As we shall see more clearly later on, weaknesses that are not easy to ex-
plain in any other way may be traced to this influence, which understandably
allied itself with the doctrine of the Invisible Hand, even in the cases of Ques-
nay and Smith. It counted of course still more in the popular opinions favor-
ing laissez-faire that conquered coffeehouses and salons and foreshadowed the

13 In England, an export bounty had been introduced in 1689 which naturally
played a role in contemporaneous discussion. Otherwise English agrarian policy did
not clash much with the general tendency described above until 1815.

' 14 I hope I have made it quite clear before that my defense of the natural-law
concept as an instrument of analysis does not cover its use as a means of deriving
imperatives of the type of the droits de I’homme.

372 II: BEGINNINGS TO ABOUT 179O

free-trade dogmatism of nineteentli-century liberals, which has not much more
to do with scientific insight than had any of the popular dogmas of mer-
cantilism.

Analytic progress, however, was slow. The controversies that arose about '
political issues, which happened to attract public attention, proved surprisingly
sterile in this respect. The one raised by the French grain policy , 15 for in-
stance, though it engaged the interest of some of the brightest stars of eco-
nomic analysis, Frangois Quesnay included, did not produce any results that
we should have to notice . 16 Still there was some advance, though advance that
led to new error as well as to new truth.

15 We may notice another. When the freer-trade clauses of the peace treaty of
Utrecht became known, the protectionists flew to arms. Among other things, a short-
lived periodical was founded. The British Merchant (republ. 1743 ), the contributors
to which throw an interesting light on the state of protectionist opinion. Among
them, Joshua Gee should be mentioned in particular. He also wrote other protectionist
tracts, e.g. The Trade and Navigation of Great Britain considered ( 1729 ), and his
protectionism mainly turns upon the employment argument. On the whole, the per-
formances of Gee and of the other contributors were by no means discreditable and,
intended as they were for popular consumption on an issue of the day, may well be
offered in refutation of the common belief that eighteenth-century "mercantilism’ was
just a heap of nonsense. But as far as I can see, there was nothing in them to interest
us here. The Tory counterblast was Mercator, or Commerce Retrieved,. which appeared
three times a week from May 1713 to July 1714 and was more of a one-man show.
That man was Daniel Defoe of Robinson Crusoe fame, a most brilliant and prolific
writer. But even his most ambitious efforts in our field remained in the sphere of eco-
nomic journalism. In particular, his case for those clauses of the Treaty of Utrecht
did not contribute anything new to economic analysis, though they rank high in the
history of free- or freer-trade opinion. The reader who takes the trouble to peruse some
of his writings (e.g. his General History of Trade, 1713 ) may well think that I am
being unjust to him, especially if he recalls my comments upon Yarranton. But merit
in such matters is to a large extent a matter of dates.

I take this opportunity to mention a somewhat later writer, Malachy Postlethwayt,
but only to give an instance of the interesting phenomenon of the survival of names
associated with substandard performance. The sole reason that I can see why this
name should still be familiar to every student preparing for a course examination in
the history of economic thought is a certain reputation he made in his own time
by his Universal Dictionary of Trade and Commerce ( 1751 - 55 ), which was largely a
compilation from unacknowledged sources. His other writings, mainly on the South
African trade, are narrow and pedestrian, though not devoid of a certain crude com-
mon sense. His Great Britain’s true System . . . ( 1757 ), which proves that he was
intelligent enough to see the importance of Cantillon’s book, contains a passage that
interprets interest as a payment to hoarders by those who stand in need of it, i.e.
as a payment necessary in order to overcome people’s reluctance to part with cash.
This reads like a clumsy version of Lord Keynes’s own-rate theory of interest. To put
him in a representative position as has recently been done by Fay . . . [note un-
finished] .

16 That discussion has, however, some indirect importance for us owing to the
general stimulus it gave to the interest in economic analysis, even though it did not
add much to it directly. This is why it will have to be mentioned again. At the

THE MERCANTILIST LITERATURE 373

[(d) Benefits from Territorial Division of Labor.] The one major accomplish-
ment that I can see consisted in a technically superior formulation of the
benefits from territorial division of labor that went some way toward antici-
pating the most important element in the nineteenth-century theory of inter-
national values. It stands to the credit of two English authors to whom we
shall confine ourselves, though others could also be cited. An anonymous
writer, in 1701, published a tract entitled Considerations on the East-lndia

moment let us note that all the authors to be mentioned were, in this matter, an-
ticipated by Graswinckel, 1651 (if not in the Discourse of the Common Weal , 1549)
and more immediately by Boisguillebert. After Boisguillebert there was a lull. It seems
that the discussion was started afresh by Claude Dupin ( Oeconomiques , 1745, of
which the part entitled Memoire sur les bleds was republ. separately in 1748), who
presented once more the argument for internal free trade in grains. C. J. Herbert
followed with his Essai sur la police generale des grains (1753). The fact that he still
retained an export duty (of the English sliding-scale type) is immaterial here; it is
more relevant that the argument about the adequacy of the normal supply that will
be automatically forthcoming is fully developed by him, though without anything
amounting to theoretical proof. Quesnay followed in an essay that will be mentioned
later, and so did others, especially after the declaration of 1763 and the edict of
1764 which established free exportation. Galiani's spirited criticism of the dogmatic
beliefs that were being developed ( Dialogues suV le commerce des bles, 1770) is par-
ticularly worthy of notice.

These Dialogues grew out of the corresponding discussion among Italian economists,
which began later and lasted longer and is really more interesting than the French one
— though participants in the latter may claim priority as to such fundamental ideas as
were involved — because the particular patterns of the situation in the Italian states,
especially in the Neapolitan Kingdom, suggested both factual studies of considerable
interest and arguments on particular points that were absent in the literature of the
more fortunate nations. Since, however, it is impossible to go into these results, none
of which, so far as I know, were of major importance to the development of the eco-
nomic apparatus, it must suffice to mention some of the more significant of those
performances which, as pointed out in the text, soon began to indicate the influence of
the Wealth of Nations. For instance, Domenico Cantalupo published in 1783 a tract
on free trade in grains (republ. in Custodi’s Scrittori classici Italiani), in which he
analyzed grain policy since 1400 and wielded the modest analytic apparatus at his
command effectively and judiciously. Another Neapolitan noble, Domenico Caraccioli,
followed him in 1785, interpreting his observations during a famine in Sicily (republ. in
the same collection). Biffi Tolomei, in his Confronto della ricchezza dei paesi che
godono libertd nel commercio frumentario (1795), attempted a factual proof of the
importance of free trade in grains for the wealth of a country that is methodologically
nOt without interest. There is appended to this book a memorandum entitled Riflessioni
sopra le sussistenze by Saverio Scrofani, an out-and-out free trader of the physiocrat
type whose other works need not concern us here. All these authors were, so far as
the principle of free exportation of grains is concerned, anticipated by Verri, Memorie
storiche suit’ economia pubblica dello stato di Milano (written, 1768; publ. post-
humously 1797) and Riflessioni sulle leggi vincolanti, principalmente nel commercio de’
grani (written 1769, printed 1796). As an example of the success — for it was success
and not eclectic weakness — with which conflicting, yet ineluctable, considerations were
combined to fit Italian situations, I will mention Ferdinando Paoletti who, though

374 11 : BEGINNINGS TO ABOUT 1790

Trade , 17 in which he treated international trade as a method of acquiring goods
with an amount of labor smaller than would be necessary to produce them at
home. He does not seem to have been aware of the relation of this to the
principle of comparative cost, but even so we have here a predecessor of
Ricardo, though possibly a quite uninfluential one.

Now producing instead of a commodity A for domestic consumption, an-
other commodity B, the export of which will fetch in commodity A at more
advantageous terms, is obviously a matter of allocation of productive resources.
From this angle the problem was considered by Gervaise, who inferred like
Marshall 18 that tariffs, spelling as they do interference with the most advan-
tageous allocation, must net a disadvantage to the nation as a whole, however
great the immediately visible advantage to the protected industries might be.
It has been mentioned that Gervaise’s tract has but 34 pages and if, on the
strength of this, we give him credit for what he might have had to say in ten
times as many, then this proposition must indeed be looked upon as a con-
siderable contribution to the apparatus of economic theory. It may, in fact, be
said to give, in the guise of an application, one of the earliest glimpses of the
theory of general equilibrium.

But there was hardly anything else. Hume, in spite of the many wise things
he had to say in his essays on commerce, on the jealousy of trade, and on the
balance of trade, 19 hardly carried this part of our subject any further. Neither
did Adam Smith, who seems to have believed that under free trade all goods
would be produced where their absolute costs in terms of labor are lowest,
though he no doubt co-ordinated, rounded off, emphasized, and illustrated. In
fact there is nothing of importance to report for the rest of the century in
spite of the mounting flood of popular literature, most of which was of free-
trade or freer-trade complexion and strongly influenced the Wealth of Na-
tions . 20 And even that advance in the analysis of territorial specialization was

also one of the group of Italian physiocrats, inserted into his scheme of things agrarian
protection { Pensieri sopra V agricoltura, 1769; I only know the part included in the
Custodi collection) and export bounties on goods not of prime necessity (Veri mezzi di
render felici le societd, 1772) — a sort of rudimentary Agricultural Adjustment Pro-
gram that is not without interest to the theorist. It would be quite wrong to think
that general principles of thought or action separate us from an author like Paoletti.
What does separate us from him is exclusively our statistical and theoretical technique.

17 [In J. R. McCulloch, ed., A Select Collection of Early English Tracts on Com-
merce, 1856.]

18 Official Papers, published for the Royal Economic Society (1926), p. 391. -

19 Compare, however, the chapter on Hume in E. A. J. Johnson, Predecessors of
Adam Smith (1937).

20 The opinions on foreign trade of some important writers, such as the physiocrats
or certain authors of comprehensive systems, may be of interest without involving 'con-
tributions/ So far as necessary these will be mentioned or have been mentioned in con-
nection with the works in which they occur. It is, however, convenient to supplement
the exposition in the text in two ways. First, it is worth while to point out that in
the twenty-five years or so preceding the publication of the Wealth of Nations , the
majority of competent economists had reached what amounted to substantial agree-

THE 'MERCANTILIST' LITERATURE

375

not an unmixed gain. Both the anonymous author , and Gervaise were much
too ready to arrive at conclusions agreeable to their free-trade opinions 21 and

ment, the physiocrats and the writers directly influenced by them being the most im-
portant group in the minority. Representative of this communis opinio at its best were
Josiah Tucker and Sir James Steuart in England, Justi and Sonnenfels in Germany,
Beccaria, Genovesi, Verri, and Palmieri in Italy, and Forbonnais in France. Briefly,
since they agreed in accepting public regulation as a normal, in fact inevitable, feature
of the economic process, protectionism followed simply as a special case. But the mer-
cantilist emphasis upon the balance of trade was reduced to small proportions, partly
in consequence of valuable critical work (e.g. Verri in his Meditazioni , 1771, and
Garli in his Breve ragionamento sopra i bilanci economici delle nazioni, 1770, which
made short work of the idea that national wealth can be measured by exports). More-
over, protectionism in their hands became a much more delicate instrument than it
had been, one of the consequences of which was the emphasis upon moderate rates,
which modern eyes can hardly distinguish from no duties at all: Forbonnais suggested
15 per cent ad valorem and Justi 10 per cent. There was a tendency, however, wide-
spread and inspired by very old practice, to believe in differentiating duties upon im-
ports in inverse proportion to their distance from finished consumers’ goods (Tucker,
Verri) — a principle that proved a hardy growth and is often met with in the nine-
teenth century. Finally, though (as the uncritical acceptance of this rule by many
writers is in itself sufficient to show) they frequently committed the kind of error
that results from inadequate technique and places too much reliance on prima facie
common sense, they rarely went wrong in matters of fundamental analytic principle.

Again, we shall readily understand why those critics who accepted the free-trade
creed should have- been unable to see anything in this except inconsistency or, at best,
an uninteresting eclecticism characteristic of a transitional stage between old error and
new truth. But from any other standpoint, there was no inconsistency (in the sense
of logical incompatibility) in that quasi-common opinion, which not only reflected
progress of analysis but also, as will be more generally re-emphasized in the text, might
have been a better starting point for further research than was the narrow dogmatism
of the free-trade doctrine that replaced it.

Second, by way of illustrating the preceding sentence, let us consider a single in-
stance from a very large class of propositions. In his Ways and Means . . . (1757),
Massie argues (as others had before him) that Port should be less heavily taxed than
French wines, on grounds that suggest the following proposition. If a country. A,
trades with countries B and C, and B’s purchases of A’s products are more elastic
with respect to the revenue that B draws from its sales to A than are C’s purchases
of A’s products with respect to C’s revenue from C’s sales to A, then it will benefit
country A to treat B’s products better than C’s. Never mind how far this is true.
True or false, this proposition is at least interesting, and its discussion is much more
likely to enrich our understanding of international trade and our analytic apparatus in
general than are any number of free-trade platitudes, however meritorious an attitude
the latter may reveal and however conducive to wise, humane, peaceful, and so on
policy they may be. Several additional instances could be adduced from Massie alone,
who excelled in this eminently useful kind of analysis, also in fields other than that
of international trade (see e.g. his Observations on the New Cyder-Tax, so far as the
same may affect our Woollen Manufacturies, Newfoundland Fisheries . . . 1764).

21 On Professor Viner’s authority (op. cit. p. 92), it may be stated that besides those
two and North, there were, before 1776, only two other English free traders (William

376 II : BEGINNINGS TO ABOUT 1790

in so doing associated their achievement with errors of reasoning that were
to become typical in the free-trade literature of the nineteenth century.
Gervaise did not realize that his theorem about the allocation of resources can-
not tell against any of those protectionist arguments, such as the infant-
industry or the underemployment argument, which visualize conditions to
which that theorem does not apply. By neglecting this Gervaise moved away
from many valuable truths that had been unearthed by the mercantilist
writers and, like North, adopted an attitude that, though permissible in pure
theory, was bound to produce error when uncritically adhered to. The case of
the anonymous author is still worse. He leans heavily on the argument that,
because international trade consists of voluntary transactions, which therefore
must necessarily be to the advantage of both contracting parties, nothing but
advantage to the nation as a whole can result from it. North had also reasoned
like this. And Adam Smith, after pointing more suo to an obvious fact, namely,
that every individual will turn to that occupation for which he feels himself
best adapted, goes on to declare that ‘what is prudence in the conduct of
every private family, can scarce be folly in that of a great kingdom/ From the
standpoint of analytic technique, this was quite as bad as anything that can be
charged to the debit of the ‘mercantilist’ account. However, the error in-
volved will have to be discussed fully later on.

We have seen that, as far at least as economic analysis is concerned, there
need not have been any spectacular break between ‘mercantilists’ and ‘liberals.’
Without any prejudice to their political ideals or interests, economists of the
latter persuasion might have succeeded the economists of the former persua-
sion at the analytic task, much as one team of workmen succeeds another in
order to carry on the job. To some extent this is what happened. But to the
extent to which it did not happen, there was not only scrapping of outmoded
error but also needless waste — comparable to the waste that would result if suc-
cessive teams of workmen smashed the products of their predecessors, whenever
they disliked the latter’s politics. If Smith and his followers had refined and
developed the ‘mercantilist’ propositions instead of throwing them away, a
much truer and much richer theory of international economic relations could
have been developed by 1848 — one that could not have been compromised by
one set of people and treated with contempt by another.

Paterson, the founder of the Bank of England, Writings edited with biography by
Saxe Bannister, 2nd ed. 1859; and George Whatley, Reflections on Coin in General,
1762, reprinted in revised form as an appendix to the 2nd ed. of his Principles of
Trade , 1774, the only one I know) and one author who came near to being a free
trader (J. Jocelyn, An Essay on Money and Bullion, publ. 1718 but dated 1717). In
a history of free-trade doctrine they are all of them entitled to prominent places. But
Paterson’s advocacy of free trade moved on a popular level and Whatley and Jocelyn,
though not without merit, did not, so far as I can see, add anything to what had been
said before them.

Part III

From 1790 to 1870

’ CHAPTER 1

Introduction and Plan

1. Coverage 379

2. Paraphernalia ~ 380

3. Plan of the Part 383

4. Concerning the Marxist System 383

•- 1. Coverage

This part is to cover the history of economic analysis from the 1790’s to the
end of the 1860's or the beginning of the 1870’s. For a decade or two after
the publication of the Wealth of Nations there is little to report as far as
analytic work is concerned, and most of what there is has been fitted into
Part 11. I can see no point in insisting on a particular year, but if we did so
insist, we might start a new period of analytic activity with Malthus’ first
Essay on Population (1798). Publication of the first volume of Marx’s Das-
Kapital (1867), of Jevons’ Theory (1871), of Menger’s Grundsatze (1871), and
the foundation of the Verein fur Sozialpolitik (1872) are some of the events,
that clearly mark the advent of another period. ' \

.Periodizing, as we know, is a necessary evil. There is first an objection of
principle to it that applies independently of the particular way in which a,
writer periodizes: historical developments are always continuous and they cam
never be cut into pieces withput arbitrariness and loss. By refusing to date by
years, we do not solve the problem but only mitigate the consequences of our.
inability to solve it. Second, our particular way of periodizing, dictated as it
is by our concentrating on the history of economic analysis, will inevitably,
fail to satisfy those who are interested in something else. And, third, even,
from the standpoint of fellow students of the history of, analysis, there are
well-founded objections to a method that puts A. Smith near the end of the
preceding period instead of at the beginning of the one that might be said to,
have been dominated by his influence. Our recognition of all this will, show in
many ways, for example, in the fact that we do not deal in this Part with all
the authors who belong in it chronologically: — the most important instance is
Cournot — and that we include some who do not belong in it chronologically
— an instance is Cairnes. But I hold, nevertheless, that our periodization brings
out essential truth. This will be for the reader to judge. But we may mention
at once two facts that go some way toward justifying our procedure. First,
many historians before us have felt that this period formed a real unit. The
feeling has expressed itself in a distinctive name: it was called the ‘classic’
period of economics — in a sense quite different from that in which the term
is used, in this book. 1 It . retained this label until, at a time when the wprd

1 Let me recall that whenever the term is used in this different sense in this hook,'
it is put into quotes in order to prevent confusion. There are three meanings to be kept

379

380 III: FROM 1790 TO 1870

‘classic’ had lost its eulogistic connotation and was beginning to stand for
‘obsolete,’ Lord Keynes used the word in order to denote the teaching of
A. Marshall and his immediate followers (or simply, pre-Keynesian economics).
Second and more important, the time between the 1790’s and the end of the
1860’s does answer our criteria of a period: there was, first, fresh activity that
struggled hopefully with the deadwood; then things settled down and there
emerged a typical classic situation in our sense, spmmed up in the typically
classic achievement — again, in our sense of the term — of J. S. Mill, who under-
lined the fact by his attitude of speaking from the vantage ground of estab-
lished truth and by the naive confidence he placed in the durability of this
established truth. Then followed stagnation — a state that was universally felt
to be one of maturity of the science, if not one of decay; a state in which
‘those who knew’ were substantially in agreement; a state in which, ‘the great
work having being done,’ most people thought that, barring minor points,
only elaboration and application remained to be done.

2. Paraphernalia

Something that is very like envy comes in to spoil the smile with which
we are apt to greet the numerous passages in the writings of this period that
breathe immense complacency. Economists, or most of them, were evidently
as pleased with the results of their handiwork as some of them were to be
again in the 1930’s. We shall make an effort later on to understand that
happy state of mind in which economists saw a solid house where they had
erected nothing better than a flimsy shack: 1 we still underrate pre-Smithian
achievement; we still overrate the achievement of the ‘classics.’

The conditions under which this work was carried on may be briefly char-
acterized as follows. I hesitate to say that professional economics definitively
established itself during this period. It certainly cannot be said that economics
as a profession established itself, for the study of economic phenomena was
not yet a full-time job and few people were economists and nothing else:
many were businessmen, or public servants, or journalists, and even the aca-
demic teachers of economics, in many if not in most cases, also taught cognate
— or even completely different — subjects. Nevertheless, we have a right to
speak of a rapid process of professionalization that went on during that period:
from the first, economics had established its claim to a definite field of research;
it had become a definite specialty; it used definite methods; its results gained
in definiteness; and economists, even though fractional personalities, recog-
nized one another, and were recognized by the public, more definitely than
before. New political economy societies were founded; new journals, new dic-

distinct: the old meaning in which ‘classic’ denotes the economic literature of the
period under discussion plus A. Smith; Lord Keynes’s meaning; and our own. [J. A. S.
intended to treat this subject more fully in the unfinished Part 1. See also Part iv,
ch. 1.]

1 See, especially, the often ridiculed passage on value theory in Mill’s Principles,
Book hi, ch. 1, $2.

INTRODUCTION AND PLAN

381

tionaries, and new bibliographies appeared — all of which, however, meant
only continuation of previous practice . 2 The study of the history of economic
thought made a vigorous start 3 and there was, of course, a rising tide of text-
books, a few of which we shall mention as occasion arises.

2 Of the societies, the Political Economy Club of London (1821) was the most im-
portant; of the journals, the French Journal des economistes (1842); of the diction-
aries, the French Dictionnaire de Veconomie politique (Coquelin et Guillaumin,
1853-4). It is interesting to note that no journal exclusively devoted to scientific eco-
nomics was founded in England until 1890. In part, however, this was owing to the
existence of those excellent serious magazines, such as the Edinburgh Review , the
Quarterly Review, the Westminster Review, which accepted even strictly professional
stuff — a great compliment to the period’s reading public. Beyond using a very limited
number of articles that I found quoted in the '‘professional’ literature, I have not ex-
amined the contents of these periodicals — a serious lacuna in my work. I have examined
the Dictionnaire but only perfunctorily.

3 Historical references on individual points of doctrine date far back, of course. In
the eighteenth century appeared also several bibliographies but no histories that I know
of, except a few on the physiocrat school by Dupont and others. From the beginning
of the nineteenth century, however, an increasing interest in doctrinal history mani-
fested itself. The sketches of McCulloch (1824-5) and J. B. Say (1829; in the 6th
vol. of the Cours complet) are the only publications of this kind that need be men-
tioned here for the time until 1837 when the first edition of J. A. Blanqui’s Histoire
de Veconomie politique . . . (with a bibliographie raisonnee ) appeared. A number
of others, some of them confined to individual countries, followed to 1870. By 1858
this literature had grown sufficiently to induce Robert von Mohl (1799-1875) to in-
sert in the third volume of his Geschichte und Literatur der Staatswissenschaften
(1855-8) a chapter on Writings on the History of Political Economy. I shall mention
only: (1) McCulloch’s Literature of Political Economy (1845); (2) Ferrara’s prefaces
to Biblioteca dell’ Economista (in 1850-68, Francesco Ferrara edited two series of
Italian translations of foreign works which he prefaced by elaborate analyses that
form the bulk of his theoretical contribution and really sum up to a history of eco-
nomics; most of them were separately published in 1889-90); (3) Roscher (a great part
of W. Roscher’s work was in the field of doctrinal history. Within the period he wrote
his Zur Geschichte der englischen Volkswirthschaftslehre im sechzehnten und sieb-
zehnten Jahrhundert, 1851-52; Uber die Ein- und Durchfiihrung des Adam Smith’schen
Systems in Deutschland, 1867; and he poured out his enthusiasm about Oresmius
[see above, Part n, ch. 2] in Ein grosser Nationalokonom des vierzehnten Jahrhunderts,
1863; we add, immediately, his later Geschichte der Nationalokonomik in Deutsch-
land, 1874, the fruit of enormous labor); (4) Manuel Colmeiro’s Historia de la eco-
nomia politica en Espaha (1863), which does not strictly belong here but, together with
his Biblioteca (1880), still forms the best starting point for a study of Spanish econom-
ics. I acknowledge the help derived from Dr. E. Schams’s excellent study, ‘Die An-
fange lehrgeschichtlicher Betrachtungsweise in der Nationalokonomie,’ Z eitschrift fiir
Nationalokonomie (September 1931), and his and Professor O. Morgenstem’s ‘Eine
Bibliographie der allgemeinen Lehrgeschichten der Nationalokonomie,’ ibid. (March
1933), which, however, excludes articles and also all work in doctrinal history that was
incidental to theoretical investigations of primarily nonhistorical scope. Dr. Schams
dates the beginning of a ‘scientific’ epoch of doctrinal historiography from E. K.
Diihring’s (see below, ch. 4) Rritische Geschichte der Nationalokonomie und des
Socialismus (1871).

382

III: FROM I79O TO 1870

Research was largely financed by the research workers themselves: Tooke’s
achievement, for example, was possible only because he was a wealthy man;
in some cases, of course, the proceeds from commercial publication of results
proved adequate. Teaching was wholly inadequate, however. Even in those
countries where there had been provision for regular lectures before, such as
Germany, Italy, Spain, and Scotland, the intention was to provide a comple-
ment to other lines of study — law, for instance, or philosophy — rather than an
independently organized curriculum of training in economics per se. In the
United States a professorship of Moral Philosophy and Political Economy was
founded at Columbia in 1818, and a professor of chemistry was commissioned
to lecture on economics at South Carolina College in 1824. Teaching of sorts
had, however, been done before that at various places by people of the most
varied qualifications. In England, very few professorships or lectureships ante-
date the subsequent period. The one at Oxford was founded in 1825 — the
first incumbent was Senior — the one at University College, London, in 1828 —
the first incumbent was McCulloch — the one at Dublin in 1832 — the first in-
cumbent was Longfield — and there was a chair of history, commerce, and
finance at the East India College in Haileybury to which Malthus was ap-
pointed in 1805. 4 But stipends and other conditions of tenure amply prove
that founders and administrations did not even wish that people should hold
appointments for long, let alone that they should make them their life jobs.
In England a National Association for the Promotion of Social Science was
founded in 1857 in order to remedy this state of things, but it took decades
to achieve perceptible success.

This must be . taken into account in any appraisal of the period’s perform-
ance and still more in any appraisal of an individual’s performance. On an-
other occasion I shall have to emphasize that funds and chairs are not every-
thing, but here I have to emphasize that neither are they nothing. Under
those circumstances, men of brilliant ability and wide culture touched upon
our field so lightly that all their abilities and acquirements did not prevent
them from making insignificant economists — which is why, in our field and
for that period, a . given appraisal of the performance does not necessarily
imply appraisal of the man. 5

Barring a few lonely peaks abroad, England easily comes out first in that
period’s performance. In fact, that period was the specifically English period
in the history of our science. The unrivaled prestige that English economists
then enjoyed was only in part due to the glory that was irrationally reflected
upon them from the economic success of their country. Mainly, that prestige
was due to the quality of the work done by them, not only by a small number

4 In France, some provision was made, temporarily, in the 1790’s and then again
after the Napoleonic Wars, but only in Paris (see below, ch. 4, sec. 4).

5 If the reader will look up a biography of such a man as Pellegrino Rossi, he will
immediately realize the force of this remark. But even in such a case as that of J. S.
Mill, it is obvious that much of what strikes us as unsatisfactory in his Principles is
easily accounted for by- the fact that this work was largely written in an office with
Mill’s mind disturbed by. the calls of current duties.

INTRODUCTION AND PLAN 383

of masters, but also by a large number of able writers, who were nob in the
front rank but whose combined efforts amounted to a great deal.

3. Plan of the Part

We are going to change our method of presentation. In Part h we had not
only to cover a vast span of years but also to contend with the difficulty that
there was no generally accepted system to describe. Strictly speaking, no such
system existed in the period covered by Part iii. But there was something that
was almost though not quite as good. That is to say, the great majority of the
people who, as we have put it, recognized one another as economists agreed
sufficiently about the fundamentals of subject matter, method, and results to
make it possible to systematize their contributions, although they disagreed —
individually or groupwise — on practically every individual problem within that
frame of fundamentals. There was even more of common ground and, as be-
tween successive decades, of continuity than the individual writers would have
been prepared to admit. For, then as now, most economists were apt to stress
differences more than agreements, though there were important exceptions to
this, the most important being J. S. Mill. It is true that there were many dis-
sentients toto coelo, men who condemned the growing quasi-system of ‘classi-
cal’ economics root and branch. But most of these do not meet our test of
analytic competence. And others objected on nonanalytic, that is, mainly on
political, moral, or cultural grounds, so that their objections are not neces-
sarily 1 relevant for us, even where we sympathize with them.

Availing ourselves of these facts, we shall be able to do in this Part what
we were not able to do in Part n, namely, after having recalled the salient
features of the political and intellectual scenery (Chapters 2 and 3), to draw a
picture of analytic developments with reference to a cross section. This cross
section will be represented (in Chapter 5) by J. S. Mill’s Principles. But in
order to simplify matters, we shall relieve Chapter 5 of some of its burden,
by introducing ourselves to the most important individuals and groups before-
hand (Chapter 4) and by reserving the details of pure theory and of money, as
much as possible, for two separate chapters (6 and 7). Chapter 7 will also
take care of the little that must be said on banking and cycles.

4. Concerning the Marxist System

Our plan is simple and works well in all cases save one: the case of the
Marxist system. The difficulty is not, as might be supposed, that Marxist eco-
nomics stands aloof in splendid isolation and is incommensurable with the
rest of the work to be discussed. We shall see, on the contrary, that it is part
and parcel of that period’s general economics, which is precisely why it must
be fitted in here. I was not thinking of Marx when I spoke of dissentients

1 The reader will understand, of course, that a moral objection may constitute a
motive for finding factual or logical objections that are relevant for us.

384 III: FROM 1790 TO 1870

toto csslo in the preceding section, and he can and will be treated in this
book exactly as are other economists . 1 Nor does the difficulty arise from the
fact that he was also a sociologist. For his sociology can be fitted into its ap-
propriate place just as well as can his economics. The difficulty is that in
Marx’s case we lose something that is essential to understanding him when
we cut up his system into component propositions and assign separate niches
to each, as our mode of procedure requires. To some extent this is so with
every author: the whole is always more than the sum of the parts. But it is
only in Marx’s case that the loss we suffer by neglecting this 2 is of vital impor-
tance, because the totality of his vision, as a totality, asserts its right in every
detail and is precisely the source of the intellectual fascination experienced
by everyone, friend as well as foe, who makes a study of him. The way in
which I propose to meet this difficulty cannot be satisfactory to the orthodox
Marxist for whom Marx is the central sun of social science. Nor can it be satis-
factory to him who wants artistic pictures of individual thinkers. But it is per-
fectly satisfactory for every reader who wants the picture of the evolution of
technical economics that this book is intended to present. We recognize fully,
but do not mean to duplicate, the distinct task of Marxology. We shall not
disturb our plan. We shall take Marx’s work to pieces and shall use, with
strict economy, only what is relevant to our purpose, in the places indicated by
our purpose. But we shall use the rest of this section in order to comment on
the whole.

1. Marx figures in this book only as a sociologist and an economist. Of course,
that creed-creating prophet was much more than this. And his creed-creating
activity, on the one hand, and his policy-shaping and agitatorial activity, on
the other hand, are inextricably interwoven with his analytic activity. So much
is this the case that the question arises whether he can be called an analytic
worker at all. This question may be answered in the negative from two very
different standpoints. The orthodox Marxist, for whom the prophet’s every
word is eternal truth and for whom dissent spells not only error but sin, will
return a negative answer, but in this particular sense: on Marx’s Hegelian emi-
nence, acting and reasoning, reality and thought, become identical; analysis
cannot, on that level, be divorced from practice; therefore, if we do call Marx’s
thought analytic, we ought to add at once that it was analytic in a sense that

1 Since this point is both very important and likely to cause surprise to some read-
ers, I wish, besides referring them to what they will read in subsequent chapters, to
state at once that this surprise is entirely due to the atmosphere of prophetic wrath
in which Marx presented his economic analysis and which, to layman and philosopher,
makes it look like something entirely different from any other. It is true, in addition,
that the Anglo-American professional literature, both in this and the next period,
treated him as an outsider. But in that literature other foreign economists of first rank
fared no better in this respect.

2 We never neglect this quite. In all the more important cases, economists are ‘intro-
duced’ to the reader and these introductions give us the opportunity to look at per-
sonal performances as a whole. But I cannot go too far in this, for theorems and
not persons are the heroes of our story.

INTRODUCTION AND PLAN

3 8 5

differs essentially from the usual one; hence, his work is not analytic in the
usual sense, and the author of this book, congenitally incapable of doing jus-
tice to it, ought to keep his unholy hands off it. Some anti-Marxists would
agree in the result, though they might formulate it differently by advising me
to keep my hands off the unholy thing: for them, Marx’s work is a series of
essentially unscientific diatribes, penned by a man congenitally unable to see
a fact or to reason straight.

My answer to our question is, "however, in the affirmative. The warrant for
this affirmative answer is in the proposition that the bulk of Marx’s work is
analytic by virtue of its logical nature, for it consists in statements of relations
between social facts. For instance, the proposition that a government is essen-
tially an executive committee of the bourgeois class may be entirely wrong;
but it embodies a piece of analysis in our sense, acceptance or refutation of
which is subject to the ordinary rules of scientific procedure. It would be ab-
surd indeed to describe the Communist Manifesto, in which this proposition
occurs, as a publication of scientific character or to accept it as a statement
of scientific truth. It is not less absurd to deny that, even in Marx’s most scien-
tific work, his analysis was distorted not only by the influence of practical
purposes, not only by the influence of passionate value judgments, but also by
ideological delusion . 3 Finally, it would be absurd to deny the difficulty that in
some cases rises to impossibility of disentangling his analysis from its ideolog-
ical element. But ideologically distorted analysis is still analysis. It may even
yield elements of truth. To sum up: we shall not chant O Altitudo each time
Marx’s name turns up in the following pages; but neither do we put him out
of court a limine ; we simply recognize him as a sociological and economic ana-
lyst whose propositions (theories) have the same methodological meaning and
standing and have to be interpreted according to the same criteria as have the
propositions of every other sociological and economic analyst; we do not recog-
nize any mystic halo . 4

3 On the difference between these three kinds of distortion, see above, Part i.

4 Let me repeat this: due account being taken of differences in definitions and in
degree of abstraction, every Marxist proposition is to carry the meaning which it would
carry if penned by, say, Ricardo. This formulation takes care of a claim often, and
sometimes justly, made by Marxists, viz. that critics (and even followers) of Marx
are likely to miss his meaning by failing to attend to the facts that (1) Marx's termi-
nology differs from that of other economists (the word Value e.g., simply means dif-
ferent things with Marx and J. S. Mill); and (2). that he reasons, in different parts of
his work, on widely differing levels of abstraction. At the same time, that formulation
spells refusal to admit another claim, noticed above, that is sometimes made by Marx-
ists and is implied in their answer to the question concerning the logical nature of
Marx’s analysis, namely, the claim that Marxist propositions have, as it were, an astral
body that is exempt from the ordinary rules of scientific procedure. Our reply to this
is: Marx reasons about the empirical world by the methods of empirical analysis; hence
his propositions — as every Marxist who discusses criticisms at all, recognizes by impli-
cation — have the usual empirical meaning or none. On the influence on him of
Hegelian philosophy, see below, ch. 3, sec. lb.

386 in: FROM 1790 TO 1870

11. Since Marx counts for us only as far as he was a ‘scientific’ sociologist
and economist, we need not consider any aspects of his career, activities, or
personal character that are not relevant to his ‘scientific’ work. I wish to dis-
claim any intention to ‘size him up’ as a man, and this also applies to his
friend and faithful ally, Engels. Some facts, however, are necessary in order
to see the work of each in its proper light. They are presented in the footnote
below . 5 Let us underline a few of them. First, .nobody will understand Marx and

5 Karl Heinrich Marx (1818 83) was the product of a thoroughly bourgeois environ-
ment that failed to provide economic independence* and of a thoroughly bourgeois
education that made him (as it makes so many) an intellectual, a radical, and a
scholar — the radicalism being of the bourgeois brand of his time and the scholarship
being of the historico-philosophical, as distinguished from the mathematico-physical,
type. As much by choice as by necessity, he took to journalism rather than to . the
academic career and in 1843 went to Paris, where he met Engels and economics
(which he had touched only peripherically before) and where he made his position
definitively socialist. In 1849, he settled in London for good and, for such a voracious
reader, this is almost equivalent to saying that he settled in the British Museum
library for good. Active revolutionism — such as he had practiced in 1 848 in Germany —
was finished, and his research work was for the rest of his life interfered with only
by the necessity of earning his bread (in part by journalistic work), by his activity in
the First International (1864-72), and later on also by failing health. The standard
biography is still F. Mehring’s (1918). Though in some respects less marred by nar-
row prejudice than are other works of this writer and in general commendable, it
calls for a protest on behalf of Marx in one respect: it entirely failed to do justice
to the scientific element in Marx’s work. We ourselves may find in his works abundant
proofs of ideological bias, but Mehring goes too far when he credits Marx with nothing
but an intention to formulate proletarian ideology (of course he means to be compli-
mentary) .

Friedrich Engels (1820-95) interspersed a fairly successful business career with revo-
lutionary activities until 1869, when he retired from business in order to serve the
cause of Marxist socialism for the rest of his life. Among other things he became the
warden of Marx’s literary remains after the latter’s death and, in addition, something
of an oracle and elder statesman (hence the object of attack by a younger generation)
to the German Social Democratic party. His self-effacing loyalty cannot but command
our highest respect. Throughout he aspired only to be the faithful henchman and
mouthpiece of the Lord Marx. It is therefore only from necessity that I point out —
for it is necessary to do so to enable the reader to understand our situation with re-
spect to the Marxist manuscripts that Engels edited — that he was not Marx’s intel-
lectual equal and that, while fairly up to the latter’s philosophy and sociology, he was
particularly deficient in technical economics. Of his own economic publications, Die
Lage der arbeitenden Klasse in England (1845) will be mentioned again: however
biased, it is a creditable piece of factual research, nourished by direct observation.
The ‘Umrisse zu einer Kritik der Nationalokonomie’ (in Ruge’s and Marx’s Deutsch-
iranzosische Jahrbiicher, 1844) and his Herrn Eugen Dilhring’s Unwalzung der
Wissenschaft (1878; English trans. Anti-Diihring, 1907) are distinctly weak perform-
ances. His philosophical and sociological publications, though not original, keep a
higher level. We shall have no occasion to mention either again. But these remarks,
let me repeat, should not induce us to think less of the man whose name is fully en-
titled to the honorific position it holds in the history of German socialism, In par-

INTRODUCTION AND PLAN

387

Engels who does not properly weigh the implications of their bourgeois cul-
tural background, which is one of the reasons, though not the only one, why
Marxism must be considered as a product of the bourgeois mind, a product
that grew from eighteenth and early nineteenth-century bourgeois roots. The
belief that it ever meant or could mean anything to the masses or in fact to any
group, except a limited number of intellectuals, is one of the most pathetic
elements in the personal ideology of Marx and Engels . 6 Second, our informa-
tion enables us to form a pretty clear idea of Marx’s opportunities for concen-
trated work. At times, he indulged in activities and lived under conditions that
are bound to get on a man’s nerves and to be more destructive of his scientific
work than we might infer from the hours actually absorbed. Nevertheless, he
had, on the average, an amount of time 'to himself’ that compares favorably
with the amount that is left, also on the average, to the typical American pro-
fessor of our own day. And he used it to the full. Again, nobody will ever un-
derstand Marx and his work who does not attach appropriate weight to the
erudition that went into it — the fruit of incessant labor that, starting from
primarily philosophical and sociological interests in his early years, was con-
centrated increasingly on economics as time went on, until his working hours
were all but monopolized by it. Nor was his the kind of mind in which schol-
arly coal puts out the fire: with every fact, with every argument that impinged
upon him in his reading, he wrestled with such passionate zest as to be in-
cessantly diverted from his main line of advance. On this I cannot insist too
strongly. This fact would be my central theme were I to write a Marxology.
Perusal of his Theorien iiher den Mehrwert suffices to convince one of it. And,
once proved, it serves to establish in turn another fact and to solve a much
discussed riddle: it serves to establish that he was a born analyst, a man who
felt impelled to do analytic work, whether he wanted to or not and no matter
what his intentions were; and it serves to solve the riddle why he failed to
finish his work but instead left us heaps of disorderly manuscripts that no
labor of love availed to put into an acceptable shape.

Third, our information warrants the statements that he was very much a
philosopher dabbling in sociology and politics (as do so many philosophers)
until he went to Paris; that there he quickly made headway and found his

ticular nothing is further from my mind than a wish to suggest that he was Marx’s
slave. In the 1840’s he may even have helped to educate Marx in economics and in
socialism, for at that time he was much further along. There are several biographies.
It suffices to mention D. Ryazanov’s Karl Marx und Friedrich Engels (English trans.,
1927, Russian original unknown to me); there is a bibliography of works on both Marx
and Engels in Marx-Engels Institute (later the Marx-Engels-Lenin Institute), Marx-
Engels Archiv, vol. 1, 1926. [The first two volumes of the Marx-Engels Archiv were
published in German and in a parallel Russian edition; subsequent volumes have been
published in Russian only.]

6 Marx took himself in and helped to foster the same delusion in his followers by
building into his structure a sufficient number of phrases — very coarse ones among
them — which indeed everyone can understand and which are what Marxism means to
the vulgar, perhaps even to people who are not covered by this term.

388 III: FROM 1790 TO 1870

feet as an economist; and that by the time he and Engels wrote the Com-
munist Manifesto (1847; published 1848); that is to say, at the age of 29/ he
was in possession of all the essentials that make up the Marxist Social Science,
the only important lacunae being in the field of technical economics. For the
rest, the main line of his intellectual life may be described as a series of ef-
forts to work out that Social Science and to fill those lacunae — tasks which, I
believe, Marx did not expect would involve any insurmountable difficulties,
though he did expect that a great deal of further work would be required to
straighten out and co-ordinate everything that was to find a place within the
vast structure.

This interpretation is not the usual one. It attributes to Marx an early con-
ception of all that is fundamental in his scheme of thought and, barring points
of comparative detail, a large amount of consistency in developing it, spring-
ing from a theoretical purpose and plan that never varied in essentials.
Even Marxists, who may be expected to sympathize with this view, will find it
too simple; but Marx critics will declare it to be downright wrong. Accord-
ingly some defense is necessary. The relevant facts are these. In 1859, Marx
published Z ur Kritik der politischen Okonomie, which evidently was to be the
first installment of a comprehensive exposition and therefore constitutes proof
that he must have thought himself equipped to write one. The fact that he
abandoned this torso proves that he was not, and that he felt he had made an
unsatisfactory beginning. But what of it? This is exactly what must be ex-
pected to happen in an enterprise of such magnitude — which, moreover, in-
volves, on the economic side, a large amount of detail, theoretical still more
than factual — and cannot be taken as proof that something had gone wrong
with fundamentals. He started afresh and, after struggles that are most in-
structively reflected in some of the manuscript material eventually published in
three volumes by Kautsky (T heorien iiber den Mehrwert, 1905-10), brought
out a new first installment ( Das Kapital , first vol., 1867). 8 The fact that no
second volume followed during Marx’s lifetime and that Engels had to edit
the second volume (1885) and to compile a third one (1894), both from un-
finished manuscripts, is interpreted by anti-Marxists to mean confession of
failure: Marx, so they said, became conscious of the presence in his system of
irreconcilable inconsistencies (especially in his value theory), and therefore re-
fused to go on. From the Theorien iiber den Mehrwert it can be shown, how-
ever, that Marx, when he published the first volume, was perfectly aware of,
and had planned for, what to his critics appeared to be irreconcilable incon-
sistencies. His correspondence, it is true, establishes the fact that he deferred

7 If this be so, it would afford another illustrative instance for Ostwald’s theory
that thinkers conceive their truly original ideas before they are 30.

8 This is all I have to say on the question whether and why Marx changed his plan.
The question, interesting as it is for Marxology, is quite irrelevant to my interpreta-
tion. Any changes of plan are readily understandable in all cases of protracted efforts.
See, however, H. Grossmann: 'Die Anderung des urspriinglichen Aufbauplans des
Marxschen "Kapitals” und ihre Ursachen,’ A rchiv fur die Geschichte des Sozialismus
und der Arbeiterbewegung, 1929.

INTRODUCTION AND PLAN

389

tlie completion of the second volume for reasons that do not read too convinc-
ingly. But surely this can be explained by the growing resistance of an aging
organism that was afraid of new efforts. Thus, the facts mentioned cannot be
held to disprove my interpretation. The positive reasons I have for preferring
it are his method of work that has been alluded to above, and my theorist’s
knowledge of what Marx’s theoretical difficulties were — from his standpoint,
they were not insurmountable. This is, of course, quite compatible with my
conviction that Marx’s system is seriously at fault. I mean only that he could
have presented a comprehensive economic theory without violating logic — he
would always have had to do violence to facts.

in. Since we have decided to do what Marxists — perhaps rightly — resent,
namely, to take the Marxist structure to pieces and to discuss each of these
pieces in the places in which they belong, we shall not get an over-all view of
it anywhere. The following comments are intended to offer a partial substitute
for such a view.

The ‘pieces’ divide up into two groups, one sociological and the other eco-
nomic. The sociological pieces include contributions of the first order of im-
portance such as the Economic Interpretation of History, which, as I shall
argue, may be considered as Marx’s own, quite as much as Darwin’s descent
of man is Darwin’s own. But the rest of Marx’s sociology — the sociological
framework that, like every economist, he needed for his economic theory — is
neither objectively novel nor subjectively original. His preconceptions about
the nature of the relations between capital and labor, in particular, he simply
took from an ideology that was already dominant in the radical literature of
his time. 9 If, however, we wish to trace them further back, we can do so with-
out difficulty. A very likely source is the 'Wealth of Nations. A. Smith’s ideas
on the relative position of capital and labor were bound to appeal to him, espe-
cially as they linked up with a definition of rent and profits — as ‘deductions
from the produce of labour’ (Book 1 , ch. 8, ‘Of the Wages of Labour’) — that is
strongly suggestive of an exploitation theory. But these ideas were quite com-
mon during the enlightenment and their real home was France. French econo-
mists, ever since Boisguillebert, had explained property in land by violence,
and Rousseau and many philosophers had expanded on the subject. There is,
however, one writer, Linguet, who, more explicitly than others, drew exactly
the picture that Marx made his own: the picture not only of landlords who
subject and exploit rural serfs, but also of industrial and commercial employ-
ers who do exactly the same thing to laborers who are nominally free, yet
actually slaves. 10

9 It is in this field that Mehring’s interpretation of Marxist doctrine (as a verbaliza-
tion of proletarian ideology) comes nearest to being true. Our quarrel with him is only
that he extended this interpretation to the whole of Marx’s work.

10 S. N. H. Linguet (1736-94), a barrister and journalist, was a prolific and bellicose
writer, who is difficult to classify. He criticized the physiocrats (R eponse aux docteurs
modernes . . . 1771) and took part in many controveries of his day without making
any mark. But one of his books is of great interest for us, his Theorie des loix civiles
(1767), neither because of its attack upon Montesquieu nor because of Morellet’s biting

390 III: FROM 1790 TO 1870

This sociological framework offered most of the pegs that Marx needed in
order to have something upon which to hang his glowing phrases. And since
historians are primarily interested in these, no matter whether they admire
them or are shocked by them, it is difficult to gain assent to what is the ob-
vious truth about the nature of the purely economic pieces of the Marxist sys-
tem. This obvious truth is that, as far as pure theory is concerned, Marx must
be considered a 'classic’ economist and more specifically a member of the
Ricardian group. 11 Ricardo is the only economist whom Marx treated as a
master. I suspect that he learned his theory from Ricardo. But much more im-
portant is the objective fact that Marx used the Ricardian apparatus: he
adopted Ricardo’s conceptual layout and his problems presented themselves
to him in the forms that Ricardo had given to them. No doubt, he trans-
formed these forms and he arrived in the end at widely different conclusions.
But he always did so by way of starting from, and criticizing, Ricardo — criti-
cism of Ricardo was his method in his purely theoretical work. Only three out-
standing illustrations can be mentioned here: Marx substantially accepted the
Ricardian theory of value (see below, ch. 6) and defended it by the Ricardian
arguments but, recognizing that Ricardian values cannot be expected to be
proportional to prices, tried to work out a different theory of the relation be-
tween the two; Marx, following Ricardo’s lead, ran up, as Ricardo did, against
the problem of surplus value but, recognizing that Ricardo’s solution really
was no solution at all, developed his exploitation theory from the Ricardian
set-up; Marx wholly accepted, down to details, Ricardo’s theory of technolog-
ical unemployment but, finding it inadequate for his purposes, tried to turn
into a general ‘law’ what with Ricardo was no more than a possibility. It is
hoped that these points will become clearer as we proceed (chs. 5 and 6). Here
they are mentioned by way of anticipation to give definiteness to the meaning
of my statements that Ricardo was Marx’s master, and that Marx, though he
transformed the theoretical material he found, yet worked with tools that he

reply, but because it unfolded a quite elaborate historical sociology, the central theme
of which was the enslavement of the masses. I do not know that the book had much
influence. But, as a symptom at least, it stands at or near the fountainhead of the
ideology that Marx and many others, nonsocialists among them, have substituted for
capitalist reality, and on which sophomoric enthusiasms feed even today. Linguet sup-
plied not only the picture but also the characteristic spirit with which to look at it.
An example will illustrate. Linguet adopts the theory that in the dawn of civilization
there were agrarian populations, living in substantially equalitarian conditions, and that
a kind of feudal society arose through the subjection of those populations by war-
like tribes who established themselves as their lords. There is much to be said for this
theory, which is in fact accepted by some modern prehistorians. Now, however, among
the results of this subjection that created lords and serfs is everything we include in
the term 'culture/ But Linguet has no eye for this. It is the fact of subjection that
matters to him and nothing else. And his conclusion is moral indignation and nothing
else.

11 Observe that, so far as theory is concerned, this makes Marx an English econo-
mist. And he was one.

INTRODUCTION AND PLAN

391

found and not with tools that he created. This is only another way of ex-
pressing that, however ‘secular’ a phenomenon Marx may have been in some
respects, he was essentially period-bound as a theoretical technician — a fact
that later on created many a difficulty for followers who felt unable to admit
that Marx could ever grow out of date in any respect.

However, in order to drive home a point that seems important, I have strictly
confined myself in the preceding paragraph to Marx’s theoretical technique.
But there are two features of Marxist theory that transcend technique. And
these were not period-bound. The one is his tableau economique. In his anal-
ysis of the structure of capital, Marx developed Ricardo once more. But there
is an element in it that does not hail from Ricardo but may hail from Ques-
nay: Marx was one of the first to try to work out an explicit model of the
capitalist process . 12 The other is still more important. Marx’s theory is evolu-
tionary in a sense in which no other economic theory was: it tries to uncover
the mechanism that, by its mere working and without the aid of external fac-
tors, turns any given state of society into another . 13

iv. This is all that our space permits us to say about the Marxist system in
general and about the manner in which the component parts of it will be taken
into account in this book . 14 A reader’s guide should follow now. But I feel un-
able to produce one. Marx was so diffuse and repetitive a writer, and, barring
the first volume of Das Kapital, his theoretical works reflect so unfinished a
state of his argument, that it is impossible to point out what is most signifi-

12 The next economist to try his hand at this task was Bohm-Bawerk (see below.
Part iv, chs. 5 and 6). The affinity between the two is hidden by phraseology and by
trappings, but is nevertheless real and close.

13 Marxologists sometimes speak of Marx’s methods’ being essentially ‘historical.’
This phrase carries in this connection two different meanings: it means, first, that
different parts of Marxist theory may have been intended by Marx to apply to differ-
ent states of society; and it means, second, what is meant above by the word ‘evolu-
tionary.’ Both meanings are capable of defense. But the phrase is infelicitous all the
same, because it also carries other meanings — among them the one that is most natu-
rally associated with the word ‘historical’ — that do not apply to Marxist theory. (On
the evolutionary aspect of Marx’s theory, see below, ch. 3, sec. 4b.)

14 The reader need not, perhaps, be told again how incomplete all this is. But there
is one point that merits explicit notice. I have emphasized the influence that Smith
and Ricardo exerted upon Marx. I have mentioned the influence of Quesnay only as
a possibility, because Marx’s model might have been developed independently from
the Ricardian base. But some other possible influences I have not mentioned at all.
Many have been asserted by other historians and, since Marx’s knowledge of literature
was very nearly exhaustive, the possibility that they are right cannot be excluded. But
there is no cogent reason for assuming other influences more specific than what is
inevitably implied in his having read, analyzed, and criticized very many other people.
I have therefore economized space by not mentioning any of the suggestions that have
been offered. In fact, as soon as one has grasped the importance of Ricardo’s influence,
which Marx did nothing to hide, and, in addition, the caliber of Marx’s mind, one
will automatically cease to be interested in those suggestions, let alone accusations of
plagiarism.

592 III: FROM 1790 TO 1870

cant with any confidence. Instead of attempting an impossible task, I shall
refer my readers to a book by Dr. Sweezy (the work of an accomplished theorist
and a monument of unswerving loyalty) which presents Marx’s economics in
the most favorable light and, in addition, is the best introduction to Marxist
literature I know . 15 Relying on this reference, I shall confine myself to tender-
ing the following pieces of advice.

There is no point whatever in perusing selected bits of Marx’s writings or
even in perusing the first volume of Das Kapital alone. Any economist who
wishes to study Marx at all must resign himself to reading carefully the whole
of the three volumes of Das Kapital and of the three volumes of Theorien
iiber den Mehrwert . 16 Further, there is no point whatever in tackling Marx
without preparation. Not only is he a difficult author but, owing to the nature
of his scientific apparatus, he cannot be understood without a working knowl-
edge of the economics of his epoch, Ricardo in particular, and of economic
theory in general. This is all the more important because the necessity for it
does not show on the surface. Again, the reader must be on his guard against
being misled by traces of Hegelian terminology. It will be argued below that
Marx did not allow his analysis to be influenced by Hegelian philosophy. But
he sometimes uses terms in their specifically Hegelian sense, and a reader who
takes them in their usual sense misses Marx’s meaning. Finally, a reader who
wishes for anything other than indoctrination must, of course, learn to distin-
guish both facts and logically valid reasoning from the ideological mirage. Marx
himself helps us in this: sometimes, becoming semiconscious of ideological
delusion, he rises, in defense, to the heights of his vituperative rhetoric, which
therefore serves to indicate the spots at which there is something wrong.

15 Paul M. Sweezy, The Theory of Capitalist Development (2nd ed., 1946). My
recommendation does not imply agreement with all of Sweezy’s interpretations, espe-
cially with his attempt to make a Keynesian of Marx. Attention is drawn to the well-
chosen entries in the bibliography, to which I have only one item to add: W. Lexis
[J. A. S. here inserted the title of Bohm-Bawerk’s criticism of Marx, Z um Abschluss
des Marxschen Systems (1896) — obviously a slip. He probably intended to refer to a
review article written by Lexis after the publication of vol. ni of Das Kapital , namely,
‘The Concluding Volume of Marx’s “Capital” ’ in the Quarterly Journal of Econ-
omies October 1895]. The importance of Bortkiewicz’s contribution has been abun-
dantly emphasized in Sweezy’s text.

16 The Communist Manifesto is also indispensable, of course. But for any purpose
short of becoming a Marxologist, I think that nothing need be added except the
Class Struggles in France, articles written in 1848-50, published as a book, with an
introduction by Engels in 1895. Only the Marxologist need go into Marx’s corre-
spondence.

CHAPTER 2

Socio-Political Backgrounds

1. Economic Development 396

2. Free Trade and Foreign Relations 397

3. Domestic Policy and Sozlalpolitik 399

4. Gladstonian Finance 402

5. Gold 405

During the last decade or so before the French Revolution, some of the
traits became visible of a social and political pattern that, after the revolu-
tionary and Napoleonic Wars and their immediate consequences were over,
more or less established itself for the rest of the nineteenth century. It seems
desirable to touch upon a few of its essential features, if only to correct some
misapprehensions the reader’s mind may harbor and to soften the unrealistically
definite colors in which the various ideological traditions have painted it.

In doing so we shall have to struggle with a difficulty that is not new to us.
We are going to try to visualize an economic and social structure— in process
of incessant change, of course — and the cultural superstructure that was either
associated with it or, according to Marxist doctrine, generated by it: we call it
the civilization or the spirit of the times, or the Zeitgeist . 1 But this Zeitgeist
is never a structural unit. It is always an imperfect synthesis of warring ele-
ments and can never be described truthfully in terms of a few consistent ‘prin-
ciples.’ The most obvious reason for this is that at any given time both the
economic and social structure of a society and its Zeitgeist contain elements
that hail from historically prior states. But there are other and more funda-
mental reasons, less easy to explain, which make it impossible to analyze what
happens in a social organism in terms of processes that conform to the imma-
nent logic of its state and in terms of processes that are induced by the re-
sistance of survivals or, still more superficially, as ‘progress’ and ‘reaction.’ The
conceptual arrangement we are going to use bears witness to this difficulty.

On the whole, however, it may be averred that, though the peak of bourgeois
ascendancy occurred in the subsequent period, it was in the period under sur-
vey that the ascent of the business class was most nearly unimpeded, most
nearly unchallenged. In the great nations, the bourgeoisie did not rule politi-
cally, the most important exceptions being the United States and, for the sev-
enteen years of Louis Philippe’s regime, France. But in all countries the gov-

1 The Marxist term Uberbau is satisfactorily rendered by its literal translation, super-
structure. But for the German word Zeitgeist there is no perfect equivalent. Hence I
am going to use it (as I do other foreign terms that are hard to translate exactly) just
as American physicists use Eigenschwingung and American philosophers, Weltan-
schauung.

393

394 111 : from 1790 to 1870

ernments, however unbourgeois in origin and structure, not excluding those
that have been voted most ‘reactionary’ by bourgeois oppositions, backed the
economic interests of the business class almost without question and did their
best to protect them. 2 Still more important, they did so in a spirit of laissez-
faire, that is to say, on the theory that the best way of promoting economic
development and general welfare is to remove fetters from the private-enter-
prise economy and to leave it alone. This is what will be meant in this book
by Economic Liberalism. The reader is requested to keep this definition in
mind because the term has acquired a different — in fact almost the opposite —
meaning since about 1900 and especially since about 1930: as a supreme, if un-
intended, compliment, the enemies of the system of private enterprise have
thought it wise to appropriate its label.

By Political Liberalism, which must be distinguished from economic liberal-
ism as our footnote amply shows, we mean sponsorship of parliamentary gov-
ernment, freedom to vote and extension of the right to vote, freedom of the
press, divorce of secular from spiritual government, trial by jury, and so on,
including retrenchment and pacific, though not necessarily pacifist, foreign
policy. This was the program 3 of the first phase of the French Revolution. A
tendency to carry it out eventually asserted itself everywhere. But the rates of
speed differed widely as between different countries and so did the combina-
tions of forces and circumstances that were responsible for each step.

The rate at which the business class itself was converted to political liberal-
ism also differed widely, and not only as between different countries, but also
as between different subgroups of the bourgeoisie. Not even economic liberal-
ism was welcomed everywhere and by the whole business class; political liberal-
ism came to large sectors of it like an undesired child. The adherents of the
Spanish Constitution of 1811, who were the first to call themselves liberates ,
had not the whole bourgeoisie behind them. Neither had the French liber aux
of the 1820’s. It was a wing only, which was but semirecognized and received
also nonbusiness support from intellectuals and the masses, that forced the pro-

2 The Prussian government of the Stein-Hardenberg era, the Austro-Hungarian gov-
ernment from 1849 to 1859, an d the Russian government throughout, are the most
striking examples of governments that, though surely autocratic enough, adhered, so
far as the principles and tendencies of their economic policy is concerned, to what I
am about to call economic liberalism. This may read surprisingly. But the reason why
it does so is only that these countries were, at the beginning of the period, so far re-
moved from a state of individual freedom in the economic sphere, and that, in their
conditions (especially in the conditions of Russia), progress toward this state had to
be so slow that the tendency does not show so spectacularly as it does in England.
Perusal of any economic history of Europe and, to some extent, the comments that
are to follow in the text will, however, convince the reader. In order to understand
the economic literature of the period, this fact is of prime importance. Botl^Prussian
and Russian Smithianism was not just a literary fad indulged in by opposr ^^ r its
stronghold was in the conservative bureaucracies.

3 Certain items of it are disputable. For example, men whose right to be called
political liberals cannot be denied opposed free public education. Not all liberals spon-
sored extension of the franchise; some conservatives did.

SOCIO-POLITICAL BACKGROUNDS

395

gram of political liberalism upon a not-quite-willing majority, though this ma-
jority was converted in the end. In England, this shows quite clearly in the
way in which first the Whigs and then the Palmerstonians were pushed along
by a small group that was known as 'radical.’ This group, or at least its intel-
lectual core, the Philosophical Radicals, is of particular interest to us because
some of the most important English economists belonged to it or sympathized
with it. But unlike their successors of a later day, these radicals were not at
all what we should call radical in matters of economic policy. Some of them,
J. S. Mill in particular, visualized indeed a different organization of economic
activity for a more or less distant future. For the time being, however, they
were economic liberals in the sense defined above, or what we should now
call conservatives. Their radicalism found plenty to do in the purely political
sphere. Moreover, at the beginning of the period, laissez-faire — and in particu-
lar free trade — was not as yet established policy. It was something to be fought
for, fresh not stale, and something that was felt to be 'progressive/ It attracted
the majority of intellectuals instead of disgusting them. Their idea of reform
was to clear the economic system of what they regarded as nonessential 'abuses’
in order to allow laissez-faire to work itself out fully. 4 They were supporters of
the new Poor Law and no friends to Chartism, still less to any of the-socialist
groups that were in existence then. 5

Thus the correlation between the interests and attitudes of the bulmess
class and liberalism was anything but perfect. In addition, as we have already
observed, it was by no means only its own left wing that pushed the bourgeoisie
along. Conservative governments — and not only the autocratic ones, but also
the English conservative governments — had a decisive share in the progress
toward economic liberalism. Moreover, groups, strata, parties, and attitudes of
noncapitalist origin, though they had to yield occasionally, held their own on
the whole. The period’s political history bears witness to this. So does its reli-
gious history. The period indeed begins and ends with a decade in which in-
difference or even actively hostile laicism prevailed. But between the Napo-
leonic Wars and the 1860’s, the Catholic Church experienced a marked re-
vival of activity and power that was paralleled in Protestant countries, espe-
cially in England (evangelical movement on the one hand, Oxford movement
on the other). Nor do the period’s currents of thought outside the religious
sphere fit into any simple schema. Tory democracy put in an appearance.

4 It is, therefore, understandable that Marx and the Marxists should have professed
contempt for bourgeois radicalism — though they transferred their contempt also to
the radicalism, of a later time — that they should have looked upon it as a sham that
was really meant to preserve what it pretended to reconstruct. But understandable
though such an opinion is in people who felt themselves to be the competitors of
bourgeois radicalism, it is nevertheless quite wrong (1) because radicals and, drawn
along by them, simple liberals helped labor to gather in a harvest of considerable
value even in the economic field; and (2) because their work in the political field cre-
ated the conditions under which socialist parties were able to grow to numerical
importance.

5 On the Chartist Movement , see the book with this title by M. Hovell (1918).

396 m: FROM 1790 TO 1870

Naive radicalism — and the philosophical radicals were nothing if not naive —
certainly did interpret all these things as survivals. Only the subsequent period
was to show that, when they thought they fought the past, they were really
fighting the future.

A bird’s-eye view of the intellectual scenery of the period and of some de-
velopments in fields of particular interest to the economist will be presented
in the next chapter. The rest of this one will be devoted to a survey of the
policies of the period. For brevity’s sake, we shall confine ourselves almost
entirely to economic policies and to the English paradigm.

1. Economic Development

The liberal intermezzo was everywhere, but most spectacularly in England,
associated with an economic development which, so far as we can judge, was
unprecedented — all the achievements of the early and middle railroad age. It
was easy to attribute that impressive sequence of undeniable successes to the
policy of economic liberalism as its main or even only cause. The reader will
understand that, however inadequate, this theory was far from being wholly
wrong. It cannot reasonably be doubted that, in the historical conditions of
that epoch, the removal of fetters from the energies that crowded into business
pursuits, together with a policy that guaranteed to the businessman secure en-
joyment of success and at the same time made it clear to him that he had no
help to expect in case of failure, must in fact have had the energizing in-
fluence that was extolled until the argument got stale through repetition. Thus
the system kept on justifying itself in the eyes of most contemporaneous ob-
servers, even of those who, like J. S. Mill, bore it no love. Such complacent
registration of 'progress’ seems strange to us who look back upon that age from
different standpoints and in a different humor and abhor the atmosphere of the
hard-driven homes of rising industrialists almost as much as the squalid dwell-
ings of their workmen. But let us remember that much of all that offends us
now was in the nature of childhood diseases — some of which were passing
even at the time of Marx’s glowing indictments — and that the economic
promise, which the system of free enterprise held out to all, was not. an empty
one: the standard of living of the masses remained low, but it rose steadily
almost all the time; ever-growing numbers were absorbed at increasing real
wages; the 'free breakfast table’ of the English free traders was perhaps the
least misleading slogan that politicians ever forged. Also, contemporaneous and
later critics, both conservative and socialist, have never adequately realized the
extent to which the welfare policies of the next period were rendered possible
by the developments of the first three quarters of the nineteenth century and
by the policies that fostered them. So far as this goes, there is no reason for
discounting either the honesty or the competence of the economists of that
time, or for voting them victims of ideological delusion.

eSSSi;

SOCIO-POLITICAL BACKGROUNDS

397

2. Free Trade and Foreign Relations

The English advocates of free trade claimed perfect generality for their ar-
gument. For them, it was absolute and eternal wisdom for all times and places;
he who refused to accept it was a fool or a crook or both. But as has been
pointed out many times, England’s individual historical situation in which a
free-trade policy was clearly indicated had probably more to do with her con-
version than had the element of general truth in the free-trade argument. The
hope that a spectacular example would convert other nations also may have
played some role. The decisive factors and arguments, however, were quite in-
dependent of any such hope. The superiority of England’s industry in 1840
was unchallengeable for the calculable future. And this superiority had every-
thing to gain from cheaper raw materials and foodstuffs. These were no delu-
sions: so satisfied was the nation with what it took to be the results of this
policy that criticism was almost silenced until the depression of the eighties.
Even that hope did not prove illusory for several decades. Though England re-
mained the only great nation to embrace free trade wholeheartedly, all the other
nations displayed tendencies toward free trade for longer or shorter periods and
to a greater or lesser degree. Thus Prussia and then the German Empire, from
the Prussian Tariff of 1818 to the Caprivi treaties of 1891-4, moved on a line
that never departed very far from free-trade principles. 1 The Anglo-French
treaty of i860 (Cobden-Chevalier Treaty) marked an important if short-lived
interruption in the generally protectionist policy of France. It should be ob-
served, however, that on the Continent free-trade or quasi-free-trade policy was
never supported by public opinion as strongly as was the case in England: it
was imposed by bureaucracies — as in Germany — or by rulers — such as Na-
poleon III — who were doctrinaire liberals in these matters. Those economists
who, like the majority of the French, were free traders elicited little response
from the public. In the United States, too, free trade was never popular ex-
cept with economists and not with all of them. Different national conditions
of course amply account for this, and they also enable us to put a more favor-
able construction on the views of protectionist economists in these countries
than ardent free traders were wont to put upon them. The dramatic story of
England’s conversion to free trade need not be retold here. But there are two
aspects of it that we cannot afford to neglect.

First, from a parliamentary point of view the adoption of the free-trade
policy stands wholly to the credit of the conservative party. The first effective
steps in the direction of free trade were taken before the outbreak of the
French Revolution by Lord Shelburne and the younger Pitt. Advance toward it

1 The fact is somewhat obscured by the moves and countermoves that preceded the
conclusion of the Customs Union (Z ollverein) of 1834 and by concessions made from
time to time to individual protectionist interests. On the whole, however, the policy
of the Customs Union and, for the rest of the century, of the Empire is adequately
described by the sentence above. Bismarck’s mild protectionism had mainly fiscal

reasons.

398 III : FROM I79O TO 1870

was resumed in the 1820’s by Huskisson. And free trade was (substantially)
carried, the most difficult point — removal of the import duties on grains — in-
cluded, by the conservative government of Sir Robert Peel. Though his cab-
inet and party foundered on the rocks, it still remains true that a government
largely composed of landowners carried a policy that was obviously contrary
to their own economic class interests as well as to the economic interests of
the class with which they were most closely allied, the farmers. Interpret it
as you please, but do not forget to ponder over this most interesting phenom-
enon of political sociology. The manufacturers and merchants who provided
political steam are another matter. The Merchants’ Petition of 1820 must be
mentioned because it was drawn up by one of the leading scientific economists
of the age, Thomas Tooke. And this is our only opportunity, in a history of
analysis to mention the two heroes of the Anti-Corn-Law League, Richard
Cobden and John Bright. 2

But, second, free-trade policy means much more than a particular way of
dealing with questions of foreign trade. In fact, it could be argued that this
is the least important aspect of it and that a man might be a free trader, even
if he thinks little of the purely economic case for free trade per se. It is easy
to see — to some extent we shall see presently — that free-trade policy is related
to other economic policies in such a manner that, for political as well as eco-
nomic reasons, these other policies are difficult to pursue without free-trade
policy, and vice versa. In other words, free trade is but an element of a com-
prehensive system of economic policy and should never be discussed in isola-
tion. Nor is this all. The really important point to make is that this system
of economic policy conditions, and is conditioned by, something that is more
comprehensive still, namely, a general political and moral attitude or vision
that asserts itself in all departments of national and international life and may
indeed be linked up with utilitarianism. 3 This attitude, which has come to be
called Manchesterism by its enemies, was in fact Cobden’s and Bright’s. Among
its many manifestations, colonial and foreign policies are particularly impor-
tant for us. Colonies used to be acquired for the sole purpose of being ruled
and exploited in the interest of the mother country and of keeping other na-
tions from doing the same thing. From the Manchester school standpoint
there is not even an economic argument in favor of doing this. Still less is
there a political one. Colonies exist for themselves just as do any other coun-
tries; they should be self-governing; and they should neither accord to, nor be
accorded by, the mother country any particular commercial advantages. Nor
did all this remain in the realm of either philosophy or agitation. Some prac-
tical progress was made toward the goal. England’s Canadian policy, as out-

2 It may seem incongruous, in spite of all I might say, that this book accords but a
perfunctory notice to those great names. But there is nothing I can do about it except
refer the reader to the two masterly lives that he will peruse with pleasure and profit:
the Life of Richard Cobden by Lord Morley and the Life of John Bright by G. M.
Trevelyan.

3 In England, this affiliation was obvious. But it is not necessary — there are other
systems of thought that yield the same attitudes.

SOCIO-POLITICAL BACKGROUNDS 399

lined in the Durham Report, was for the time being the most important step . 3 4
There were many backslidings, of course.

The foreign policy of the period, both at the time of the Holy Alliance 'and
later, cannot be analyzed briefly. So far as England is concerned, we may,
however, point to a few facts which, though hardly representative of prevail-
ing practice, do indicate the existence of a tendency that was in accord with
the wider implications of free trade. The most important of these facts was the
actual practice of the second Peel administration, the one that repealed the
Corn Laws: its sober and responsible management of foreign affairs, its refusal
to see English interests in whatever happened anywhere on the globe, was an
important sign of the times. Another was the adoption of the principle (Can-
ning) to side with nations ‘rightly struggling to be free’ or even, with some
reservation in the German case, with nations that strove for national union:
nationalism did not have the connotation it later acquired and was an ally,
not an enemy, of bourgeois liberalism or else of something to the left of it
(Mazzini). Furthermore, though the period witnessed a number of wars, others
were prevented by the new attitude: English relations with the United States
during the Civil War afford an example. Most important of all, attempts at
sowing the seeds of war by arousing a spirit of either aggression or suspicion,
which of course continued throughout, were also under criticism throughout:
as an example I mention Cobden’s highly characteristic struggle for a better
understanding of France and his not less characteristic struggle with Urquhart . 5
In parliament, Gladstone became — and remained — the most powerful spokes-
man of the new attitude which he invested with all the glories of his rhetoric . 6

3 . Domestic Policy and Sozialpolitik 1

We must remember that conditions differed sufficiently in different coun-
tries to produce different policies and also different attitudes on the part of
economists even where the guiding principles were the same. Thus the aboli-
tion of serfdom in Russia and the agrarian reforms in Germany and Austria —
the so-called Liberation of the Peasants — were certainly conceived and car-

4 See Charles P. Lucas, ed., Lord Durham's Report on the Affairs of British North
America (19x2). Lord Durham (1792-1840) submitted his report in 1839.

5 David Urquhart, a former member of the diplomatic service, founded in 1835 a
periodical, the Portfolio, and, later on, foreign-affairs committees that made vigorous
propaganda for an activist foreign policy. Cobden subjected to destructive criticism
the possible advantages from such a policy, made fun of arrogant and ignorant diplo-
matists and political busybodies, and on the whole counteracted Urquhart effectively.

6 Perhaps the best, certainly the most pleasant, way for the reader to satisfy himself
as regards this point is a perusal of Lord Morley’s great Gladstone biography ( Life of
'William Ewart Gladstone, 3 vols., 1903). This is also perhaps the best reference to
make for the rest of this chapter.

1 As I said before, I prefer a word that everyone understands, even though it is a
foreign one, to one that would need explanation. Hence we shall use the word Sozial-
politik throughout.

400 hi: FROM 1790 TO 1870

ried out in the spirit of economic liberalism: the idea of making the peasant
the free proprietor of a free holding and of leaving him to his own devices was
even surprisingly — and indeed absurdly — radical. But in France this had been
done in the Revolution; the land system of England presented for the moment
no pressing problems at all; and the agrarian problems of Ireland were of an
entirely different nature. Similarly, the regulations that fettered or sheltered
the craft guilds and also other sectors of industry had withered away in Eng-
land before this period; in France it was again the Revolution that had de-
stroyed them; elsewhere they wete removed at different times and in some
places much more completely than in others: in Prussia, for example, by the
Stein-Hardenberg reforms after the battle of Jena. These differences were,
however, not a matter of different economic principles, although writers may
sometimes have rationalized them in this way. They were merely a matter of
different social conditions, of differences in the economic structures that ex-
isted in different countries at the beginning of the period. Again, England com-
pletely reconstructed her law of joint stock companies. To some extent this
was done everywhere, and everywhere the tendency asserted itself to 'liberalize’
company laws and to reduce public control (until after the crash of 1873 when
some of the steps taken were retraced). But the results differed widely.

Differences of principle as well as of existing conditions account for the
widely different policies we find in such matters as religion, the press, crimi-
nal and civil justice, education, and so on, within the same country at different
times as well as between different countries. In England, for example, the old
civil liberties having been restored after the Napoleonic Wars, it was Catholic
emancipation, parliamentary reform — at first a liberal patent, later infringed
on by the Disraeli conservatives 2 — and Ireland which supplied the daily bread
of current politics in the noneconomic field. But we are mainly interested in
the English 3 Sozialpolitik of that period.

2 In England, the running fight for the ultimate enfranchisement of the masses was
carried on entirely between upper-class groups: the masses themselves had nothing to
do but to stand by and cheer or boo. This interesting phenomenon illustrates well a
characteristic difficulty of political interpretation. Tactics had much to do with the
attitudes taken by Whigs and Tories: Catholic emancipation ‘drove the Whigs back
upon parliamentary reform’ and the Whig parliamentary reform in turn drove the
Tories back upon further parliamentary reform. But tactics are not all of it. There is
something in Disraeli’s contention that conservatism of his type (Tory democracy) rep-
resents the true interests and feelings of the masses and hence should look to the
masses for support.

3 As the reader might expect, the paternalistic tendencies of the preceding period
survived better in some continental countries. But there is something else. In France,
before the accession to power of Napoleon III, socialist movements had had little prac-
tical effect except that of eliciting violent hostility. But there were nevertheless some
writers who visualized with perfect clarity the governmental Sozialpolitik of later times.
By far the most eminent of these was Charles Dupont-White (1807-78); see his Essdi
sut les relations du travail avec le capital (1846) and his L’individu et Vetat (1857).
Napoleon III and some of his advisers entertained fairly advanced ideas on the subject
of social reforms that were to be imposed by authority ( socialisme authoritaire, so-

SOCIO-POLITICAL BACKGROUNDS 4OI

English labor legislation developed along three lines. First, there was the
factory legislation — protection being, however, substantially confined to women
and children. 4 Second, the various acts prohibiting combinations of workmen
were repealed in 1824, though complete legalization of trade unions was de-
ferred until 1871 and 1875. Third, a Poor Law Amendment Act was passed in
1834, which is important for us, among other reasons, because it was based
on a report written by Edwin Chadwick in collaboration with one of the lead-
ing economists of the age. Senior. Two aspects of this act must be carefully
distinguished. On the one hand, it greatly improved the administrative ma-
chinery of poor relief and stopped a number of practices that would be con-
sidered abuses even now. This was almost universally recognized, though some
critics found fault with the act's administrative scheme. In any case, this aspect
does not concern us here. On the other hand, the act adopted certain eco-
nomic principles that do concern us. They were by no means new. In fact,
they were as old as the poor-law controversy: the act simply adopted the views
of one party to the controversy. That is to say, it confined poor relief to main-
tenance in the workhouse and prohibited outdoor relief on principle, 5 the idea
being that the able-bodied unemployed, who were in distress, should not in-
deed be left to starve but should be maintained in semipunitive conditions.

Interpretation of these policies is an extremely delicate matter. We cannot
do much more than visualize the various groups of problems that arise. First
of all, these policies must not be considered in isolation. They were part of a
system that offered other things to the working class. If we assign its proper
weight to the effects on the real wage bill of the free-trade policy and to all
that the 'free-breakfast table' implies, we shall conceive a wholly different idea
of the period's performance in Sozialpolitik. Second, it is by no means clear
how these policies fit in with economic liberalism. As regards the factory legis-
lation, for example, it is as easy to argue that it was part of the logic of eco-
nomic liberalism as it is to argue that it spelled deviation from this logic. I sug-
gest that, as far as protection for women and children is concerned, we adopt
the former opinion. Third, it must not be forgotten that though this type of
factory legislation enjoyed some liberal or radical support — Cobden came out
strongly on behalf of the children — the bulk of the political forces that car-
ried it was supplied by conservatives (Lord Ashley, seventh Earl of Shaftesbury),
who approached this whole range of problems in a quite different spirit. This
fact is significant, no matter how we answer the question of compatibility of
social legislation with the logic of economic liberalism.

Contemporaneous and later critics, German exponents of Sozialpolitik in
particular, have accused the English 'classic' economists of cold indifference

cialisme d’etat ), and some practical measures were actually taken. Dupont- White may
be considered the literary exponent of this type of etatisme.

4 A reference must be substituted for information that cannot be presented here:
Hutchins and Harrison, A History of Factory Legislation (new ed., 1907).

5 It soon proved impossible to enforce this principle where there was serious re-
sistance.

402 in: FROM 1790 TO 1870

to the fate of labor. The first thing to be said about this is that the indictment
reveals a lack of historical sense that is particularly strange in critics associated
with the German historical school: the man who disapproved of a ten-hour
bill in 1847 might easily be a New Dealer in modern America without our
having any right to impugn his consistency. But we can go further. Most
‘classic’ economists supported the factory legislation, McCulloch especially.
The repeal of the Combination Acts was vigorously pushed by a member of
the Benthamite circle (Place 6 ). And the Poor Law Amendment Act, which
was almost unanimously supported by economists, has other aspects besides
what seems to us harsh treatment of people in distress. At the same time, we
must not go too far. The support that ‘classic’ economists gave to this act
acquires additional significance from the fact that the theory underlying it
tallied well with their general scheme of economic and political thought, their
scheme of Natural Liberty. It also tallied well with their views on population
and wages. It tallied still better with their almost ludicrous confidence in the
ability of individuals to act with energy and rationality, to look after them-
selves responsibly, to find work, and to save for old age and rainy days. This,
of course, is Benthamite sociology, hence bad sociology. On this point, the
critics were right, however wrong they were in imputing to the ‘classics’ a de-
fective social conscience. 7

4. Gladstonian Finance

In the field of fiscal policy, we are more prone than we usually are to give
the jockey credit that is really due the horse. P. J. Cambon was an able finan-
cier, yet all the reader is likely to know about the finances of the French Revo-
lution is the breakdown of its paper money. 1 F. N. Mollien was a master of
the art, but under the conditions of the Napoleonic regime he had no chance
to produce ‘great’ fiscal policy 2 — and there are several others who deserve our
respect though they have left a checkered record. Yet there was one man who
not only united high ability with unparalleled opportunity but also knew how
to turn budgets into political triumphs and who stands in history as the great-

6 On this interesting man, see Graham Wallas’ Life of Francis Place (1898), one of
those books that bring past milieus back to life.

7 Nor is it quite true that all the ‘classics’ were liberals in the party sense; Malthus
was not a liberal. But most of the others were; and there is some truth in speaking of
an ‘alliance’ of ‘classic’ economists with the liberal party. Therefore, by virtue of psy-
chological, though not of logical association, the later decline of political liberalism
contributed to the decline of the prestige of ‘classic’ economics. Observe, however, that
there is a long way between recognizing this and identifying ‘systems’ and their for-
tunes with the political humors of the hour.

1 This gives me the opportunity to call the reader’s attention to the important bib-
liography on the finances of France in the eighteenth century by Rene Stourm ( Bibli-
ographic historique des finances de la France au dix-huitieme siecle , 1895).

2 Frangois N. Mollien’s Memoirs d’un ministre du tresor public, 1780-1815 (1845),
however, rise in places to the level of scientific analysis.

SOCIO-POLITICAL BACKGROUNDS 403

est English financier of economic liberalism, Gladstone . 3 We cannot do better
than consider him alone.

The greatest feature of Gladstonian finance — the feature that it shares with,
and which may be said to define, all 'great finance’ — was that it expressed
with ideal adequacy both the whole civilization and the needs of the time,
ex visu of the conditions of the country to which it was to apply; or, to put it
slightly differently, that it translated a social, political, and economic vision,
which was comprehensive as well as historically correct, into the clauses of a
set of co-ordinated fiscal measures. This applies both to the measures them-
selves and to the intuition that bore them, but not to the talk of the day,
Gladstone’s own included, which was highly doctrinaire. We are not interested
in the details of these measures but only in the principles involved. Let us try
to state them.

Gladstonian finance was the finance of the system of 'natural liberty/ laissez-
faire, and free trade. From the social and economic vision that this implies—
and which we must now understand historically, irrespective of all general
arguments pro and con — the most important thing was to remove fiscal ob-
structions to private activity. And for this, in turn, it was necessary to keep
public expenditure low. Retrenchment was the victorious slogan of the day and
was even more popular with radicals — such as Joseph Hume, the 'sleepless
watchdog of finance’ — than it was with either Whigs or Tories. Retrenchment
means two things. First, it means reduction of the functions of the state to a
minimum; this was referred to by later, especially German, critics as the policy
of the 'night-watchman state.’ For instance, within that social vision there is
hardly any place for public expenditure on art or science: the way to further
art and science — and powerfully furthered they were — is to allow people to
earn so that they have the money to buy pictures or to enjoy leisure for re-
search . 4 Second, retrenchment means rationalization of the remaining func-

3 The most spectacular of those triumphs was won by the budget of 1853. The
reader will do well to familiarize himself with its main features. He finds these de-
scribed, in the whole political setting and in all their rhetorical glory, in Lord Morley’s
Gladstone biography already referred to.

4 In a well-known passage, Ruskin (see below, ch. 3) upbraided English governments
for refusing, unlike continental governments, to spend money for the encouragement
of the arts. This is an interesting instance of a type of social criticism that always
fails to see a social system as a whole. It was Ruskin’s right to prefer other methods
of encouraging art. But it was his duty, as an analyst of social phenomena, to realize
that the English method of doing so, even if inadequate, was a method and not just
nothing. Independently of this, he should have further recognized that inadequacy of
the English method was not obvious from results. This also holds for the sciences and,
among others, for economics. If we view results in historical perspective and in par-
ticular attach due weight to originality of research, we shall not find it easy to aver
with confidence that this social system was less productive of artistic and scientific
achievement than is the modern system that uses different and more direct methods.
I emphasize this because the principle involved is very important in the field of tech-
nical economics: for instance, present-day Keynesians are within their rights, logically,

404 fix: FROM 1790 TO 1870

tioiis of the state, which among other things implies as small a military estab-
lishment as possible. The resulting economic development would in addition,
so it was believed, make social expenditures largely superfluous. Observe once
more that all this, wholly wrong if cast into terms of timeless general prin-
ciples, did contain a large element of truth for England in 1853.

Equally important was it, from the same vision of economic opportunities
and mechanisms, to raise the revenue that would still have to be raised in such
a way as to deflect economic behavior as little as possible from what it would
have been in the absence of all taxation (Taxation for revenue only’). And
since the profit motive and the propensity to save were considered of para-
mount importance for the economic progress of all classes, this meant in par-
ticular that taxation should as little as possible interfere with the net earn-
ings of business. Therefore, so far as direct taxation is concerned, no progres-
sion. In principle, if not in practice, Gladstone went even further than this in
1853. The Napoleonic Wars had brought the income tax (in the English
sense). It had been abolished promptly when the emergency was over (1816),
but had been reintroduced by Peel (1842) in order to make good the defi-
ciency expected from his reductions of import duties. 5 But Gladstone pro-
posed in 1853 to abolish it again in seven years. 0 As regards indirect taxes, the
principle of least interference was interpreted by Gladstone to mean that taxa-
tion should be concentrated on a few important articles, leaving the rest free.
This opinion prevailed throughout against that of Sir George Cornewall Lewis,
the Chancellor of the Exchequer during the Crimean War, who preferred a
system of numerous duties that would bear lightly on every point touched. 7

Last, but not least, we have the principle of the balanced budget or rather,
since debt was to be reduced, the principle that Robert Lowe, one of the

when they aver that the capitalist mechanism that tends to Equilibrate ex ante saving
and investment is weak and apt to stall; but if they aver that it does not exist, they
are simply committing a definite and provable mistake.

5 The same policy was adopted by the Wilson administration in 1913.

6 In fact, he kept to this idea throughout. In his electoral manifesto of 1874 he
pronounced again in favor of total repeal. The question how far this is consonant
with the creed of economic liberalism is difficult. An income tax so high as to change
distribution of income substantially certainly is not. This would clearly conflict with
the principle of Taxation for revenue.’ But an income tax of a few per cent, even if
progressive, seems to me to fit the Gladstonian vision better than does the course he
actually took.

7 Economically— though perhaps not administratively — Lewis was right, I think,
s Gladstonian orthodoxy overlooked another point also. It was strongly against taxing

‘necessities.’ In fact, this principle, together with the free-trade policy, was the greatest
direct contribution of Gladstonian finance to social welfare (though we must, in order to
appraise its total contribution, keep in mind that this direct contribution was not its
only one: in addition it did something toward helping into existence the wealth that
later proved so easy to tax in the interest of the masses). But this exclusive emphasis on
the distinction between 'necessaries’ and ‘luxuries' fails to do full justice to the impli-
cations of the distinction between commodities that are elastic and commodities that
are inelastic in demand.

SOCIO-POLITICAL BACKGROUNDS

4 ° 5

Chancellors of the Exchequer of the Gladstonian era, embodied in his defini-
tion of a minister of finance: 'an animal that ought to have a surplus.' Again,
there is no point whatever in criticizing either the policy of balancing the
budget or the policy of debt redemption from modern standpoints. Even if
we grant all that modern advocates of deficit financing claim, we should admit
that in a world bursting with 'investment opportunities’ neither policy can be
set down as unalloyed nonsense.

5. Gold

The little that need be said for our purposes on the currency and banking
policies of that period will be more conveniently reserved for the last chapter
of this Part. In consequence, there is only one point to make here. After the
monetary disturbances — the inflation — incident to the Napoleonic Wars, all
countries struggled back to what was considered normalcy. This took many
decades in such countries as Austria, but was achieved promptly and with com-
parative ease in England and France. On the Continent, normalcy meant
silver or a bimetallic standard, but England, after having legalized the de facto
gold standard established in the eighteenth century, resumed gold redemption
of Bank of England notes within a few years of Waterloo, much as she re-
turned to gold at prewar parity (though in a somewhat different form) after
the First World War of our time. Moreover, it was a perfectly 'free' or 'auto-
matic 7 gold standard that allowed for no kind of management other than is
implied in the regulatory power of any central bank that is 'a lender of last
resort. 7 Our question is: why? The measure drew fire from many quarters,
even from some economists. Powerful agrarian interests attributed to it —
never mind now whether rightly or wrongly — the depression that plagued
them. There was enough unemployment to induce the government (Castle-
reagh, 1821) to propose public works — an almost Rooseveltian program — as a
remedy. Merchants do not relish losses, nor bankers frozen assets — and there
were plenty of both. Also, we shall see that many competent people advocated
a managed paper currency. Nevertheless, the gold-standard policy was never in
real danger politically, and if it was not, until much later, adopted by all in-
dustrialized countries, this was not a matter of their choice: in spite of all
counterarguments, the 'automatic 7 gold standard remained almost everywhere
the ideal to strive for and pray for, in season and out of season. Again: why?

At present we are taught to look upon such a policy as wholly erroneous —
as a sort of fetishism that is impervious to rational argument. We are also
taught to discount all rational and all purely economic arguments that may
actually be adduced in favor of it. But quite irrespective of these, there is one
point about the gold standard that would redeem it from the charge of fool-
ishness, even in the absence of any purely economic advantage — a point from
which also many other attitudes of that time present themselves in a different
light. An ‘automatic 7 gold currency 1 is part and parcel of a laissez-faire and

1 Of course, it is never quite automatic and this phrase is misleading. I use it here
for the sake of brevity and do not mean by it more than that all other means of pay-

^06 in: FROM 1790 TO 1870

free-trade economy. It links every nation’s money rates and price levels with
the money rates and price levels of all the other nations that are ‘on gold.’ It
is extremely sensitive to government expenditure and even to attitudes or poli-
cies that do not involve expenditure directly, for example, to foreign policy,
to certain policies of taxation, and, in general, to precisely all those policies
that violate the principles of economic liberalism. This is the reason why gold
is so unpopular now and also why it was so popular in a bourgeois era. It im-
poses restrictions upon governments or bureaucracies that are much more
powerful than is parliamentary criticism. It is both the badge and the guaran-
tee of bourgeois freedom — of freedom not simply of the bourgeois interest,
but of freedom in the bourgeois sense. From this standpoint a man may quite
rationally fight for it, even if fully convinced of the validity of all that has
ever been urged against it on economic grounds. From the standpoint of
etatisme and planning, a man may not less rationally condemn it, even if fully
convinced of the validity of all that has ever been urged for it on economic
grounds.

ment should be redeemable in gold and that everyone should have the right to im-
port and export, monetize or demonetize, gold at will.

CHAPTER 3

The Intellectual Scenery

1. The Zeitgeist of the Period and Its Philosophy 407

(a) Utilitarianism 407

(b) German Philosophy 411

2. Romanticism and Historiography 4x8

(a) Romanticism 418

(b) Historiography 424

3. Sociology and Political Science: Environmentalism 428

(a) The Natural-Law Sociology of Government and Politics 428

(b) The Historians’ Sociology of Government and Politics 431

4. Evolutionism 43 5

(a) Philosophers’ Evolutionism 436

(b) Marxist Evolutionism 438

(d) The Intellectualist Evolutionism of Condorcet and Comte 442

(e) Darwinian Evolutionism 444

5. Psychology and Logic 446

[(a) Associationist and Evolutionist Psychology ] 446

[(b) Logic, Epistemology, and Cognate Fields] 448

[(c) J. S. Mill’s Logic] 449

6. Pre-Marxian Socialism 452

[(a) Associationist Socialism ] 454

[(b) Anarchism] 457

[(c) Saint-Simonist Socialism ] 460

1. The Zeitgeist of the Period and Its Philosophy

The truth of our proposition that the Zeitgeist of a period can never be de-
fined in terms of a single system of mutually consistent ideas or beliefs is
brought home to us when we turn to the philosophical currents of that time
in order to discover the philosophical affiliations, if any, of the social sciences.

(a) Utilitarianism. The most obvious of these affiliations is with English
utilitarianism . 1 This was indeed a product of the eighteenth century. But it
ran the best part of its career in the first half of the nineteenth. No philosophy
at all in the technical sense , 2 unsurpassably shallow as a ‘philosophy of life/ it

1 See Sir Leslie Stephen, The English Utilitarians (1900).

2 Evidently, the ‘calculus of pleasure and pain’ and the principle of ‘greatest happi-
ness for the greatest number’ do not, in themselves, assert anything about specifically
philosophical or epistemological problems, though they are capable of producing an
ethical doctrine. The reason why this speculative deficiency of utilitarianism was not

407

408 in: FROM 1790 TO 1870

fitted to perfection the streak of materialistic (antimetaphysical) rationalism
that may be associated with liberalism and the business mind. Actually, how-
ever, the majority of the English business class did not accept it but, whether
Anglican or nonconformist, kept to the religious philosophy of either Church
or Chapel. The utilitarian leaders evidently knew why they were so careful
not to affront religion openly. 3 And all leading politicians knew why they left
utilitarianism severely alone. Its appointed apostles, the philosophical radicals, 4
were at first a very small circle that gathered around Bentham and James Mill.
J. S. Mill cannot be called a utilitarian without qualification. In some respects
he outgrew the creed; in others he refined it. But he never renounced it ex-
plicitly, and it was through his influence upon the rising generations in the
1850's and 1860's that a more sophisticated utilitarianism established itself in
the intellectual centers, especially in Cambridge. But it did not not become
dominant. This seems to be clear from an analysis of the position of the men
who were then or later became leaders of Cambridge life and thought, par-
ticularly of Sidgwick. 5

It will be maintained later that there is no point in calling Ricardo a utili-
tarian, though he was personally connected with the group and may have pro-
fessed sympathy with its creed. Bentham, James Mill, and (with qualification)
J. S. Mill were the only prominent economists who were also prominent and
militant utilitarians, as Beccaria and Verri had been in the eighteenth century.
It was natural for Bentham and the Mills to see themselves in the role of
philosophical patrons of economics and to assume responsibility for an alli-
ance between economics and utilitarianism that was acquiesced in by many
later economists, such as Jevons and Edgeworth; but it was neither necessary
nor useful. This alliance is the only reason why utilitarianism looms so large in
the economist’s picture of nineteenth-century thought, much larger than is

more keenly felt was that utilitarians found what they wanted ready at hand in the
empiricist tradition of the Locke-Hume type.

3 J. S. Mill's Three Essays on Religion appeared posthumously in 1874. The views
on religion that are contained in his elaborate Examination of Sir William Hamilton’s
Philosophy (1865) probably did not filter through to the general reading public.

4 See e.g. C. B. R. Kent, The English Radicals (1899); E. Halevy, La Formation
du radicalisme philosophique (1901-4; English trans. 1928).

5 Henry Sidgwick (1838-1900) really has claim to more attention than we can be-
stow upon him. His work in economics will be noticed in passing where it belongs
chronologically, but there is little in his eminently reasonable rendering of ‘classic’ doc-
trine to call for comment in a sketch like this. Nor, I am afraid, would a historian
of ethics or politics — the other two fields in which he produced major work — be able
to say more. But he was one of the greatest English university men all the same:
milieu-creating, milieu-leading, soul-shaping to an extraordinary degree. Perhaps lack of
originality is one of the conditions for this particular type of academic achievement.
Of all the Cambridge leaders, he was — with his antimetaphysical mind that was so
lucid and so wingless— the one most favorably disposed to accept utilitarian starting
points. Nevertheless, his ethics cannot be called straight utilitarianism, and this is the
test, for it is here that a utilitarian creed, qua philosophy, would have to assert its
sway.

THE INTELLECTUAL SCENERY

4°9

justified by its importance either as a philosophy or as a factor of the Zeit-
geist. We must digress for a moment in order to consider the effects of that
alliance upon economics. The reader will recall that, for earlier epochs, we
have dealt with this question already.

Since economists, especially nontheorists, are and always have been apt
to entertain exaggerated notions about the importance of philosophical
backgrounds upon the positive work of economic analysis, we shall under-
stand that this alliance made English economic theory unpopular in
many quarters. Especially with some German writers the utilitarian garb
was quite sufficient for wholesale condemnation of the theory that ap-
peared in this guise. More interesting than this attitude, which rested
upon nothing but an obvious misunderstanding, is, however, the ques-
tion of the real influence of utilitarian philosophy upon the contents of
'classic’ economics. We must distinguish influence upon policy recom-
mendations, economic sociology, and economic analysis proper. As re-
gards the ‘classic’ recommendations, there are no doubt many that are
wholly neutral with respect to any philosophy of life: one need not be a
utilitarian in order to recommend peasant proprietorship for Ireland, or in
order either to recommend or condemn return to the gold standaid after
the Napoleonic Wars. But there are others— unconditional free trade, for
example — that did imply views of general policy and attitudes to life that
do seem, to say the least, to link up with utilitarianism better than with
any other philosophy of life. As regards economic sociology, utilitarian-
ism can only be described as a complete failure since its rationalistic
conception of individual behavior and of social institutions was obviously
and radically wrong. But as regards that part of economic analysis which
works with rational schemata, utilitarian philosophy, though superfluous,
does no harm. And this fact, as critics would have recognized if they had
been competent economists, salvages the bulk of the work in economic
analysis done by the utilitarians . 6

Professional philosophy in England, mainly the philosophy of the Scottish
common-sense school, was but moderately affected by utilitarianism- and was,
on the whole, hostile to the utilitarian way of disposing of specifically philo--
sophical problems. But there was during that period no leader of English
philosophical thought strong enough to counteract the able and vigorous
propaganda of the philosophical radicals. Leaders of thought that did counter-
act it to some extent were produced by the romantic (see below, sec. 2) and
several religious movements. A leader of still another type might be mentioned
here, Carlyle . 7 For economists he is one of the most important and most char-

6 Of course, this should not be understood to mean that this work was not open to
objection on other grounds.

7 Thomas Carlyle’s (1795-1881) fame rests on the solid basis of his historical works
that are too well known to be mentioned here. But one should not call him a historian
without adding that, besides being much else, he was a historian sui generis. He

410 III: FROM 1790 TO 1870

acteristic figures in the cultural panorama of that epoch — standing in heroic
pose, hurling scorn at the materialistic littleness of his age, cracking a whip
with which to flay, among other things, our Dismal Science. This is how he
saw himself and how his time saw and loved to see him. Completely incapable
of understanding the meaning of a theorem, overlooking the fact that all sci-
ence is 'dismal’ to the artist, he thought he had got hold of the right boy to
whip. A large part of the public applauded, and so did some economists who
understood no more than he did what a 'science’ is and does. But the digres-
sion above on utilitarian economics shows that he was not wholly in error. The
utilitarian economists did advocate policies indicative of a philosophy of life
that fully deserved all the stripes that Carlyle administered. And the reader
should for a moment stop to ponder over the difficulty that has so much to do
with the futility of so many of our controversies, namely, the difficulty that
both the professional and the public mind experience in disentangling the
analytic aspect of such cases from the cultural philosophy that goes with it,
and in realizing that adverse criticism of the former is perfectly compatible

painted portraits in the style and spirit of the artist. Though these portraits rest on
sound -and often minute research, they render artistic not scientific interpretations.
The modem reader will be amazed to miss economic and social facts almost com-
pletely. And he will turn away with something like disgust from the overemphasis on
the personal element that he finds everywhere. Yet this is not quite what he should
do. By itself Carlyle’s 'hero worship,’ which seems to make history a tissue of individ-
ual biographies, is not indeed acceptable sociology. But in times when the personal
element and its explanatory value are in danger of being drowned in statistics and
when the 'common man’ holds the stage, Carlyle’s hero worship, by stressing the for-
gotten factor, personality, comes in as a useful antidote. Directly relevant to the his-
tory of economics are his Chartism (1840), Past and Present (1843), and Latter-Day
Pamphlets (1850).

Carlyle’s emphasis upon the element of personality (the contrast with Bentham, who
was individualist without being a 'personalist,’ should suffice to show that the two are
entirely distinct) calls up the name of R. W. Emerson (1803-82), who was, to use his
own phrase, another Representative Man. With him, that emphasis did not amount
to hero worship, and to this extent his contribution to a sociological schema of the
historical process is sounder though less original than is Carlyle’s. Emerson did not
.cross swords with 'classic’ economics. But from another angle he is still more impor-
tant for us: his thought, the focus of many currents and the source of others, was the
adequate expression of the civilization of that age as it mirrored itself in the particular
conditions of the New England environment. This I conceive to be his claim to emi-
nence in the history of thought. 1 am sorry this sounds involved. However, since it is
impossible to describe that (New England) intellectual and moral environment in the
available space, we must leave it with this sentence. Nor can we afford to stay to look
at the Concord and Cambridge (or Boston) circles with which, directly and indirectly,
Emerson and his associates were connected. This is all the more regrettable because
they are the sources of an important component of a specifically American radicalism
that influenced the attitudes of American economists long after those circles them-
selves. had disappeared, and accounts for much that a European finds hard to under-
stand. A study of Thoreau’s writings might prove particularly enlightening. (On the
‘social science movement,’ see below, sec. 6a.)

THE INTELLECTUAL SCENERY

411

with admiration for the latter and vice versa. Something; however, may be
said for Carlyle even from the analytic point of view: he had the vision, though
he had not the means to make it analytically articulate, of an economic so-
ciology that was much more realistic than was the utilitarian. What a nation is
and really wants and what are the real determinants of its fate, he saw much
more clearly than did Bentham; the analysis that might be distilled from his
pages would take account of a number of important facts that Bentham ig-
nored or, at all events, brushed aside, because from the standpoint of his
creed they were simply irrelevant aberrations. J. S. Mill sensed this to some
extent. He grew to realize that the scheme of utilitarian rationality is quite in-
adequate beyond a limited range of problems. But he was not the man to
make anything of it, and so the vision of one man and the analytic power of
another never met to work together. Carlyle influenced another but (for us)
much less important prophet, Ruskin, who, though his writings on economic
subjects belong to the subsequent period, shall therefore be mentioned here.

Almost throughout the period under discussion, John Ruskin (1819-1900; any work
of reference will give the reader all that is needed to appreciate the points to be
made in this paragraph) was one of those creative interpreters of art — painting, archi-
tecture, sculpture, and also poetry — whose interpretations are themselves works of art,
works that have a life of their own and elicit admiration even in those who (like my-
self) do not believe in them as interpretations. For us, it is particularly important to
note his contributions to a general sociology of art, his attempts to analyze the social
conditions that produce, or are favorable to the production of, great works of art.
From the end of the 1860’s on, he turned, however, to the mission that was to make
him so popular with the crowd as well as with economists of radical propensities —
wrathful and dilettantic criticism of the sins of capitalism: the reader will quickly ac-
quire an adequate notion of this criticism by dipping into Unto this Last (1862),
Munera Pulveris (1872), and Fors Clavigera (1871-84), all in The Works of Ruskin. I
have only one point to make. There is a definite reason for objecting to Ruskin’s way
of handling economic problems (I am not speaking, of course, of his generous and not
unsuccessful practical work in the interest of the welfare and civilization of the
masses): he failed to do in this field what he did as a matter of course in the field of
art. We know that he prepared himself most sedulously for his career as an interpreter
of art; that he mastered techniques and studied historical detail according to the canons
of scholarship. It is ‘genius' that speaks from his interpretations, but genius tutored
and made effective by learning. In the field of economics he did nothing of the sort;
all he did was to add generous indignation to half-understood observations and un-
digested pieces of reading. It is this and not his evaluations (with which many of us
will sympathize) that puts him out of court, except for such writers as J. A. Hobson.
The judgment I pass on him — and he stands for so many — is exactly the same that he
himself would have passed on any writer who undertook, for example, to criticize
Turner’s paintings without having previously acquired, by morally neutral study, an
adequate mastery of the relevant facts and techniques.

(b) German Philosophy. The reader presumably knows that the first part of
the period under discussion witnessed the peak achievements of German specu-
lative philosophy, and the names of Kant, Schelling, Fichte, Hegel, and
Schopenhauer will immediately turn up in his mind. But, no matter whether

412 III: FROM 1790 TO 1870

he knows much or< little about them, it is impossible to enter here into the
purely philosophical aspects of their work. All I can say without proof about
Kant, Schelling, and Schopenhauer is this. First, their creations are striking
examples of autonomous philosophical thought: it would be hopeless to try to
link their teaching with the attitudes that may be associated with the class
position of the bourgeois or any other element . 8 Second, Kant was the only
one of the three to exert significant international influence ; 9 but in Germany,
all three of them wielded powerful influence upon the thought of generations
in whose mental pattern the philosophical component then counted for still
more than it did during the subsequent period. Nevertheless, whatever else this
influence may have touched or shaped, it did not extend to the professional
work of German — let alone of other than German — economists. Many of them
no doubt would have described themselves as Kantians. But their professional
methods and results were just as compatible with any other philosophy. This
question of influence posits itself somewhat differently in the cases of Fichte
and Hegel.

Fichte 10 calls for comment, because he associated with his speculative phi-
losophy, in the technical sense of the term, a social and political philosophy
that trespassed freely on the economics field and must be noticed for two
reasons. He blocked out a plan for a particular economic organization of so-
ciety that will be considered below in the section on socialism. And he has
been assigned a key position in the early development of O. Spann’s ‘universal-
ist economics.’ 1X

8 Some Marxists have tried it, fortified by the conviction that it must be possible to
do so. Such a conviction will always insure some measure of spurious success that means
nothing: everything can be forced into correlation with everything else.

8 Kantian ideas spread in particular to England. Even James Mill grappled with them,
but the nonutilitarians, Hamilton especially, and also philosophy-minded divines, put
them under heavy obligation, which, considering the elements of English origin that
we find in Kant, will not surprise us. A. Marshall’s enthusiasm for Kant — highly signifi-
cant of the intellectual atmosphere of his early days — will be noticed in the appropriate
place.

10 The works of J. G. Fichte (1762-1814) that are particularly relevant tq us are his
Reden an die deutsche Nation (1808), his Grundlage des Naturrechts (1796-7), and
D er geschlossene Handelsstaat (1800), all in his Sammtliche W erke (ed. by I. H. Fichte,
1845-6). Difficulties of interpretation are greatly increased by the fact that his ideas
underwent, in several essential respects, changes of two different types: his philosophy
changed, in the course of his life, in consequence of his own work upon it; his gen-
eral outlook changed in consequence of a German's typical experiences during the
Napoleonic period that turned the cosmopolitan — who had defined a man’s country as
that country which happens at any time to stand 'at the height of civilization’ — into
an ardent patriot.

11 As has been mentioned already, the idea that the history of economics may be
described in terms of the struggle between two 'systems’ of thought, an individualist
and a universalist one, is really Professor Pribram’s. But it was Professor Spann who
founded what is known in Germany as the universalist school. On Fichte’s relation to
it, as conceived by the latter, see O. Spann, Haupttheorien der V olkswirtschaftslehre

THE INTELLECTUAL SCENERY

4 X 3

Fichte was, to be sure, no individualist in the Benthamite sense and no
laissez-faire man. If this constitutes a ‘universalist,’ then he was one, and the
only thing to be said is that this species will then grow uncomfortably numer-
ous. If this is not enough to constitute a universalist, we are left with Fichte’s
conception of a superindividual and 'superconscious’ group mind — in which the
individual consciousnesses participate. The mere fact that he emphasized the
autonomy of the phenomenon Society as against the phenomenon State, be-
sides being as old as scholasticism, has certainly nothing specifically ‘universal-
ist’ about it. It is true that this conception is in the ‘universalist’ line, but it is
also in many other lines, for example, in the entirely positivist line of Durk-
heim. Perhaps it is somewhat less unrealistic to assume a connection, via ro-
manticism, between Fichte and Spann than it is to trace Durkheim’s thought
to Fichte. Confidence in such purely phraseological relations is in any case
misplaced and only serves to prevent perception of more substantial ones.

Hegel 12 calls for comment on three counts: first, because of his stupendous
success; second, because of his theory of the state and because his philosophy
constitutes an important branch of what we shall term evolutionism; third, be-
cause of his formative influence on the thought of Karl Marx.

All that I can say about the first point is that it makes Hegel’s philosophy
one of the factors in the Zeitgeist we are trying to survey. More than this I
cannot say because the success was beyond anything I might be able to ac-
count for. I could explain temporary success in Germany of the philosopher
who is credited with the saying: ‘Of all my pupils one only has understood
me; and this one has misunderstood me.’ Perhaps I could also explain, partly
by the fact that Hegelian philosophy is capable of widely different interpreta-

(1st ed., 1911, many later ones; English trans. 1930). The reader who wishes to have
a further and more sympathetic first introduction to universalist economics than I am
able to provide is referred, once for all, to Professor Salin’s exposition in the Encyclo-
paedia of the Social Sciences (article, 'Economics,’ section on ‘Romantic and Univer-
salist Economics’), where all the works of Spann are mentioned.

If the reader will carefully go over Professor Salin’s exposition (op. cit. vol. v,
pp. 386-7), he will immediately see the reason for lack of sympathy on my part. If uni-
versalists were content to preach a ‘holist’ meta-economic or philosophical interpreta-
tion of both economic reality and economic theory, there would be no objection; in
fact I should actually sympathize with their meta-economics, though I might interpret
it to myself in terms of Gestalt psychology. In any case, their philosophy would be
as irrelevant for us as was Quesnay’s theology. But they make larger claims, viz.
claims to having developed a new and different method of analysis. They actually ‘reject’
propositions about pricing and money, for example. And all they do after rejecting them
is to reformulate them in a clumsy and inadequate way. For instance, after rejecting
the concept of equilibrium. Professor Spann introduced the concept of equi-importance
(at margins), which is to do exactly the same things.

12 G. W. F. Hegel (1770-1831). For us, the most important of his works are:
Phdnomenologie des Geistes (1807; 2nd ed. of English trans. 1931), his most ‘realistic’
performance that may serve to elucidate some of his more ‘abstract’ phases; 'Wissen-
schaft der Logik (1812-16, English trans. 1929) and Vorlesungen iiber die Philosophic
der Geschichte (ed. 1837, from lecture notes; rev. English ed. 1899). .

414 HI: FROM 1790 TO 1870

tions, why Hegel’s influence on German thought not only proved durable but
also experienced a strong revival in the twentieth century. But what is beyond
my power of comprehension is the great influence he exerted in England,
France, Italy, and the United States, that is, on soils that should not have been
favorable to this plant. The fact itself is indubitable, however. The second
point will be dealt with in section 4 of this chapter. The third, Hegel’s in-
fluence on Marx, constitutes our immediate concern.

Many Marxists, and not only those of philosophical bent of mind,
have come near to stating that Marxism is rooted in Hegelism and that,
the relation being one of dependence, acceptance of the ‘dialectic
method’ constitutes part of Marxist orthodoxy. Marx himself was of a
different opinion. In the preface to the second edition of the first vol-
ume of Das Kapital, he tells us that as a philosopher he had been a
Hegelian; that he never lost his early preference for Hegel’s philosophy;
and that what he considered superficial criticisms of it only served to
strengthen his taste for ‘coquetting’ with it; but that he never allowed
himself to be guided by it in his positive research into the facts of capi-
talist society. I suggest that this statement be accepted. Authors often
misinterpret their own procedure and there is the possibility that Marx
was mistaken. But it can be shown that he was not. For every proposi-
tion of his, economic and sociological, as well as his vision of the capi-
talist process as a whole, may be either traced to sources other than philo-
sophical — such as Ricardo’s economic theory — or else understood as re-
sults of strictly empirical analysis of his own. The Hegelism of his ex-
position is not more than a form that we can discard in all cases with-
out affecting the substance of his argument. The only case that could
possibly be considered doubtful will be discussed below.

‘Idealistic’ (that is, metaphysical) philosophy never ruled unchallenged. As
the period wore on, the streak of materialism that we associate with bourgeois
rationality asserted itself independently of the utilitarian current. Among other
things, it encouraged a materialistic interpretation of Hegel: some people dis-
covered that his metaphysical concepts are not really necessary for his general
mode of reasoning, which can stand without them, and dropped them accord-
ingly. Perhaps the most important of the Hegelians who, in doing so, de-
veloped into straight materialists was Ludwig Feuerbach. 13 The poor lot of
‘free thinkers’ (exponents of mechanist or sensationalist materialism), who
published in the last decades of that period and are significant only because

13 L. A. Feuerbach's (1804-72) most important work. Das Wesen des Christenthums
(1841; English trans., 2nd ed., 1877), holds a key position in two respects: first, it at-
tacked the foundations of that part of Hegel’s metaphysics that irked its ‘free-thinking’
followers most, the part that seemed to lend support to religious beliefs; second, it
attacked, though less directly, Hegel’s metaphysics altogether and turned — a most sig-
nificant sign of the times — philosophy into a sociology of sorts. (On Marx’s violent
hostility to Feuerbach’s system of thought — that of course does not exclude his being
influenced by it— see below, sec. 3c.)

THE INTELLECTUAL SCENERY

4*5

their popular success was an important sign of the times, owe something to
him but less than we might suppose and less than many historians have sup-
posed. Once more: in analyzing broad currents of ideas we are too prone to
assume relations between the bubbles that bubble up from the same crater.

(c) Comtist Positivism. Of course, that period’s pattern of philosophic
thought was very much richer than our survey suggests. But we shall take
from it only one more strand that not only embodies another of the main
components of that period’s Zeitgeist , but also is particularly important for
economists. In France professional philosophy continued to keep up a Car-
tesian tradition, curiously interwoven with ideas that hailed from the English
empiricists, from Condillac, and, in reaction against Condillac, from Scottish
'common sense.’ 14 The antimetaphysical component, which, disregarding any
other possible meaning of the word, I shall call positivist, asserted itself in
many ways. But it found its most nearly adequate expression in a suggestion
thrown out by Saint-Simon and carried out by Auguste Comte (1798-1857),
a theoretical physicist by training, in his Corns de philosophie positive, which
was to satisfy two distinct and logically independent needs: first, the need for
a general body of thought that would fill the void left by receding metaphys-
ical speculation, the need for a substitute for philosophy (or religion); second,
the need for a general body of thought that would put some order into the
tropical growth of specialized research. Herbert Spencer’s Synthetic Philosophy
— 'synthetic’ indeed! — that appeared in installments from 1862 on ( First Prin-
ciples, Biology, Psychology, Sociology, and Ethics ) was, in a sense, another
attempt to satisfy both needs.

Comte’s Cours appeared, 1830-42, in six volumes. Of Comte's other
writings only his letters to J. S. Mill ( Lettres d’ Auguste Comte a John
Stuart Mill, 1841-1846, publ. 1877) come within our orbit. As regards the
rest, the less said the better. It should be kept in mind that, in speaking
of Comte and his work, I am referring exclusively to those two publica-
tions, for Positivism and Comtism were to acquire also, from the aberra-
tions of his declining years, quite different meanings.

As explained above, the Cours presents two aspects which must be
carefully distinguished. First, it expounds the doctrine that all our knowl-
edge is knowledge of invariant relations between given phenomena on
whose nature or causation there is no sense in speculating. This positivism
brought earlier tendencies to a head and anticipated, in some respects, the
much more interesting empiriocriticism of the next period. It is a philo-

14 That group is usually referred to, with a value judgment, as eclectics, which per-
haps does not do full justice to its most important member, Victor Cousin. It is asso-
ciated with another group of political theorists and practitioners (and histprians) that
gathered around the strong personality of Royer-Collard (the 'doctrinaire’ party as it
was called; Guizot, the historian and prime minister belonged to it — more or less).
Both groups are important elements in the Paris picture of the epoch between 1815
and 1848, and their thought displays parallelisms with that of the period’s economists.
But I can mention them only in order to apologize for my inability to insert them.

416 III: FROM 179O TO 1870

sophical doctrine in the technical sense of the term — though a negative
one — and as such did not exert, and was incapable of exerting, any in-
fluence upon research in any particular science.

But, second, Comte’s primary concern was not really with this philoso-
phy. The Cours starts with the question how, in an epoch of inevitable
specialization, we might salvage that organic unity of all human knowl-
edge that was so vital a reality in the times of the polyhistors. His an-
swer was that we should create for this purpose another specialty, the
specialty of generalites. This plan has meaning quite independently of
whatever philosophic opinions one might entertain and comes to the
fore again later on. The Cours is an attempt to carry this plan into ef-
fect in a particular, way and with a particular slant.

Comte’s particular way was this: he tried to arrange the total of all
scientific knowledge (knowledge from other than scientific sources he did
not recognize) into a hierarchy of sciences or, to change the simile, into a
building, every floor of which was to be occupied by a different science
and which was to rise from foundations in logic and mathematics toward
the problems of human society. The six floors were respectively assigned
to Mathematics, Astronomy, Physics, Chemistry, Biology, and — Psychol-
ogy being conspicuous by its absence- — Sociology, the science of society.
And he actually proceeded, if I may keep to the analogy, to furnish
every floor with what he conceived to be those elements in every science
that were most important for the science located on the next floor. Noth-
ing can or need be said about the grandeur and the shortcomings of the
plan or of its execution.

Comte’s influence upon the social sciences in general, and upon eco-
nomics in particular, was considerable and gathered momentum as the
century wore on. This was not because of his ‘philosophy/ but because he
did sociological work himself. We shall have to touch upon contributions
of his — constructive and critical — both in the rest of this chapter and in
later chapters. It will be convenient, however, to list the four most im-
portant ones, and to dispose of two of them at once: (1) Comte bap-
tized nascent sociology and sketched out a research program for it that
foreshadowed later developments in Social Psychology; (11) this sociology
is geared, as we shall see, to an eighteenth-century conception of social
evolution; (in) he introduced into the social sciences the concepts of
Statics and Dynamics; (iv) he developed a methodology that led him to
attack the procedure of ‘classic’ economics in a manner that anticipated
many later criticisms. I shall proceed to comment on (111) and (iv).

(iii) Comte was primarily concerned with social evolution (see below,
sec. 4d}. But he fully realized that the idea of evolution does not .cover
all the problems presented by social organisms. There are also nonevo-
lutionary phenomena or aspects that require a different treatment. There-
fore he assembled another body of facts and propositions about ‘social
instincts,’ which act and react upon one another so as to produce by
means of an equilibrating process the ‘spontaneous order of society’; and

THE INTELLECTUAL SCENERY 417

this body of facts and propositions he laid alongside the evolutionary
compound, or, as he styled it, the theory of ‘natural progress.’ Adopting,
as he tells us, the terminology of the zoologist H. de Blainville, he called
the former Statics and the latter Dynamics. J. S. Mill, the author who
introduced these terms into economic theory, was well acquainted with
Comte’s thought, and it is natural to assume that he took them from
Comte, though he did not say so. If this was the case, then Mill was
wrong in speaking ( Principles , Book iv, ch. 1) of ‘a happy generalization
of a mathematical phrase.’ Since many people who failed to appreciate
the importance of that distinction have tried to stigmatize it as an illegiti-
mate derivate of a mechanistic way of thinking, it is time to state the
fact that, so far as there is sense at all in talking about borrowing — as
regards the words that is, not as regards the distinction itself which
forces itself upon us in any case — the ultimate lender was not mechanics
but zoology. We shall return to the subject more than once. It should,
however, be mentioned that Mill's definitions of statics and dynamics
correspond to Comte’s, as far as I can see; but these terms subsequently
acquired several different senses and .are now being used in a still differ-
ent one.

(iv) Methodologically, Comte’s plan was to observe historical and ethno-
logical facts and to build his science of society from such generalizations
as these facts would suggest. This is, of course, a very familiar program
that was, then and later, espoused by numerous writers, especially by his-
torical economists. All the. more important is it to realize a paradoxical
fact: while it was perfectly natural for historical economists to adopt
this plan, it was not at all natural for Comte to do so. The historian,
and hence the historical economist, distrusts any theory that tries to ‘iso-
late’ the economic element in social life. Theory is for him indeed specu-
lative and unrealistic. It is even something still worse: it is speculative
construction that borrows its methods from the physical sciences. Only
the real phenomenon in all its historical facets — with the economic, eth-
ical, legal, and cultural facets all simultaneously considered — is for him
the true object of social research, whose methods must therefore differ
toto caslo from any used by the physicist. But Comte could not argue
like this. On the contrary, he wanted to adopt the methods of the physi-
cist. When he accused ‘classic’ economists of unscientific speculation, he
meant exactly the opposite of what the economists of the historical
school were to mean. And there, as J. S. Mill realized, he was completely
in error. But in addition to being in error as regards his criticism, he was
also in error as regards his own choice of method. For physical science
does not accept unanalyzed fact: either in the laboratory or (where lab-
oratory experiment is not possible) by mental experiment, physicists do
separate or isolate individual aspects and then theorize about them with
a boldness that far surpasses anything that economists ever ventured to
do. Had Comte wished to be ‘scientific’ in this sense, he could not have
adopted any method other than that followed by Bentham, Say, and

418 III: FROM 1790 TO 1870

later by J. S. Mill. He adopted the one he did adopt (generalization from
unanalyzed historical or ethnological fact) by mistake and, if he antici-
pated some of the later arguments of the historical school, he antici-
pated them, again, by mistake — honest ignorance of economics and Saint-
Simonian prejudice against it being, of course, the psychological sources
of both. The comedy of errors will be complete when we realize that, on
top of it all, he indulged in genuinely metaphysical speculation himself.
This clarification reduces considerably our conception of Comte's in-
fluence: the later historical economists of the Schmoller school were not
Comtists at all; their philosophical and methodological affiliations were
quite different; they arrived at their arguments against 'classic' theory
from the logic of their own intellectual position and would have arrived
at them even if Comte had never lived; it is merely a coincidence that, as
it was, these arguments, or some of them, look Comtist to the his-
torian. 15 With other exponents of historicism, Comte's influence is more
in evidence. (On Ingram, for example, see below. Part iv, ch. 4.)

2. Romanticism and Historiography

We might learn a lot about the Zeitgeist from surveying the literary cur-
rents of that period were it possible to do so. Very interesting inferences could
be drawn, for example, from the success of the novels of Dickens, Thackeray,
or Flaubert, which are also really sociological treatises — highly colored by ideol-
ogies that we do not usually attribute to the people who read them. Or to men-
tion but one other and far distant example, we might also learn a lot by analyz-
ing the burst of German enthusiasm for Greek art that started in the eighteenth
century 1 but survived well into the nineteenth. We must refrain. But there
was one literary movement. Romanticism, that we cannot afford to pass by,
partly because of its real importance for the development of the social sci-
ences, partly because of the importance that has been wrongly attributed to it.

(a) Romanticism. Like its cultural antipode, utilitarianism, the romantic
movement started in the eighteenth century: we, who are primarily interested
in its analytic performance, cannot do better than to choose as our landmark
the great name of Herder. 2 Unlike utilitarianism, romanticism was not a phi-
losophy, or a social creed, or a political or economic ‘system/ It was essentially

15 This is not true for sociology: many sociologists, especially French ones, did de-
scend from Comte (de Roberty, Durkheim, and others). But as regards the economists
who faced each other in the Battle of Methods, Menger, the theorist, was much more
Comtist than was Schmoller, the historian.

1 J. J. Winckelmann’s Geschichte der Runst des Altertums, a book, both sympto-
matically and causally important, appeared in 1764.

2 J. G. von Herder (1744-1803): Fragmente iiber die neuere deutsche Litter atur
(1767), the most definitely romanticist of his works; Uber den Ursprung der Sprache
(1772); Ideen zur Philosophic der Geschichte der Menschheit (1784-91), for us the
most important of his writings. But Herder’s thought transcends romanticism: in-
fluence from and influence on romanticism is but one aspect of his work. As a sociol-

THE INTELLECTUAL SCENERY

419

a literary fashion that linked up with a certain attitude toward life and art:
on the one hand, the movement was entirely confined to intellectual circles —
there are no romanticists who were not also literati; on the other hand, the
movement gained international importance primarily in the field of belles
lettres and in the neighboring fields of literary criticism and philology. For
painting, architecture, and music it meant less — though it also set fashions
there, witness, for example, some ‘Gothic’ horrors— and it influenced but
peripherically whatever else it touched. But from the history of literature it
is indeed possible to compile an impressive list of names, such as Byron, Alfieri,
Shelley, Wordsworth, Coleridge, Scott, Longfellow, Chateaubriand, Gautier,
Hugo, Holderlin, Novalis, Brentano, Arnim, and the two Schlegels . 3 It is
there that we must look for the achievement of romanticism and for the seri-
ous work of the romanticists. They no doubt sallied forth from that stronghold,
as literati will, and roamed all over those parts of philosophy and social sci-
ence that happened to attract them. It is with their exploits on these excur-
sions that we are concerned here. But we must bear in mind that in dealing
with these we are not dealing with the core of romanticist achievement and
that we must expect any grain we may find to be mixed with dilettantic chaff.

However, even as regards belles lettres we cannot help being struck by a fact
that is indeed evident from our little list of names and would stand out still
more clearly in any more extended one: works and men that in one sense or
another may be labeled romanticist often have very little in common and
look strange in juxtaposition. This will cease to surprise us as soon as we make
an attempt to define what the romanticist attitude consisted in. On the sur-
face, it spelled revolt against classic canons of art, for instance, against Aris-
totle's three dramatic unities (of time, place, and action). But below this sur-
face, there was something much more important, namely, revolt against con-
vention, particularly against rationalized convention: feeling (possibly genu-
ine) rose against cold reason; spontaneous impulse against ultilitarian logic;
intuition against analysis; the ‘soul’ against the intellect; the romance of na-
tional history against the artefacts of the Enlightenment. Let us call this atti-
tude anti-intellectualism, although this term will also be used in a different
sense below. Remembering that the romantic movement was confined to in-

ogist he also experienced and exerted influence of an environmentalist type (see below,
sec. 3c); he fought Kant’s aesthetics in an almost empiricist spirit, and there are
passages in his Ideen on cultural change that have a Spencerian ring; his theories of
language, literature, art, religion, mythology — including the methodological suggestions
in the direction of comparative philology and comparative mythology and hierology —
make him the precursor of several important modern, as they make him the heir to
several important eighteenth-century, tendencies, including tendencies enshrined in the
Hobbes-Locke-Hume tradition. If we cannot go into these cross currents of ideas that
elucidate many features of the nineteenth-century Zeitgeist, our comfort must be that
they entirely failed to fertilize economics.

3 Goethe is too great to be pigeonholed and, moreover, disliked the romanticists in-
tensely. But his work, both at dawn and at sunset, displays many romanticist elements.
It is only in between that Goethe was, or tried to be, severely ‘classic.’

420 III: FROM 1790 TO 1870

tellectuals — and therefore was something quite different from what we may
term the common man’s anti-intellectualism — we should not flinch at the ap-
parently paradoxical designation, intellectual anti-intellectualism. Viewed like
this, the phenomenon of romanticism really comes within a well-known class:
like other workmen, intellectuals seem from time to time to get disgusted with
their tools and to be possessed with a desire to ‘down’ them and to use their
fists instead.

This diagnosis explains, among other things, why it is impossible to systema-
tize romanticism into a coherent whole and to develop rules that would en-
able us to identify romanticist ideas or programs as easily as we can identify,
for example, utilitarian ideas or programs. The movement was in the nature
of a shake-up. Its fertility was principally due to this fact. The individual who
experienced its impact was left free to walk in any direction after having been
shaken up. This applies particularly to the political and economic views of in-
dividual romanticists which later historians have tried to unify in directions of
which they themselves approved if they were sympathetic, and in directions of
which they disapproved if they were hostile. The resulting picture was un-
realistic in both cases. Romanticism has been identified with political ‘reaction’;
it is true that many romanticists, following the tendencies of their time, turned
conservative or ‘reactionary’ when their environments did, and that some of
them even sold their services to ‘reactionary’ governments; but the essentially
revolutionary character of the movement was never quite lost, as may be gath-
ered from the case of that powerful leader of opinion, Joseph von Gorres.
Romanticist ideology has been contrasted with Benthamite ideas about lib-
erty and democracy; again it is true that romanticist liberty was not the liberty
of J. S. Mill’s essay and that romanticist democracy was not Bentham’s mech-
anistic thing; but it might be urged that some romanticists had a deeper un-
derstanding of what liberty and democracy meant to people as they are and
think and feel than had the utilitarians or than has anyone who tries to im-
pose a logical scheme of his making on existing social patterns. Romanticism
has also been credited with a strong taste — taste is the right word, since we
are speaking of literati — for the Roman Catholic faith; it is true that the
romanticists, with their sense for live realities, were bound to look upon that
mighty structure with feelings very different from those of the utilitarians; it
is also true that, at least in the early nineteenth century, their movement went
parallel with and was related to, a Catholic revival; but it is quite wrong to
confuse the two. Few of the true leaders of the Catholic movement (Gorres
is the most important instance, Chateaubriand a doubtful one) were promi-
nent in the romantic movement; most of them stood to it on a footing of cool
and reciprocated indifference. Finally, if romanticism has been associated with
‘universalist’ social philosophies, this was only because romanticists were op-
posed to rationalist individualism of the utilitarian type; but the feeling, the
intuition, the impulse they extolled were subjective and individual feeling,
intuition, and impulse — this extreme subjectivism, which knew no binding
rule, was precisely what set Goethe against them.

THE INTELLECTUAL SCENERY

421

What, the reader may well ask, can have been contributed to economics
by a movement such as this? The answer will, of course, read differently ac-
cording to whether we think of attitudes to practical problems, ideological
haloes, humors, and so on, or of technical analysis. A romanticist or any writer
influenced by the romantic attitude would, of course, look upon industrial life
and its problems in a nonbourgeois spirit and take views quite different from
the Benthamite ones. More generally, he would feel a healthy disgust at the
utilitarian tendency to reduce the colorful variety of social patterns and proc-
esses to a few bald generalizations about thoroughly rationalized hedonic inter-
ests. And he would build where utilitarianism leaves a void — or else provides
a dump for what is simply nonsense from its standpoint — a shrine for the his-
torically unique and for the values of the extrarational (though, as the discus-
sion above shows, these values differed greatly from one romanticist to an-
other). As voiced by some romanticist writers, much of this does not quite ring
true. It should be clear, however, that not all of it was literary fake. The stand-
point that is appropriate for a history of the search for scientific truth .is not
appropriate for a comprehensive appraisal. Nevertheless, we may list definite
contributions to positive analysis.

There are none to be recorded so far as technical economics is concerned.
Considering the nature of the movement, this is only what we should expect
and does not even amount to a criticism. Enthusiastic lovers of romanticism
seem to me to have committed a tactical mistake by insisting on the presence
of contributions of this nature, especially because it forced them to make a
hero of such a man as Adam Muller (1779-1829). As far as this goes, it should
be frankly admitted that there never was such a thing as a 'romantic school of
economics' at all.

It was, I think, W. Roscher who gave currency to that phrase by his paper, 'Die
romantische Schule der Nationalokonomik in Deutschland,’ Z eitschrift fur die gesamte
Staatswissenschaft , 1870, and who covered Muller with unmerited praise. Modem
'universalists,' having been hard put to it to find other members for this 'school,’ have
resorted to three devices: first, they included men such as F. Gentz and K. L. von
Haller (the interested reader is invited to look them up in any work of reference),
who were no economists at all; second, they claimed for the school famous men who
had but the most tenuous relation to it, if indeed any, such as F. List; third, they
applied themselves to the task of unearthing additional members who were duly
dubbed geniuses, such as Franz von Baader ( Sozietdtsphilosophie , in his Samtliche
W erke, 1854), who may pass for a sociologist. As to Adam Muller himself (mainly:
Elemente der Staatskunst, 1 809, new ed., 1922; Versuche einer neuen Theorie des
Geldes . . . , 1816, new ed., 1922; Von der Notwendigkeit einer theologischen
Grundlage der gesarriten Staatswissenschaften, 1819; a selection of papers has been
edited by Dr. Jacob Baxa, who also wrote a life of Muller with complete bibliography,
1930), it is sufficient to state that his economics consists in a negative revaluation of
part of A. Smith’s facts and arguments — of laissez-faire, free trade, division of labor,
and so on — which is his and not our affair, and in the introduction of a number of
wholly inoperative metaphysical conceptions.

Suppose even that there is any sense in saying, for instance, that money is money
only in the moment it changes hands and that in this moment it is not private (dlod,

422 III: FROM 1790 TO 1 870

as he called it) but public property ( feod ), or that it is the expression of ‘national value’
or ‘national force' — what of it? Such interpretations of metaphysical meanings are by
nature incapable of telling us anything that we do not already know about the rela-
tions subsisting in the empirical world. Qn the other hand, I do not wish to go
further than this. I have no intention of paralleling the ignorance that fails to ap-
preciate the tasks and methods of analysis by equally ignorant failure to appreciate the
tasks and methods of philosophic vision or interpretation of meanings. It is enough
for me if I can make the reader understand that these are two different worlds that
do not touch anywhere and neither of which can tell us anything about the phenomena
- — or whatever the word should be — in the other without reducing its own arguments
to futility. In order to make this point stand out strongly, I refrain from asking the
question how good or bad A. Muller’s speculations are when considered as phi-
losophies. 4

It seems possible, however, to speak of a romanticist sociology or at least of
definite contributions of romanticist writers to economic, political, and gen-
eral sociology. One has been mentioned already: we may restate it by saying
that it consists in the insertion, into the analysis of institutions and of be-
havior within institutions, of the compound of nonrational — not necessarily
irrational — human volitions, habits, beliefs, and so on, which largely make a
given society what it is and without which a society and its pattern of re-
action cannot be understood. The names of Herder and Novalis 5 may be
mentioned as illustrations. The artistic component in romanticism is, in par-
ticular, responsible for emphasis upon psychological relations and reactions, a
fact which lends some color to the view that the romanticists were forerunners
of modem social psychology . 6 The outstanding example of contributions of this
kind are the concepts of a National Soul ( Volksseele ), a National Character,
and a National Fate. Such concepts came readily to literati and they acquired
with them an emotional connotation. But the sentiments, as well as any philo-
sophical visions, may be dropped, whereupon the National Soul reveals itself
as a catch-all for a number of very important facts. Even as an entity it has
appealed to many later sociologists of the group-mind type. How very 'positive’
a thing can be made of it is shown by the fact that we also find it in so thor-
oughly unromanticist a writer as Comte.

But the chief importance of the romanticist movement for analytic eco-
nomics consists in the impulse it gave to all kinds of historical research. It
taught us better understanding of civilizations other than our own — the Mid-

4 It is on this question only that meaningful difference of opinion is possible be-
tween us and the modern universalist admirers of A. Muller. And with this statement
they should really agree — especially as I am also prepared to concede political value
judgments — because they have always affected to despise the field for which I claim
autonomy from romantic or any other metaphysical speculation.

5 Novalis was the pseudonym of Friedrich von Hardenberg (1772-1801), German
poet. A fragmentary theory of society may be compiled from his unsystematized writ-
ing ( Gesammelte Schriften, ed. Obenauer, 1925). There is. an essay on him by Car
lyle, which does not, however, go much beyond artistic aspects.

6 I do not share this view without qualification (see below, Part iv, ch. 3, sec. 3e).

THE INTELLECTUAL SCENERY

'"Av

i -

fllii

4 2 3

die Ages, for example, and extra-European cultural worlds as well. This meant
new vistas, wider horizons, fresh problems, and, above all, the end of the
stupid contempt that Voltairians and utilitarians professed for everything that
preceded ‘this enlightened age/ 7 Let us glance at the most important of the
cases where romanticist influence, national soul and all, shows unmistakably,
on the surface at least: the emergence of the Historical School of Jurisprudence.
This school acquires additional significance for us because it helped to pro-
duce a similar movement in economics . 8

After the Wars of Liberation, national exhilaration asserted itself in many
proposals that, more or less directly, pointed toward a unified Germany. Among
them were proposals for codifying the German law. One of these — by a promi-
nent jurist, Thibaut — was adversely criticized in a pamphlet by Savigny that
attracted nationwide attention . 9 Its argument rose high above the particular
occasion and amounts to a general sociology of law: the legal institutions of a
nation are part of its individual life as a nation and the expression of the
whole of it, and of the whole of its historically determined situation; they
embody all the intimate relations and necessities of this life which find in
them more or less adequate formulation; they fit as does the skin of the human
body; to replace them by a rationally excogitated code is like tearing off a
body’s skin in order to replace it by a synthetic product. Hence — this is what
matters to us — the necessity of studying law not from the standpoint of a few
rational principles, but within the framework of all its bearings on the na-
tional soul or character. Hence the conclusion — in exact opposition to the

7 Theophile Gautier occasionally used the phrase moyennagiste as a synonym for ro-
manticist, and the two phrases seem in fact to have meant much the same for the
whole romanticist cenacle in Paris. This cult of medieval civilization did not fail, of
course, to elicit liberalist sneers, the more so because it involved unhistorical idealiza-
tions as well as (in the case of Gautier) red waistcoats. But we must see through and
condone the inevitable pranks of literati: if ignorance entered into this cult, much
more ignorance had entered into that of la raison.

8 The influence of the historical school of jurisprudence is particularly evident in the
case of Roscher, who took arguments from the jurists and attached importance to what
he considered to be a close parallelism between the situations in the legal and the
economic fields. In other cases, that of R. Jones for instance (see below, ch. 6), -no such
influence can be proved.

9 Vom Beruf unserer Zeit fur Gesetzgebung und Rechtswissenschaft (1814), by
Friedrich Karl von Savigny (1779-1861), an academic jurist of established reputation,
who had, by an earlier work of striking originality (Recht des B esitzes, 1803), rejuve-
nated the decadent jurisprudence of his day. By the foundation, with Eichhorn (who
represents the Germanist element in the alliance, as Savigny represents the Romanist),
of the Zeitschrift fur geschichtliche Rechtswissenschaft (1815), by his Geschichte des
romischen Rechts im Mittelalter (1815-31), and by his System des heutigen romischen
Rechts (1840-49), he rose to a position of recognized leadership in the German legal
world of his day, both in the academic and (in Prussia) in the official sense. This leader-
ship meant the victory, for the time being, of the historical school. But he should not
be called its ‘founder/ As could be shown had we space, he brilliantly led and devel-
oped a tendency, all the seeds of which had been sown before.

424 III: FROM 1790 TO 1870

Benthamite view — that the only method for scientific jurisprudence to pursue
is the historical one . 10 This, in a nutshell, was the creed and program of the
historical school of jurisprudence. Owing to the use of the concept of a na-
tional soul and character, the relation between this historical sociology of law
and specifically romanticist thought stands out strongly, perhaps more strongly
than it should. For common sense tells us that there would have been his-
torical jurisprudence even if there had not been any romanticism. This also
applies to those German economists who, having undergone legal training or
having what by a later American term we may call an institutionalist bent,
were no doubt influenced by the example of the historical school of juris-
prudence.

(b) Historiography. The extent to which the rich developments in that
period’s professional historiography are to be credited to romanticist ideas is
still more debatable. It is true that the romanticist mood stimulated interest in
historical research and increased the public’s receptiveness to its results. Be-
yond this it is not safe to go without more specific reasons than a general be-
lief in the all-pervading influence of romanticism. But it seems to me that
one such reason does in fact exist. The period had indeed a large number of
historians who pleaded a cause, the cause of a country or of a political system
or a party, or made it their business to grade — yes, as a schoolmaster grades
his pupil’s boohs — the men and events reported on, according to moral or cul-
tural standards of their own . 11 A tendency toward taking a different line as-

10 These points must be kept in mind if misunderstanding is to be avoided: (1)
This sociology of law is not quietist or hostile to reform. It only sponsors 'organic’
reform from 'organic’ necessities as against reform from speculative principles. Savigny
himself, as Grand Chancellor, carried reforms. (2) This sociology, by virtue of its
emphasis upon historically given conditions, has a side that might be described as
'national.’ But it has no 'nationalistic’ implications whatsoever. (3) Even reforms car-
ried out in the historical spirit presuppose certain general principles and deductions
from them. Savigny overlooked this and his program was therefore, however great
its merits, scientifically inadequate. From our standpoint as economists, it is very im-
portant, on the one hand, to notice this error and, on the other hand, to realize that
it does not necessarily impair the usefulness of the historical method.

11 Thus, Lord Macaulay pleaded the causes not only of England, but also of the
Whig party: he made no effort to understand any other standpoints. Michelet glorified
France; Droysen, Prussian policy; Dahlmann and von Rotteck pleaded for liberalism
and constitutionalism; Grote for Athenian democracy (George Grote, History of
Greece, 1st ed., 1846-56, is of particular interest to us because he was an orthodox
Benthamite and one of the most important members of the philosophical-radical
circle); G. Bancroft for Jacksonian democracy. In all such cases there is, irrespective
of any conscious intention of the authors, obvious danger of ideological distortion of
facts. But even if all facts are reported with scrupulous impartiality, they will still
stand, as it were, in an artificial light — the light of the writer’s convictions or creed —
and not in their own. Consider an additional example of a somewhat different type:
W. E. H. Lecky (especially History of the Rise and Influence of the Spirit of Ra-
tionalism in Europe , 1865), one of the relatively few nineteenth-century exponents of
the eighteenth-century raison. To begin with, he wrote from a definite sociology of
history that makes ideas the prime movers of the historical process. In addition, he re-

THE INTELLECTUAL SCENERY 425

serted itself, however: to present facts in their own light, to let events appear
as they might have appeared to the people who experienced them, to preserve
the color and the spirit of time and place. This 'immanent interpretation’ of
historical processes evidently raises very serious methodological problems as
regards the nature of the intuitive understanding of the individuals and civili-
zations it involves. For us it is of particular interest because of the close af-
finity of its principles to those of Max Weber. It is primarily associated with
the name of Leopold von Ranke . 12 A French sponsor of it was Augustin
Thierry. The work of these and other men was, in its scholarly aspects, neu-
tral to romanticism and, in other aspects, even hostile to it. But their respect
for the autonomy of every culture and for its individual color constitutes an
affinity with romanticist ideas that we must not overlook.

For the rest, since it is impossible to report on that period’s historiography
so as to convey an adequate impression, we must confine ourselves to a brief
survey of those features of it that are most relevant for economics. In the first
place, there were the new materials and the new standards of criticism. It was
during this period that historiography definitely stepped out of the range of
literary sources and — systematically and on a large scale — began to use original
documents and the information that is enshrined in monuments, inscriptions,
coins, and the like. Cuneiform writing (Grotefend) and hieroglyphs (Cham-
pollion) yielded their secrets. Techniques for the exploitation of source ma-
terials were taught, and comprehensive publications of such materials were un-
dertaken: the ficole des Chartes, the English Rolls Series, and the Monumenta
germanide historica are examples of a purposeful and systematic activity, for
which there was no parallel in our own field. Criticism of sources attained
new levels, and it was this plus the new materials that produced the achieve-

duced the march of ideas to a scheme that is unaware of anything but an increasingly
successful struggle of reason with religion. He thus produced a report that stands and
falls with a definite creed and has no meaning irrespective of it. I use this opportunity
to advert to the problems that arise from the naive habit of historians who have no axe
to grind or cause to plead but set themselves up as judges of all things human, who
know all motives and are in possession of all standards of behavior. An example will
illustrate. The great Mommsen was a conspicuous victim of the self-delusion involved:
he knew how the Roman legions should have been handled in the battle on the
Trebbia; he knew how Cicero ought to have dealt with Catilina’s conspiracy; he knew
what motives swayed Julius Caesar. He never displayed any awareness of the dangerous
extent to which he relied on his intuitive comprehension — the comprehension of a
no doubt able and respectable middle-nineteenth-century bourgeois mind. This has
some obvious bearings also upon procedures of economists.

12 Without presuming to proffer my own opinion, I may state that a majority of
historians of all countries would agree to call him the first historian of that period.
His international influence — also on historiography in the United States — rests mainly
on the new standard of historical scholarship that his famous seminar was the means
of establishing. His mastery in exploiting new source material and in applying new
canons of criticism was of a piece with his refusal to accept the guidance of philo-
sophical (especially Hegelian) ideas. If we notice the romanticist element in his work,
it should be added that he himself was careful to distance himself from romanticism.

426 III: FROM 1790 TO 1870

ments of Niebuhr 13 and Mommsen. But the emphasis upon the original docu-
ment was quite general. It constitutes the main scholarly merit of Michelet.
We find it also in writers whom we do not value primarily as scholars, for ex-
ample, Thiers, the politician. We find it even in the creators of the realistic
novel, for example, the brothers Goncourt.

In the second place, historians developed a bent for sociological analysis that
benefited from its proximity to facts. Niebuhr’s attention to institutions and
to the question of the effects of policies and reforms and Thierry’s attention
to racial factors may serve as examples. This hardly ever amounted to explicit
theorizing, but it very often implied sociological theories though, needless to
say, they were none the better for not being properly articulated. Moreover,
much more than before, we observe interest in economic phenomena per se.
This interest manifested itself even where we should least expect it, in the
field of ancient history, 14 on the one hand, and in the 'pictorial’ history of the
period, on the other. Lord Macaulay’s History of England (1848-61) illustrates
to perfection what I mean by pictorial history — history that concentrates on
the picturesque military or political events and narrates them with an eye to
stirring effect. But Macaulay has chapters descriptive of economic and social
conditions that are indeed effective pictures but entirely different ones. An
analogous statement holds for L. A. Thiers’ History of the French Revolution
(1st French ed., 1823-7; English trans. 1838).

In the third place, there was a literature, important by virtue of achieve-
ment but still more important as the basis of later developments, that may
be described as the product of the purely scientific wing of the historical school
of jurisprudence or as the product of the institutionalist wing of the historians.
I shall illustrate this by the names of four eminent men whose lines of re-
search, widely though they differed from one another, all come within the
category envisaged. Maurer 15 was the leading though not unchallenged au-
thority on the social organization of medieval Germany, and his theories ex-
erted influence far and wide throughout the nineteenth century — even after
they had become obsolete. Fustel de Coulanges’ famous book, which penetrated

18 1 wish I could stay to sketch the personality and work of this civil servant,
scholar, banker, teacher, and ambassador (B. G. Niebuhr, 1776-1831), whose R dmische
Geschichte (1811-32) placed research in Roman history on a new footing. Among
other things, he holds two claims to being considered an economist also: he was an
authority on currency policy; he wrote Forschungen zur intemationalen Finanz- und
Bankgeschichte (A. Trende ed., 1929). Theodor Mommsen’s famous Romische Ge-
schichte appeared 1854-6.

14 Examples are. Die Staatshaushaltung der Athener , a study of Athenian finance
by August Bockh (1817) and, still more significant, the Ideen iiber die Politik, den
Verkehr, und den Handel der vomehmsten Volker der alten 'Welt (1793-1812, English
trans. 1833-4) by A. H. L. Heeren. The influence of this great scholar and teacher
extended over a wide domain that also included political geography.

15 G. L. von Maurer (1790-1872), Geschichte der Markenverfassung in Deutschland
(1856); Geschichte der . . . Hofverfassung in Deutschland (1862-3); Geschichte der
Dorfverfassung in Deutschland (1865-6); Geschichte der Stddteverfassung in Deutsch-
land (1869-71).

THE INTELLECTUAL SCENERY 427

into the general reading of the educated (but not, so far as I can see, into that
of economists), arranged the fruits of scholarly work around a theory to the
effect that religion is the most important factor in shaping the legal and po-
litical institutions of a society, a theory that, owing to the close correlation
between the various departments of national life, will never be contradicted
by facts, even though it should be wrong or inadequate. 16 Sir Henry Maine’s
(1822-88) leadership belongs to the next period, but the work that spread his
fame belongs to this. It presents a most instructive piece of a historian’s the-
orizing. 17 Finally, the historico-ethnological work of J. J. Bachofen 18 must be
mentioned, though its influence also belongs in the next period.

Finally, in the fourth place, Kulturgeschichte , 19 though not of course a new
phenomenon, established itself as a recognized specialty. Its bearings upon our
subject are obvious. It may paint murals or it may paint miniatures. The foot-
note below mentions the outstanding masters of the two forms, Burckhardt and
Riehl. 20

16 N.' D. Fustel de Coulanges (1830-89), La Cite antique (mainly the Greek city
state or polis ), 1864; English trans. 1874.

17 Sir Henry Maine, Ancient Law (1861). Students of economics should know more
about Maine’s work than the slogan ‘from status to contract.’

18 That is, the one work of Bachofen’s that I shall mention: Mutterrecht (1861),
the fountainhead of a whole literature on matriarchy.

19 Another word that is refractory to translation except by the un-English phrase,
history of culture. History of civilization is not quite right. History of civil society
would be still more misleading.

20 Of Jakob Burckhardt’s (1818-97) imposing works, it will suffice, for our purpose,
to mention Die Kultur der Renaissance (i860; English trans. 1878). The nature of
the performance, which I trust is familiar to every reader, is difficult to define in
general terms. Perhaps this phrase will come as near to defining it as it is within my
power: a vision of an epoch’s life in terms of art and politics (both taken in the
widest possible sense). The essential point that differentiates such a structure from
the history of any of the things that furnish the material for it — from the history
of art and literature per se, or science per se, or economic, social, or any other politics
per se — is that these things do not stand in the structure for their own sake, but for
the sake of expressing, functionally, some larger and deeper reality. Jakob Burckhardt’s
place in the history of thought transcends this performance, and the influences (Ranke’s
among them) that helped to form him and the influences that emanated from him
would be interesting to analyze. But the popularity of the work I mentioned must
not deceive us concerning his influence as a social philosopher or political thinker.
He was too far removed from the liberal slogans of his time and then again too far
removed from any prophetic wrath about them to wield much influence.

W. H. Riehl (1823-97) might have been included in the next section’s report. For
his work is still more definitely relevant to professional sociology than is Burckhardt’s.
But the elements of his sociology (some of them anything but bombproof) would
have to be picked out from what, fortunately, always remained historical work. I do
not think that his influence went much beyond Germany’s frontiers. But perusal of
his Kulturstudien aus drei J ahrhunderten (1859) would do a lot of good to students
of economics. This book might be an excellent substitute for some of the items on
our current reading lists.

428

in: FROM 1790 TO 1870

3. Sociology and Political Science: Environmentalism

We know that sociology dates from the scholastics and even from the
Greeks. But the status of a recognized field of research it did not acquire be-
fore the next period (see Part iv, ch. 3). In the period under discussion sociol-
ogy was indeed, as we have put it above, baptized by Comte, but no great
importance should be attributed to this fact. It is true that there was plenty
of important sociological work. But it remained unco-ordinated and unsys-
tematized. Most of it we have noticed already. We may speak of a philoso-
pher's sociology, a lawyer's sociology, a historian’s sociology. Each of them
took many forms that differ widely from, and stand in the most varied rela-
tions to, one another. It is dangerous to force these forms into large categories.
But, for the purpose of a summary review, they may be divided into an 'ab-
stract' and a 'historical' compound. In practical importance, Benthamite utili-
tarianism stands first among the former, 1 historical jurisprudence first among
the latter. In this section we shall adopt, as far as possible, this schema. In ad-
dition an attempt will be made to supplement our sociological harvest by what-
ever we can glean from the period’s literature on government and politics, for
which the phrase Political Science then came increasingly into use, and by a
brief glance at a line of thought that should interest economists particularly,
Environmentalism.

(a) The Natural-Law Sociology of Government and Politics. Let us recall
three results that have been established previously at various turns of our
way. First, the historical origin of all social science is in the concept of Natural
Law, which -was from very early stages associated with more or less definite
concepts of 'community' or 'society.' The Greeks may have confused the latter
with the concept of government. It would have been natural for them to do so
under the conditions of the polis. But the scholastic doctors were proof against
this analytic mistake, because the practical problems of their age and their own
position in the social organism could not fail to make it clear to them that the
State or the Government — or the 'Prince' — is a distinct agent with interests
of its own that do not necessarily coincide with the interests of the people or
the community (the Common Good). That 'society' was a discovery of the
philosophers of natural law, of the romanticists, or of still later groups is one
of the legends of the history of sociology. 2 Second, we have seen that utili-
tarianism was a natural-law system. Like all natural-law systems, it was all-

1 Other types of sociologies, or fragments of sociologies, that were abstract in the
sense that they proceeded from a few ‘first principles,’ are to he found chiefly in the
writings of speculative philosophers. Thus, Kant presented what he described as Meta-
physical Elements (A nfangsgriinde) of the Theory of Law (Werke ix, pp. 72 et seq.).
This theory was ‘abstract’ and nonhistorical enough. But it was, of course, anything
but utilitarian.

2 If there is a writer who actually- can be accused of confusing the State with
Society, that writer is the romanticist A. Muller, for he called the state the 'totality
of human affairs’ (E lemCnte, vol. 1, p. 60).

THE INTELLECTUAL SCENERY

429

embracing in principle and very nearly so in actual practice. It was conceived
as a unitary social science that was both normative and analytic and, among
other things, included ethics, government, and legal institutions down to all
the details of judicial procedure and criminological practice — in both of which
Bentham himself was at least as intensely interested as he was in any eco-
nomic question. Third, we know that this unitary social science of utilitarian-
ism was individualist, empiricist, and 'rationalist,' the last term meaning here
simply that the system, both in its analytic and in its normative aspects,
strictly excluded everything that would not pass the test of utilitarian or
hedonist rationality. The reader will save himself much trouble and greatly
improve his understanding of doctrinal history if he gives due consideration
to two vital facts. First, individualism does not necessarily involve empiricism
or rationalism in this sense; 3 empiricism does not necessarily involve individ-
ualism and rationalism in this sense; and rationalism in this sense does not
necessarily involve individualism and empiricism. But, second, so powerful a
synthesis as Bentham’s was bound to create, in the minds of foes as well as
friends, an association between all the elements that enter into it which gave
the impression of logical connection even where none existed. 4

Now, by virtue of its very nature, this system is incapable of taking ac-
count of the facts of political life and of the way in which states, govern-
ments, parties, and bureaucracies actually work. We have seen that its funda-
mental preconceptions do little harm in fields such as that part of economics
where its 'logic of stable and barn' may be considered as a tolerable expression
of actual tendencies. But its application to political fact spells unempirical and
unscientific disregard of the essence — the very logic — of political structures and
mechanisms, and cannot produce anything but wishful daydreams and not
very inspiring ones at that. The freely voting rational citizen, conscious of his
(long-run) interests, and the representative who acts in obedience to them,
the government that expresses these volitions — is this not the perfect example
of a nursery tale? Accordingly, we shall expect no contributions to a service-
able sociology of politics from this source. And this expectation is almost
pathetically verified. Strong common sense redeems, to some extent, Bentham's
philosophy of government as presented in the Fragment on Government
(1776) and, of course, very many of his practical recommendations on judicial
procedure and the like. But James Mill's ‘Essay on Government' 5 can be de-
scribed only as unrelieved nonsense though, so it seems, also ineradicable non-
sense. Moreover, its purely speculative character — so unlike the character of

3 This sense of the term rationalism has, of course, nothing to do with the sense
which we attributed to it in another place (11, ch. 1, sec. 6). But all along, these two
and other meanings have been confused by many writers — a fertile source of mutual
misunderstandings and of pointless antagonisms and controversies.

4 Actually, the situation was and is further complicated by the fact that, of the
terms mentioned, only ‘empiricist’ (in the sense of antimetaphysical) has a fairly stable
meaning. The preceding footnote shows that this is not so in the case of ‘rational’
or ‘rationalistic/ The case of the term ‘individualism’ is still worse.

5 Encyclopaedia Britannica (suppl., 1823).

430 III: FROM 1790 TO 1870

the same author’s no doubt abstract argument in his book on economic
theory 6 — is obvious. This was realized at the time by many non-utilitarians
such as Macaulay. But much more important is it that J. S. Mill (without
mentioning his father’s name) applied to the political theory of the Benthamite
school the unflinching epithet ‘unscientific’ (Logic, vi, ch. 8, § 3) and that in
addition, his sentences vibrating with suppressed impatience, he said practically
everything else that needs to be said about it. In this, as in so many respects,
he rose above his early Benthamism. But he never shook off its shackles en-
tirely: though his essays On Liberty and Considerations on Representative
Government are no doubt redeemed, in part, by wider horizons and deeper
insight, they are still ‘philosophical radicalism.’ It will thus remain forever
a matter of the historian’s personal equation whether J. S. Mill’s theory spells
abandonment or improvement of that of his father . 7

Non-utilitarian and anti-utilitarian philosophers also continued to produce
systems of natural law — and corresponding philosophies of the state — but of
much more restricted scope, most of which reflect the influence of the ro-
mantic mood or else the influence of Kant or Hegel . 8 The harvest to be gath-
ered for our purposes from this field is small indeed. Lawyers, too, continued
to produce natural-law speculations. The most valuable ones were, however, in
special fields, such as constitutional or criminal law . 9 More comprehensive en-
terprise of this type was being rapidly discouraged by the rising prestige of the

6 After all that has been said above, the difference should be obvious. But the point
is important both for our immediate object, which is to show why general objections
against utilitarian premisses do not necessarily constitute objections in the particular
case of economic theory, and for our wider aim, which is to understand why general
objections against any philosophy do not in themselves dispose of any particular theory
that, actually or apparently, links up with that philosophy. Therefore, let me restate
the argument in still a different form: any theory involves abstractions and therefore
will never fit reality exactly, hence economic theory is inevitably unrealistic in this
sense; but its premisses are induced from realistic observation of the profit-seeking and
calculating businessman; the premisses of political theory (style James Mill) are not
induced from observations of the agent of politics, the politician, but postulated from
a completely imaginary agent, the rational voter; therefore these premisses, hence re-
sults that are derived from them, are not merely abstract but also unrealistic in a
different sense.

7 Exactly as in the case of the theory of value, as we shall see more fully later on;
in all parts of his wide domain, J. S. Mill’s intellectual situation and character asserted
themselves in precisely the same way.

8 A fairly long list, chiefly of German performances — for England, T. H. Green’s
would have to be mentioned — could be compiled. We merely recall one of the earliest
and most influential that has been mentioned already, Fichte’s Grundlage des Natur-
rechts (1796-7). Hegel’s glorification of the state as the embodiment of Absolute Reason
is mentioned as a curiosum only. No wonder he was popular with the Prussian bu-
reaucracy. '

9 As an example, I mention P. J. A. von Feuerbach’s (not to be confused with the
philosopher L. A. Feuerbach) criminology: Kritik des natiirlichen Rechts (1796).

THE INTELLECTUAL SCENERY

43 1

historical school . 10 An extremely influential performance of this kind, Stahl’s,
must however be noticed . 11 For the rest, lecturers displayed a significant tend-
ency to turn their lectures on philosophy of law into lectures on the history
of the philosophy of law . 12

(b) The Historians' Sociology of Government and Politics. Writers who
were professional historians or at least had an eye for historical reality were
bound to do better than utilitarian or other theorists as far as politics is con-
cerned, for it is more difficult for historians to neglect facts that stare them in
the face. Edmund Burke, for example, was a man who saw the concrete situa-
tion with passionate energy — whether indulging in bursts of wrath or proffer-

10 But let the reader keep this in mind : the historical school fought abstract specula-
tion of either the Benthamite ‘empiricist’ or the German ‘idealistic’ types, because
these were the types with which natural law had become identified; they fought natural
law as such. From our standpoint, however, there is no point in doing this, and any
generalization produced by jurists of the historical school should also be included in
the corpus of natural law, just as the historical economist’s generalizations are still
economics and may even enter the concept of economic theory (e.g. in the case of
‘theories’ of the origins of markets).

11 F. J. Stahl ( Philosophic des Rechts nach geschichtlicher Ansicht, vol. i, 1830;
vol. 11, 1837) was a sort of Lutheran Filmer and rose to be a power in the intellectual
life of Prussia in the era of Frederick William IV. The title of that work is justified
in the case of vol. 1 by its attack upon utilitarian natural-law rationalism (and, in-
cidentally to this, by sympathy with the standpoint of the historical school of juris-
prudence) but is a misnomer for vol. 11, where Stahl, having found his bearings, at-
tacked the historical school of jurisprudence and based himself squarely upon Lutheran
theology. Informed readers will miss the name of K. Frantz (Naturlehre des Staates,
1870), as they will many others, e.g. that of Joseph de Maistre, and the whole con-
tiguous literature on Church and State. In defense, I can only point to the particular
purposes of this fragmentary sketch.

12 It is with reluctance that I leave a topic that was a close neighbor of economics
on the continent of Europe and in whose province the explanation may be found of
many a peculiarity of continental economics, among other things, of the proficiency
of German economists on the institutionalist side of their science: links that had to
be fought for elsewhere, especially in the United States at the time of the institutionalist
controversy, were a matter of course for the products of many, if not most, continental
universities. The continental student of economics absorbed a sociology of legal in-
stitutions — that meant much for his intellectual equipment — in many cases before
he had had a word of technical economics. I shall therefore mention the names of
two eminent men, who were no doubt jurists first and last but who nevertheless helped
to form many an economist. Their influence belongs in the next period rather than
in the one under discussion, but both published their most characteristic work before
1870. Rudolph von Gneist (1816-95) was a typically Anglophile German liberal, an
authority in many fields but especially in constitutional and administrative law. See
Das heutige englische Verfassungs- und Verwaltungsrecht (1857-63). Rudolph von
Jhering (1818-92), Geist des romischen Rechts (1852-65). Neither has been translated
so far as I know, although later works of both of them were (e.g. Gneist’s Englische
Verfassungsgeschichte, 1882, English trans. 1889; Jhering’s Z week im Recht, 1877-83,
English trans. 1913).

432 ni: FROM 1790 TO 1870

ing sober advice — and knew how to distill generalizations from them that
have established the reputation of his writings as a storehouse of political wis-
dom even with people who bore no love to his politics: it might be said that
he taught politics by the case method and, as everyone knows, very effectively. 13
Again, nobody has ever commended Lord Macaulay for profundity of thought.
But as regards insight into the nature of political processes, he was immeas-
urably superior to James Mill, and his criticism of the latter's presentation of
the political theory of utilitarianism in the Edinburgh Review (1829) was
perfectly adequate as far as it went although it did not go very far. Politics was
still a ‘science’ to him (not the object of a science) though an ‘experimental’ 14
one — by which he simply meant that the utilitarian principles of politics were
out of contact with political reality and that generalizations could be arrived
at only by observations of political reality. He did not try to formulate such
generalizations explicitly. Had he done so, they would, we may be sure, have
turned out to be idealized Whig politics. This was the case also with those
historians who did try their hands at political generalization. 15 Finally, let us

13 Edmund Burke’s (1729-97) name — no particulars are necessary — cannot be
omitted from any survey, however sketchy, of the intellectual scenery of the period,
though chronologically his most characteristic performances belong to the preceding
one. Students of economics should peruse his writings carefully to learn not only how
people should reason on political questions but also how people do reason in these
matters. As the reader sees, I find it difficult to join the general chorus of admiration
for Burke as a thinker. In fact, the man who defined a political party as a group of
people who co-operate in order to further the public interest on some principles on
which they are all agreed was certainly no profound analyst; moreover, he was clearly
infected by the tendency of his time to take rationalizations for analytic explanation.
The reader can easily satisfy himself of the lack of realism in Burke’s definition by
trying to apply it, e.g., to the two great American parties.

14 It is amusing to observe this use of the term ‘experimental.’ The utilitarians,
being empiricist philosophers and believers in the application of the methods of
physics, specifically claimed that their procedure was ‘experimental.’ These attempts
by both ‘theorists’ and ‘antitheorists’ to appropriate a term that, through the successes
of physical experimentation, had acquired a eulogistic connotation also runs through
the whole history of economics from the seventeenth century as will be noted again
and again. Actually the term as applied to social phenomena is next to meaningless;
what the writers who use it mean to convey must be ascertained separately in each case.

15 The subject being very important for us, I shall mention a few examples: the
Grundziige der Politik (1862) by the historian Georg Waitz is by far the most cred-
itable one I know, though not free from intellectualist fallacies; the Politik auf den
Grund und das Maass der gegebenen Zustdnde zuriickgefiihrt (1835) by the strongly
partisan (liberal) historian F. C. Dahlmann is an able piece of analysis; the L ehrbuch
des Vernunftrechts und der Staatswissenschaften (1829 35) by the still more partisan
(radical) historian K. W. R. von Rotteck is an illustration of the truth that, given
sufficiently close-fitting blinkers, a man may completely lose that sense for historical
reality which is the main practical advantage to be derived from historical study.
Finally, it is convenient to mention in this place a book that belongs chronologically
in the next period but is an excellent example of the Political Science of the best
historians of the period under discussion: J. R. Seeley’s Introduction to Political Science

THE INTELLECTUAL SCENERY 433

recall what I believe to be the finest flower of the period's literature of politi-
cal analysis: de Tocqueville’s De la Democratic en Amerique (183 5-40). 16
What is the nature of the performance that produced one of the 'great books’
of the period? It conveyed no discovery of fact or principle; it did not use
any elaborate technique; it did nothing to court the public (especially the
American public). An extremely intelligent mind, nurtured on the fruits of an
old civilization, took infinite trouble as to observations and brilliantly subdued
them to serve an analytic purpose. This was all. But it is much. And I know
of no other book that would train us better in the art of succeeding in this
particular kind of political analysis.

But the, period’s great performance in the field of political sociology stands
in the name of Karl Marx. We are not yet in possession of the facts that are
necessary to establish this. They will be supplied in the next section (4b). Here
I wish merely to say by way of anticipation that Marx’s theories of history, of
social classes, and of the state (government) 17 constitute, on the one hand, the
first serious attempts to bring the state down from the clouds and, on the other
hand, the best criticism, by implication, of the Benthamite construct. Unfortu-
nately, this scientific theory of the state, like so much else in Marxist thought,
is all but spoiled by the particularly narrow ideology of its author. What a
pity, but at the same time, what a lesson and what a challenge! Two examples
will illustrate another type of political analysis that, from negligible beginnings
in the eighteenth century, made some advance during that period, though it
did not get very far. As soon as political analysis becomes alive to the claims
of scientific methods, it is bound to run up against problems of criticism — in
the logical, not in the political sense: criticism of political concepts and of po-
litical reasoning — and of mechanisms. The book of a man who was himself an
eminent politician. Sir George Cornewall Lewis (1802-63) illustrates that

(first edited by H. Sidgwick in 1896 — the gleanings from Seeley’s ‘conversation classes’
on the subject that were so interesting a deviation from the current practice of formal
lectures).

16 Alexis de Tocqueville (1805-59) needs no introduction, for his name and work
have penetrated into secondary schools — a success only the more difficult to explain
because it was so thoroughly deserved. Attention is invited to the rest of his writings.
See Oeuvres completes (ed. Beaumont, 1860-65).

, 17 Marx’s truly sociological, i.e. nonspeculative, theory of the state is contained, in
a nutshell, in the Communist Manifesto and is there summed up in the pithy sentence
that a government is a committee for the management of the common interests of
the bourgeoisie. There is, therefore, no such thing as a socialist state — the state as
such dies in the transition to socialism, a proposition that has been taken over and
much emphasized by Lenin(!). It is impossible to say here all that should be said
about this theory of the state and of politics. That central sentence is, of course, a
half-truth at best. But it suggests indirectly something that is much more important than
is that half-truth, viz. the idea that the state (government, politicians, and bureaucrats)
is not something to philosophize on or to adore but something to be analyzed as
realistically as we analyze, e.g., any industry.

434 111 : from 1790 TO 1870

awakening to critical consciousness. 18 The later’ book of another man who
also was something of a politician, though primarily an academic leader, Franz
von Holtzendorff (1829-89), illustrates a growing sense of the necessity of ana-
lyzing the mechanism of public opinion. 19

(c) Environmentalism. A Zeitgeist that contains a component of mechanist
— or what amounts almost to the same thing, sensationalist — materialism will,
in exact proportion to the relative strength of this component, favor sociolog-
ical theories that emphasize the explanatory value of environmental factors.
Accordingly, we find a streak of environmentalist thought that may be de-
scribed as a vulgarized form of Montesquieu’s. 20 Two examples will suffice.
Feuerbach, the philosopher (not the lawyer), made man a product of his phys-
ical environment. If we add those qualifications that are necessary in order to
raise this proposition to the level at which it becomes possible to discuss it at
all, we have here a theory that has, explicitly and implicitly, come to the fore
again in our own time. His emphasis, within environmental factors, upon
food 21 is also in evidence in our second example, Buckle. 22 If space allowed us
to do so, we should have to consider his work under three aspects which, as it

18 Treatise on the Method of Observation and Reasoning in Politics (1852) — a for-
gotten book by a half-forgotten man. Yet both deserve to survive. The former is
strongly recommended to the reader because economists greatly need instruction of
the kind it imparts. The latter we have had occasion to mention in passing (above,
ch. 2).

19 Wesen und 'Wert der offentlichen Meinung (1879). Von Holtzendorff also wrote
Principien der Politik (1869), which does not seem to me to amount to much. None
of the other works of this prolific writer (though some of the fruits of his editorial
activities) are known to me.

20 Montesquieu does not seem to me to have overrated the explanatory value of
environmental factors. How far environmentalist arguments that occur fairly frequently
in the sociological literature of the second half of the eighteenth century — e.g. in
Herder’s writings — should be traced to his influence, I do not feel able to say. The
Esprit des lois was one of the most famous and most extensively read books of that
century. On the other hand, there were so many other sources from which a man
might have drawn environmentalist inspirations that it is difficult to make positive
assertions even in cases where Montesquieu was quoted.

21 L. A. Feuerbach ( Sammtliche Werke, 1903-11, vol. x, p. 22) coined the phrase:
‘Der Mensch ist was er isst.’ The pun loses in translation: ‘Man is what he eats’ —
one of those phrases that express a whole mental world. Feuerbach’s writings were
part of a literary current that popularized what Marx and Engels so well described
as ‘vulgar materialism.’ Let us notice in passing this very significant fact: many if not
all ideas of Feuerbach should have appealed to Marx for they agreed well with one
aspect of Marx’s work. Nevertheless, Marx fought them in season and out of season
(see e.g. Marx-Engels Archiv, 1, 1926, and Engels’ Ludwig Feuerbach . . . , 1888;
English trans. by A. A. Lewis, 1903), often with arguments that, coming from him,
were not very convincing. The explanation is simple, however: whatever else he was,
Marx was a highly civilized man; it was beyond him to swallow that sort of thing.

22 H. T. Buckle, History of Civilization in England (2 vols., 1857-61). The work
is a torso; in fact it is not more than an introduction to what was conceived as a
huge enterprise. There is a considerable Buckle literature.

THE INTELLECTUAL SCENERY

435

is, can only be indicated. First, there is an idea : to reduce history to a science
by arriving, through ‘induction’ from observed facts, at ‘laws’ of the same
kind as what Buckle conceived the ‘laws’ of physics to be. In intention, Buckle’s
interpretation of history, and not Marx’s, is the truly ‘materialistic’ one — which
is, of course, all to the credit of Marx. Nothing is more obvious, however, as
soon as one delves into Buckle’s work, than the fact that this idea is purely
ideological in nature: it is what he wished to carry into effect, whereas he
was actually swayed by pure speculation that from first to last forced facts
into a preconceived schema. Second, there is the conceptual implementation
of the idea, consisting of three types of ‘laws’ that determine social states and
their changes — physical, moral (i.e., propositions on human behavior), and in-
tellectual. The latter (mainly growth of technological control over physical
environments) supply the motive power of ‘progress,’ a principle that links up
with what we shall presently describe as Condorcet-Comte evolutionism. As
far as these aspects are concerned, namely, the analytic ones, even the little
we have said about the book is too much: its importance consists wholly in
providing a case study in analytic miscarriage, which may teach us to look out
for speculative propensities behind a nonspeculative program and for dilettant-
ism behind an apparently large scientific apparatus. But there is, third, the
almost unbelievable success this book has had with all types of people, rich
and poor, educated and uneducated, English and foreign. It is this success
only that raises the book to significance: it was one of the items of the lay-
man’s reading, one of the educators of that period’s public mind. As such its
teaching is an important element in the intellectual scenery we are trying to
visualize.

Like other ‘theories,’ environmentalism can easily be carried to a point where it
becomes obvious nonsense. But within its sphere, it is an indispensable helper of the
analyst of social phenomena — as it proved to be, for example, for Michelet. Tire case
may be illustrated by the (in this respect) similar case of ‘racialism.’ It is a melancholy
but very important observation to make that in the social sciences factors are always at
work that will drive such theories to the point of nonsense and — what is very much
the same thing — turn them into bones of contention for ideological and political
parties. Both environmentalism and racialism suit so many books that neither is al-
lowed to make its contribution to our understanding of social processes — their friends
and their foes alike join forces to prevent this consummation. Let us notice again a
work of the period which, with remarkable freedom from bias, succeeded in balancing
the environmentalist and racial element in a way that was quite satisfactory as far as
it went: F. T. ( not Georg) Waitz’s Anthropologie der Naturvolker (1859-64) — espe-
cially the first volume.

4. Evolutionism

Social phenomena constitute a unique process in historic time, and incessant
and irreversible change is their most obvious characteristic. If by Evolutionism
we mean not more than recognition of this fact, then all reasoning about social
phenomena must be either evolutionary in itself or else bear upon evolution.
Here, however, evolutionism is to mean more than this. One may recognize

436 III: FROM 1790 TO 1870

the fact without making it the pivot of one’s thought and the guiding principle
of one’s method. The utilitarian system may serve to illustrate this. James Mill
would have smiled at a questioner who asked him whether he was aware of
the occurrence of social changes, and he would have, in addition, conceived a
poor opinion of the questioner’s intelligence. Yet his various systems — in eco-
nomic, political, and psychological theory — were not evolutionary in the sense
that his thought in any of those fields turned upon evolution. And it is this
that shall be the criterion of evolutionism for us, both as regards philosophy — -
comprising also purely metaphysical speculation — and as regards any ‘scientific'
field. Evolutionism in this sense asserted itself in the course of the eighteenth
century but reached and passed its high-water mark in the nineteenth.

Attention is drawn to the presence of a disturbing factor, the influence of
which will be felt in many ways and not only in this section. In itself, the
concept of evolution is perfectly free from any valuation except within well-
defined standards . 1 As far as this goes, we merely recognize that people will
describe a change as progress if they like it, and as retrogression or degenera-
tion if they dislike it. But in the eighteenth century evolution was naively
identified with progress — toward the rule of la raison — that is to say, it carried
a value judgment by definition. And this naive association of ideas persisted
throughout the nineteenth century, though signs of its gradual dissolution ap-
peared in serious research work as time went on. The bourgeois whose busi-
ness and class position prospered had any amount of confidence in ‘progress’
of certain types, and he and the literary exponent of the bourgeois mind dis-
played a lamentable tendency to link this confidence in a certain set of de-
sired changes with some ineluctible forces that move civilizations or even the
universe. But we must try to keep clear of such infantilisms, however impor-
tant they are as features of the Zeitgeist.

For clarification and illustration, it will be useful to distinguish five differ-
ent — though often overlapping — types of evolutionist thought, all of which
loom large in the intellectual scenery of this period and also in that of the
subsequent one: what follows refers to both periods, though instances are taken
only from the one under survey.

(a) Philosophers’ Evolutionism. Hegel is the outstanding example. With
every apology for the temerity involved, I shall put the one point that is rele-
vant for the purposes of this book as follows. Let us postulate the existence of
a metaphysical entity — no matter what we call it — that is ultimate and abso-
lute reality, and let us thus place ourselves on the standpoint of an ultra-
idealistic philosophy . 2 Let us, at the same time and in the same sense, define

1 Thus, within the range of the accepted standards of the dental profession, it is
a meaningful proposition to aver that at the present time teeth are being extracted
‘more efficiently’ than a century ago and even that dentist A extracts teeth ‘more
efficiently’ than does dentist B. An analogous statement applies to technical economic
theory. But obviously this is no longer so when it comes to comparisons of social
structures or civilizations and outside of the range of specified standards in general.

2 Idealism as applied to German philosophy from Kant to Hegel has, of course,
nothing whatever to do with idealism in the ethical sense.

THE INTELLECTUAL SCENERY 437

the same reality as the totality of all actual and potential observational facts.
How is this possible? It is possible, if, as, and when we see in these observa<
tional facts, as it were, runes that embody (manifestations of) that entity 3 —
in much the same way in which we should do so if we adopted straight pan-
theism in the ordinary sense. Now, that entity is supposed to undergo an imma-
nent evolution in an essentially logical process of theses, antitheses, and syn-
theses . 4 And so does the observational reality. This is the kind of thing that
will always appeal to one type of mind and never to another. We pass on with
a definition and a comment. The definition: reasoning from the conception
of a metaphysical entity, which in unfolding its own contents produces a se-
quence of changes in the reality of experience, we call emanatist. The com-
ment: the reader will observe that of Hegel's emanatist conception of evolu-
tion something remains, even if we drop its metaphysical trappings, namely,
the idea or perhaps discovery that reality, as we know it from experience, may
be in itself an evolutionary process, evolving from inherent necessity, instead
of being a set of phenomena that seek a definite state or level, so that an ex-
traneous factor — or at least a distinct factor — is necessary in order to move
them to another state or level as the analogy with Newtonian mechanics sug-
gests. This idea, if tenable, is of course extremely important. As regards philoso-
phy, it renders it possible to proceed, for example, from Hegelianism in its
original acceptance to what may be termed Hegelian materialism, which many
of the so-called Young Hegelians did. As regards sociology, it Suggests a novel
approach to the facts of social change.

Before going on, we may notice two other methods by which philosophers
sometimes contrived to impart to their philosophies an evolutionary slant.
'Progress’ was in the air and, like other people, philosophers enjoy being up
to date. The agnostic or materialist, especially of the semi-popular variety, was
apt to substitute intellectual progress for the entities that he discarded, that
is to say, he was apt to raise a loan, from what will be described below (d) as
Condorcet-Comte evolutionism; or else he was apt to exploit biological evolu-

3 This is what Hegel’s famous phrase was meant to convey (if we equate our meta-
physical entity to reason): whatever is, is rational (conforms to reason) and .whatever
is rational (thinkable), is. As meant, this does not lend any support to conservative
attitudes. But the reader will have no difficulty in realizing how easily it can be made
to do so. Moreover, Hegel’s phrasing invites such an interpretation. This was even
an important factor in his success.

4 The irreverent did not fail to notice that here was an opportunity of proving
Hegel’s system to be nonsense. Misguided by their inability to rise to Hegelian heights,
they pointed — with a vicious smile — to the fact that this piece of philosophizing can-
not be readily translated into English. The German verb aufheben means both to
cancel and to raise. Hegel averred that a thesis, A is B, and its antithesis, A is not B,
aufheben each other into something higher, a synthesis that comprises the content of
both. But contradictory statements do not aufheben each other in the sense of raising
each other into something more comprehensive: they simply cancel , i.e. annihilate,
each other — which would be rather serious for Hegel and evolution. It is, of course,
possible to save the situation. A warning to us remains, however.

438 III: FROM 1790 TO 1870

tionism (e) for philosophical purposes. Whatever we may think of this as a
philosophy, it made popular literature.

(b) Marxist Evdlutionism. I have just adverted to the possible implications
for sociology that a despiritualized Hegelian philosophy might harbor. This
suggests that here we have after all more than a phraseological influence 5 of
Hegel upon Marx. If, nevertheless, we maintain substantive autonomy of
Marx’s so-called Materialistic Interpretation of History as against Hegelism,
and if we list it as a separate type of evolutionism, we allow ourselves to be
guided by two considerations. First, Marx’s theory of history developed inde-
pendently of Marx’s Hegelian affiliation. We know 6 that his analysis started
from a criticism of the current (and apparently immortal) error that the be-
havior that produces history is determined by ideas (or the 'progress of the
human mind’), and that these in turn are infused into actors by purely intel-
lectual processes. To start with this criticism is a perfectly sound and very
positive method but has nothing to do with Hegelian speculation. Second,
Marx’s theory of history is a working hypothesis by nature . . It is compatible
with any philosophy or creed and should therefore not be linked up with any
particular one — neither Hegelianism nor materialism is necessary or sufficient
for it . 7 What remains is, again, Marx’s preference for Hegelian phrasing- — and
his own and most, though not all, Marxists’ preference for anything that sounds
anti-religious.

5 An example of the purely phraseological influences, of which there are many, will
be noticed in passing. The untutored reader of Marx’s writings may wonder why
Marx speaks so often of 'contradictions’ of capitalism when he means nothing but
mutually counteracting facts or tendencies: these are contradictions from the stand-
point of Hegelian logic. This has had an amusing consequence. To this day, the
average Marxist, accepting the word Contradiction in the sense it carries in ordinary
logic and parlance, infers that Marx wished to charge the capitalist system with logical
incompatibilities in this ordinary sense every time he spoke of 'contradictions’ — which,
of course, is not the case.

6 See e.g. Marx’s introduction to his Contribution to the Critique of Political
Economy (publ. by Kerr, Chicago, 1904). The original German edition (Zur Kritik der
politischen Oekonomie) was published in 1859, the Einleitung (introduction) in the
Neue Zeit, 1902-3; the English translation by N. I. Stone includes the 'recently pub-
lished’ introduction in an appendix.

7 I have found that this statement is likely to cause surprise. But proof is easy.
For we may fully accept the doctrine of freedom of individual will in the sense in
which it is taught, e.g., by St. Thomas Aquinas, and still go on to argue that the
exercise of this free will, being limited by physical and social data, will in general
produce a course of events in conformity with these data. The economic interpretation
is nothing but a hypothesis about what, in turn, determines these data, and per se
implies neither absence of the individual’s moral responsibility for his acts nor refusal
to admit the possibility of supermundane influence upon these data themselves and
the ways in which they work out. Marxists, it is true, will not admit this. But they
will not admit this for reasons — beliefs, philosophies — that are extraneous to the logic-
ally essential content of the economic interpretation of history: philosophical deter-
minism is, as a matter of fact, mostly associated with sponsorship of the latter, but
in logic it has nothing to do with the methodological determinism that is implied in it.

■ - Jv*;

THE INTELLECTUAL SCENERY 439

Both the achievement embodied in that hypothesis and the limitations of
this achievement may be best conveyed by means of a brief and bald state-
ment of the essential points, (1) All the cultural manifestations of 'civil society’
— to use the eighteenth-century term — are ultimately functions of its class
structure. 8 (2) A society’s class structure is, ultimately and chiefly, governed by
the structure of production ( Produktionsverhaltnisse ), that is, a man’s or a
group’s position in the social class structure is determined chiefly by his or
its position in the productive process. (3) The social process of production dis-
plays an immanent evolution (tendency to change its own economic, hence
also social, data). To this we add the essential points of Marx’s theory of social
classes, which is logically separable from points (1) to (3) that define the eco-
nomic interpretations of history but forms part of it within the Marxian
scheme. (1') The class structure of capitalist society may be reduced to two
classes: the bourgeois class that owns, and the proletarian class that does not
own, the physical means of production, which are ‘capital’ if owned by em-
ployers but would not be ‘capital’ if owned by the workers who use them. (2')
By virtue of the position of these classes in the productive process, their inter-
ests are necessarily antagonistic. (3') The resulting class struggle or class war
(Klassenkampf) provides the mechanisms — economic and political — that im-
plement the economic evolution’s tendency to change (revolutionize) every so-
cial organization and all the forms of a society’s civilization that exist at any
time. All this we may sum up in three slogans: politics, policies, art, science,
religious and other beliefs or creations, are all superstructures ( Vberbau ) of the
economic structure of society; 0 historical evolution is propelled by economic
evolution; history is the history of class struggles. 10

This is as fair a presentation of Marx’s social evolutionism as I am able to
provide in a nutshell. The achievement is of first-rank importance 11 although
the elements that enter into it are of very unequal value or, rather, unequally
impaired by obvious ideological bias. Least valuable for any but agitatorial pur-

8 I repeat that the term ‘function’ here used does not imply causal determination.
In fact, an attempt to insist on such ‘absolute’ or ‘mechanical’ determination would
not achieve anything except to make the theory very easy to refute. Both Engels and
Plekhanov, the chief Marxist authorities on the subject, have seen this and both re-
laxed considerably on the stringency. Emphasis upon ‘ultimately’ was one of the
means of doing so.

9 One aspect or application of this theory we have discussed in Part 1, viz. the doc-
trine of the inevitable ‘ideological bias’ of all thought.

10 Marx’s ideas on social evolution and classes are, of course, basic for everything
he ever wrote, and comments on them are strewn all through his works — which does
not make it any easier to do justice to them. But of all his publications, the following
seem to me the most important sources to be used in any attempt at interpretation:
the Communist Manifesto; the Class Struggles in France ; the Eighteenth Brumaire
of Louis Bonaparte, and the Critique of Political Economy. (All available in English
translations; for details as to dates and publishers, see Sweezy, op. cit. p. 382.)

11 This achievement should, I believe, be attributed to Marx alone. For every per-
formance of such scope it is, of course, possible to name forerunners. But there were
rather less of them than we are accustomed to find in comparable cases. The only

44-0 hi : from 1790 to 1870

poses is the theory of social classes that Marx associated with his economic
interpretation of history: the two-class schema is all but useless for serious
analysis; exclusive emphasis upon class antagonism is as patently wrong — and
as patently ideological — as is exclusive emphasis upon class harmony of the
Carey-Bastiat type (see below, ch. 4); and the proposition that the evolution
of forms of social organization is brought about by a mechanism that can be
described exclusively in terms of the struggle between those two classes is a
simplification that eliminates the essentials of the mechanisms actually at work.
A qualification must, however, be added: if we get from Marx an ideologically
warped definition of classes and of class antagonisms, and if in consequence
we get an unsatisfactory description of political mechanisms, we nevertheless
get something very worth having, namely, a perfectly adequate idea of the im-
portance of the class phenomenon. If in this field there existed anything like
unbiased research, Marx’s suggestions would have led long ago to a satisfactory
theory of it.

But the economic interpretation of history is a different matter. If we re-
duce it to the role of a working hypothesis and if we carefully formulate it,
discarding all philosophical ambitions that are suggested by the phrases His-
torical Materialism or Historical Determinism, we behold a powerful analytic
achievement. Points (1) and (3) may then be defended against objections, most
of which turn out to rest upon misunderstandings. 12 Point (2) is less reliable: it

claimant for whom it is possible to argue at all is Lorenz von Stein (1815-90), whose
Socialismus und Communismus des heutigen Frankreichs (1842, later ed., entitled
Geschichte der socialen Bewegung in Frankreich, 1850, newly edited, 1921) is in fact
an important piece of analysis that links up the development of socialist ideas with
the realities of social movements and economic changes. This, however, is not the
economic interpretation of history; still less is it possible to find the latter in the
socialist writers themselves, whom Stein discussed, or in the French historians of the
revolution, the restoration, and the Orleans regime. So far as my knowledge of them
entitles me to judge, they all emphasize more or less the economic element in the
historical processes they describe which they could hardly have helped doing. But
obviously this is not enough. I suspect that those who find in this literature anything
suggestive of the economic interpretation of the historical process as a whole entertain
a different conception of the latter than I thought it proper to adopt. Mere recognition
of the importance of the economic factor is a triviality and neither distinctive nor
meritorious in itself. The case of Saint-Simon, which may be an exception, will be
stated below.

12 By simple experiment, the reader may easily satisfy himself how well point (1)
works. Take e.g. so modest a ‘cultural manifestation’ as the modem murder story.
Observe its chief characteristics — not forgetting its English — and correlate them with
the salient facts about the social structure of our time. You will not fail to enjoy
an enlightening experience.

I take this opportunity to advert to one of those misunderstandings of which, on
one occasion, Engels himself was guilty. Taking ‘materialism’ mistakenly in its ethical
sense, some writers have taken what they called 'historical materialism’ to mean that
men are actuated by material, i.e. economic, interests as motives in the psychological
sense. Marx’s theory does not mean this and has room for all kinds of motives.

THE INTELLECTUAL SCENERY

441

works well with some historical patterns and not at all with others . 13 This
problem Marx does not seem to have taken very seriously. But there was an-
other, to the solution of which he devoted the bulk of his giant powers for the
rest of his life. Obviously, the vast fabric, of which the economic interpreta-
tion of history was the base, would have had to remain incomplete without a
full analysis of that immanent evolution of the economic sector on which the
evolution of human civilization as a whole was made to rest. For him the
economic interpretation of history was, therefore, still more a program than
it was an achievement to be valued for itself. e

We have reached a point of vital importance for a proper understanding of
Marx’s work. On the one hand, we can now visualize his unitary Social Science*
the only significant all-comprehensive system that dates from this side of
utilitarianism: we see the manner and the sense in which he welded into a
single homogeneous whole all branches of sociology and economics — a venture
that might well dazzle the modern disciple even more than it dazzled Engels,
who stood too near the workshop. On the other hand, we now see Marxist
economics in its true light. Its individual features, or some of them, will come
in for notice and appraisal in their places. Here I wish only to insist on the
greatness of the conception and on the fact that Marxist analysis is the only
genuinely evolutionary economic theory that the period produced . 14 Neither
its assumptions nor its techniques are above serious objections — though, partly,
because it has been left unfinished. But the grand vision of an immanent evo-
lution of the economic process — that, working somehow through accumulation,
somehow destroys the economy as well as the society of competitive capitalism
and somehow produces an untenable social situation that will somehow give
birth to another type of social organization — remains after the most vigorous
criticism has done its worst. It is this fact, and this fact alone, that constitutes
Marx’s claim to greatness as an economic analyst. That he was more than an
economic analyst we have seen in this section. That he was more than an
‘ analyst need not be explained again.

13 The Marxist principle can be illustrated by such processes as the elimination of
the artisan class by large-scale manufacturing industry. But as Diihring pointed out,
other instances can be adduced to show that this 'causality’ is often reversed — the
truth being of course that there is interdependence between the conditions of pro-
duction and the social structure. The situation of the Marxist principle can be some-
what improved by recognizing the fact that social structures may outlive the condi-
tions of production that created them — which will account for a certain number of
discrepancies without destroying the theory. Another device is more dangerous: we
might define, e.g., the activity of a tribe of warlike conquerors as ‘productive’ and
then say that the social organization that results in conquered countries still comes
within the range of the Marxist interpretation. But this is very near to making a
tautology of it.

14 We deal elsewhere with the Smith-Ricardo-Millian contribution to the theory of
economic change. Even those readers who see merit in it, granting even the possibility
that it may have given Marx a basis from which to start, will have to admit that it
looks embryonic beside his.

44 2 in: FROM 1790 TO 1870

[For a discussion of the views of Marx and Schumpeter on the topics covered in
this section, see O. H. Taylor, 'Schumpeter and Marx: Imperialism and Social Classes
in the Schumpeterian System/ Quarterly Journal of Economics , November 1951. This
is a review article of Schumpeter’s Imperialism and Social Classes (English trans., ed.
with an introduction by Paul M. Sweezy, 1951).]

(c) Historians’ Evolutionism. Mere preoccupation with the problems of de-
scribing the events of an ever-changing world does not spell evolutionism in
the sense of this section. Professional historians, therefore, are not evolution-
ists by profession. They become evolutionists — of a distinct type — only when
they try to arrange states of society-economic, political, cultural, or general
ones — into sequences that are supposed to be necessary in the sense that each
such state is the necessary and sufficient condition for the emergence of the one
that follows it. The oldest and most primitive way of doing this is by con-
structing typical stages through which an economy must pass. This method
was represented in that period by Friedrich List, whose scheme — hunting, agri-
culture, agriculture plus manufacture, agriculture and manufacture plus com-
merce — met with deserved criticism from Karl Knies : 15 we should indeed have
put down this scheme as Completely worthless were it not for the fact that
it may be used (and was used by List) as a simple expository device for im-
pressing upon beginners (or the public) the lesson that economic policy has
to do with changing economic structures and therefore cannot consist of a
set of unchanging recipes. Another example is Bruno Hildebrand’s scheme:
exchange economy, money economy, credit economy. Beyond this there is not
much to report in this category — the better a historian, the more averse he is
to such constructions — except that a vague belief in evolutionary sequences,
such as historical sequences that were supposed to bear analogy with the youth,
manhood, and old age of individuals, are not infrequently met with in his-
torical writings of that period. An economist and economic historian who in-
dulged in this belief without however being misled by it, as far as I can see,
was W. Roscher . 16 It is worth noting that this belief in 'laws of economic
history’ constitutes. one of the main differences between his methodology and
Schmoller’s, who nevertheless had a type-series of his own: village economy,
town economy, territorial economy, and national economy.

(d) The Intellectualist Evolutionism of Condorcet and Comte. Condorcet , 17
more than any other writer, elaborated the theory of social evolution that is
specifically associated with the thought of the Enlightenment and is present,
implicitly or explicitly, in the writings of all the votaries of la raison: let us
call it Intellectualist Evolutionism. It is the last word in simplicity. Reduced
to its essential content, it comes to this: human reason, a given force, wages
an incessant war of conquest on man’s physical environment and, at any given

15 See his Politische Okonomie vom Standpunkte der geschichtlichen Methode (1853,
enlarged ed., 1883).

16 The work of List, Hildebrand, and Roscher will be discussed below in ch. 4,
sec. 5.

17 Marquis de Condorcet (1743-94), Esquisse d’un tableau historique des progres
de V esprit humain (1795; see above. Part n, ch. 2, sec. 7d).

THE INTELLECTUAL SCENERY

443

stage, on the beliefs or habits of thought that mankind has acquired at pre-
vious stages of its history. From this incessant struggle results, on the one
hand, an indefinitely increasing insight into the true laws of nature and, in
consequence, an even more perfect technological control over the forces of na :
ture and, on the other hand, an indefinitely increasing freedom from erroneous
and antisocial beliefs and propensities: human intellect, perfecting itself, per-
fects the whole of human nature, hence also human institutions, without as-
signable limit. Since many readers’ minds are presumably imbued with this
theory — perhaps to the point of accepting this 'progress of the human mind’
as a matter of course — we had better make sure that we understand the ob-
jection to it: it fails because it postulates what it is to explain. Changes —
adaptive and, possibly, also autonomous — in beliefs, in stocks of knowledge
and techniques, and in habits of thought are no doubt historically associated
with other manifestations of social evolution. But they are conditioned, to say
the least, by the facts of a changing social structure, and so are their modi
operandi. If we attribute, say, modern positivism or the modern airplane to
the progress of the human mind, we have evidently not done much toward
their explanation. In fact, we have done nothing: we have only renamed the
problem. If, in order to remedy this, we appeal to the perfectibility of the
human mind, we have still done nothing: we have only postulated the solu-
tion. And if, recognizing this, we introduce additional factors of explanation,
for example, biological ones, we have left the moorings of intellectualist evo-
lutionism.

But in spite of its patent inadequacy, this theory survived in the liberal or
progressive circles that continued the tradition of the Enlightenment. Lecky
and Buckle, however much their arguments may differ, can be mentioned
again in illustration of this. For us, however, Comte’s position is of particular
interest. His schema or ‘law’ of three stages, according to which civilization
evolves from a religious or magical stage to a metaphysical and then to a scien-
tific one, clearly hails from the thought of the Enlightenment: it does not
differ essentially from Condorcet’s. Moreover, it is not only unbelievably nar-
row but also, in Comte’s own sense, speculative and unscientific: research on
the lines of his 'positive’ program would have immediately revealed the pres-
ence of factors and mechanisms that cannot be reduced to the one factor
embodied in that 'law.’ Observe, however, that, superficially, the law seems
easy to verify: rational scientific procedure (though not in politics) is in fact one
of the features that are characteristic of our own time; and magic is in fact
characteristic of the primitive mind — the question is only how much this
means and how far the Correlation admits of causal interpretation.

There is one more point to be noticed. The religious, metaphysical, and
scientific attitudes are evidently social and not simply individual phenomena.
Therefore, Comte’s stages may be said to be stages in the development of a
collective or group mind. Much more definitely than Condorcet, Comte in
fact adopted this concept and he did something toward elaborating it. There
is, of course, a world of difference between his collective mind and the na-
tional soul of the romanticists. Viewed as tools of analysis, however, both

444 III : FROM 1790 TO 1870

come to much the same thing and both have influenced the work of later
sociologists and social psychologists.

(e) Darwinian Evolutionism. This is the only kind of biological evolution-
ism to be noticed here. Lamarck's influence was largely, though not wholly,
superseded by Darwin's (who, however, was generous in his references to
Lamarck); and Mendel, though he published his three laws in 18 66, did not
exert any direct influence at all . 18 The 'Historical Sketch’ added by Darwin to
the third and later editions of the Origin of Species will tell the reader the fas-
cinating story of the gradual emergence of the decisive ideas, so that nothing
needs to be said about it here . 19 It is, however, necessary to offer the following
comments on the social significance of the boolc and on its significance for the
social sciences . 20

18 G. J. Mendel (1822-84), an Augustinian monk, not only did excellent experimental
work — this is professional opinion; I have, of course, none of my own — but also offered
the theoretical interpretation of it that proved acceptable to biologists when his re-
sults were independently rediscovered (about 1900). He refrained from any application
to social processes. Since we are interested in the sociology of science, the question
arises: what can we learn from this case of neglect of a most important performance?
Examination of the case seems to show, however, that it teaches us nothing. Robert
Mayer personally communicated his discovery (mechanical equivalent of heat) to men
(one man at least) of indubitable professional standing, who could and should have
understood and promulgated it. Cournot published his Recherches (see below. Part iv,
ch. 7) in the broad daylight of one of the great intellectual centers. But Mendel lived
in a convent, situated in a provincial town, and published his results in an obscure
local periodical, that is, in a manner that amounted to hiding them. Thus, this case
of neglect is self-explanatory.

19 The reader is urgently advised to peruse it carefully. It is one of the most important
pieces of scientific history ever written, and presents a case study about one of the objects
of our interest — the ways of the human mind and the mechanisms of scientific advance.
In addition, it elucidates a concept that plays some role in our own story, the concept of
Inadequate Acknowledgment of Priorities. Darwin illustrates the meaning of this con-
cept by presenting an ideal instance of what is Adequate Acknowledgment. In everything
he did, that man was a living and walking compliment to himself and also to the
economic and cultural system that produced him — a point recommended to the reader
whenever he feels like ruminating on the civilization of capitalism (and, incidentally,
about more modem forms of organization of research).

Charles Darwin (1809-82) took long in evolving, still longer in publishing, the fruits
of his labor. The Origin of Species . . . was published in 1859. The Descent of Man
and Selection in Relation to Sex was published in 1871, after Vogt and Haeckel (also
others) had already pronounced in favor of its main theses. Chapters 3, 4, 5, and 19
treat matters directly relevant to general and economic sociology.

Herbert Spencer’s essay, which Darwin commends so generously, appeared first in the
Leader , 1852, and his Psychology in 1855, whereas Mill’s Principles, the restatement of
'classic’ economic thought* appeared in 1848.

20 The reader will observe that in what follows I do not of course presume to judge
the book as a professional performance in its own field. The delicate question of a
research worker’s proper behavior in matters that involve the results and procedures in
fields other than his own, therefore, does not arise at the moment, though it does arise
in connection with ‘Darwinist’ social theories.

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445

In the first place, the Origin of Species and the Descent of Man make one
of the biggest patches of color in our picture of that period's Zeitgeist . Their
secular importance for mankind’s cosmic conceptions is comparable with that
of the heliocentric system. They were very widely read by the general public,
passionately discussed, and effective in refurnishing the bourgeoisie’s mental
house, though it seems that, in most cases, this new furniture did not oust
metaphysical furniture that still existed but only occupied empty space. Our
fundamental beliefs and attitudes are beyond the power of any book to make
or shake; in particular, I do not think that any cultivated person will find his
faith destroyed through reading Darwin, provided that person has any faith to
destroy. 21

In the second place, however much or little we may think of the causal
role of Darwinism, its symptomatic importance is beyond question. It came,
and rode to success, exactly when it should have done so according to the
Marxist theory of intellectual superstructures. And it was one current only in
a broader river as the independent but analogous developments in geology
suffice to show. 22 This was the same river that also carried along the other
evolutionisms that we have been discussing above. But in all other respects
these were logically independent of either Darwinism or any other biological
theory: it is quite important to realize this in order to avoid confusions that
threaten our understanding of the intellectual history of the period. Marx may
have experienced satisfaction at the emergence of Darwinist evolutionism. But
his own had nothing whatever to do with it, and neither lends any support
to the other.

In the third place, Darwinism or Darwinist talk did intrude into sociology
and economics later on. This will be touched upon in our survey of the intel-
lectual scenery of the next period (Part iv, ch. 3). For the period under dis-
cussion, I can find no significant influence upon the social sciences apart from
what we may conceive Darwinist influence to have done to people’s general
habits of thought. 23 Both Darwin and Spencer contributed to psychology, and
the latter displayed a propensity for sociological applications from the first. But
this is all. In concluding, I wish to comment on Darwin’s remark to the ef-
fect that he derived inspiration from Mai thus’ theory of population. It seems
very hazardous, to be sure, to dissent from a man’s statement about his own

21 1 say cultivated person because the case is different for the untrained mind that
lacks resources for interpretative and critical defense. But, then, the untrained mind
takes shelter behind authority.

22 These are associated with the name of Sir Charles Lyell (1797-1875) almost as
much as biological evolution is associated with the' name of Darwin. His Principles of
Geology (1830-33) does not quite 'let the murder out’ but, by implication, it says as
much as does his Geological Evidences of the Antiquity of Man (1863).

23 In 1872, Walter Bagehot published his Physics and Politics (more appropriate
titles would have been Biology and Sociology or Biological Interpretation of History),
which uses, among other things, Darwinian social psychology. In itself no more than a
piece of brilliant dilettantism, the book contains many suggestions that came to fruition
later on. It is still worth reading.

446 III: FROM 1790 TO 1870

mental processes. But quite insignificant events or suggestions may release a
given current of thought; Darwin himself did not include Malthus’ work in
the Historical Sketch mentioned above, though he did refer to it in his intro-
duction; and the mere statement that "more individuals of each species are
born than can possibly survive’ (which, moreover, is doubtful Malthusianism)
is, in itself, not more than a platitude. I am afraid, therefore, that the service
rendered by economics to the evolution of the Darwinian doctrine bears some
analogy to the service rendered to Rome by the celebrated geese.

Psychology and Logic

The most interesting products of that period’s work in the field of psychol-
ogy are those that anticipate, or at least herald, the developments of the subse-
quent period. I am referring to the cerebral anatomy of P. J. Cabanis, F. J.
Gall (whose work also includes the first theory of reflex action). Sir Charles
Bell, and P. P. Broca; to the physiological or experimental psychology of
Tetens and Bonnet, later on continued with much greater success by Johannes
P. Muller, E. H. Weber, R. H. Lotze, G. T. Fechner; to the related line taken
by Claude Bernard; 1 and, if we insist on including Wolkerpsychologie in psy-
chology at all, to the work of F. T. Waitz, who was mentioned above in the
section concerned with Environmentalism. Furthermore, if we also include
philosophies about the collective mind — and if we choose to call them the
harbingers of modern social psychology — we have to add, on the one hand,
Comte and, on the other hand, Herder and many other 'romantics.’

[(a) Associationist and Evolutionist Psychology .] But more directly relevant
for the possibility of a psychological foundation of technical economics — if in-
deed we have any use for such a foundation — are the psychologies of Herbart
(1776-1841) and Beneke (1.798-1 854). 2 The former worked out a simple con-

1 These names are mentioned merely as pointers for readers who, if they should wish
to go further, will meet them in any history of psychology — which is why I refrain from
giving titles and dates. The names of Cabanis, Broca, Weber, and Fechner are associated
with performances of particular interest to us. Some will be mentioned again in the
corresponding chapter and section of Part iv so that we do not lose our thread. The
reader will understand, of course, that I am not competent to judge the value of such
work as Gall’s or Lotze’s in its technical aspects and that in consequence my choice of
names may be misleading: the list is the list of an economist whose impressions are in
part due to chance reading (guided, however, to some extent, by professional advice)
and chance contacts. The name of Broca, e.g., stands where it does because this author
combined to an unusual degree research in brain anatomy and in cultural anthropology,
but also because his work impressed me greatly in my formative years.

2 See e.g. J. F. Herbart’s L ehrbuch zur Psychologie (18x6) and his Psychologie als
Wissenschaft. . . (1824-5). Herbart’s very influential philosophy and pedagogics do not
interest us here. F. E. Beneke’s Grundlegung zur Physik der Sitten (1822; the opposite
pole to Kant’s Grundlegung zur Metaphysik der Sitten ) and Lehrbuch der Psychologie
als Naturwissenschaft (1833) make psychology the only basis of logic, ethics, and
aesthetics and afford an excellent illustration for what is meant in the present book by
Psychologism.

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447

ceptual apparatus for the analysis of psychic phenomena as they are given by
introspective observation without recourse to physiology. Economists might
have learned something from him, though more from his methods than from
his results. Barring a few quotations that do not mean anything, I have not
however been able to find any instances to prove that either his psychology
or his general philosophy exerted any influence upon the professional work of
economists. I wonder whether the same should be averred for the element in
that period’s psychological work that is by far the most important one from
the standpoint of a history of economics — Hartleyan associationism. This
associationism should have been obsolete by then but was revived by a new
edition of Hartley’s work (1791) and re-expounded with brilliant efficiency by
our own colleague James Mill: 3 the mind, a Lockian blank; psychic life, a
mechanical system of associations. Even J. S. Mill felt unable to rest content
with this, and A. Bain was to combine it with Darwinian elements and ele-
ments derived from the German physiological psychologists into something
that was pretty far removed from associationist orthodoxy. But for us the ques-
tion arises: since this associationist orthodoxy was part of Benthamite ortho-
doxy, shall we not expect that it influenced the economics of the group that
was another part of it? Of course, we shall — but we shall be disappointed.
The case illustrates very well the nature of the relation of a comprehensive
system to its parts. Psychological associationism agrees all right with the utili-
tarian philosophy or the utilitarian theory of ethics or of behavior in general
and in this sense does implement the rest. But if, on the strength of this, we
proceed to examine James Mill’s little treatise on economic theory, we find
that its propositions are completely independent of associationist psychology
and are just as compatible with any other: though a province of the Bentham-
ite empire, the economics of the utilitarians was a self-governing province that
could have lived equally well if severed from the empire. This verifies a result
already arrived at in other connections. 4

The only thing that needs to be added is evolutionist psychology. As has
been mentioned, both Darwin and Spencer faced the problem of the manner
in which the human mind acquired each 'mental power’: they attempted to
construct genetic theories of ‘instincts,’ emotions, curiosity, memory, attention,
beliefs, moral sense, social virtues, and the like. It should be observed that
such endeavors are not psychology in the ordinary sense: for example, analysis
of the faculty of ‘memory’ is one thing, and a hypothesis on how we came to
have this faculty is another thing. However, genesis may suggest truly psycho-
logical theories, and it is understandable that Darwinian influence began to
assert itself in professional psychology before long. Economists, however, did

3 Analysis of the Phenomena of the Human Mind (1829).

4 Observe, in particular, that the same thing also holds for Hume: his economics has
nothing whatever to do with either his psychology or his philosophy. And so for Locke.
On the other hand, the relation of associationism to utilitarian economics is compli-
cated by the fact that Bentham’s own economics differed from the economics of the
other utilitarians who were his followers in everything else.

448 in ; from 1790 to 1870

not take to this line of research, though it has obvious bearings upon problems
of economic behavior and of its malleability, say, in a socialist organization
of society — something worth pondering!

[(b) Logic, Epistemology, and Cognate Fields .] In these fields 5 substantial
advance would have to be reported both as to philosophical foundations
(Kant; Hegel's Logic is not logic in any technical sense though relevant to it
in several points) and as to formal and practical developments (Lotze, De
Morgan). From our standpoint, it is important to mention the work of a man
who holds a key position in the history of the fields within our range of vision,
Richard Whately 6 (Anglican archbishop of Dublin). And of great significance
for the picture of that period’s Zeitgeist is the effort made by another key man
to realize a desideratum that has been formulated again and again — in our own
day, by J. Dewey — to bring logic nearer to the actual procedures of science:
Whewell’s History of the Inductive Sciences (18 37). 7 The program of modern

5 If we may call mathematics a cognate field, it was the one that made the biggest
strides. About these nothing can be said here except that this period — following as it
did upon the 'heroic age of mathematics’ in which the excitement of pioneer discovery
had all but crushed the interest in logical foundations and in critical analysis of concepts
and methods — laid the groundwork of modern (rigorous) mathematical reasoning. But
a few data on probability must be mentioned, owing to the importance of the subject for
statistics and for economic theory. Laplace’s Theorie analytique des probabilites was
first published in 1812; his Essen philosophique (which is quite eighteenth century, how-
ever) in 1814; Poisson’s famous Recherches in 1837; Cournot’s Exposition de la theorie
des chances et des probability in 1843; P. L. de Tchebycheff’s paper ('Des Valeurs mo-
yennes’ in Liouville’s Journal de mathematique, pure et appliquee), 1867; Venn’s Logic
of Chance (often invoked by Edgeworth) in 18 66. Fechner’s Kollektivmasslehre (1897)
belongs in this period though not chronologically. The same applies to J. von Kries’s
Principien der 'Wahrscheinlichkeitsrechnung (1886). The Cournot of probability is the
great economic theorist (see below. Part iv, ch. 7, sec. 2). My high opinion of his
theory of random events is a layman’s opinion. But it was shared by the late Professor
Czuber of Vienna.

6 Elements of Logic, which appeared originally as an article in the Encyclopaedia
Metropolitan V826). For his work in economics, see ch. 4 below,

7 William Whewell’s (1794-18 66) powerful and masterful personality belongs to, and
illustrates at its best, that class of scientific men whom we have called Academic Leaders:
he was a peerless influence in Trinity College and in Cambridge generally, one of those
environment-creating individuals who belong in the history of science even if they
never wrote a line. Such was not Whewell’s case, however. The History is not only a
work of erudition but a live source of inspiration (so it was to J. S. Mill), though his
Philosophy of the Inductive Sciences (1840) is disappointing (at least, so it is to me)
and though his Elements of Morality including Polity (1845) has been deservedly for-
gotten. He was also something of an economist. His Lectures (r852 and 1862) do not,
it is true, amount to much, though he was far too able ever to be quite uninteresting.
But he displayed sense for quality by editing the works of Richard Jones (see below,
chs. 5, 6) and a touch of originality by making an attempt that no commonplace mind
would have made in his day, viz. to express mathematically a few propositions of the
economic theory of his time (3rd vol. of the Cambridge Philosophical Transactions) .
This effort does not go beyond stating in symbols what had already been stated in

THE INTELLECTUAL SCENERY

449

empiricist logic — as taught by the Vienna positivists such as Carnap, Frank,
Richard von Mises, Schlick — is to analyze scientific procedure and to do away
with, as not only irrelevant but meaningless, everything else, especially all
‘metaphysics.’ Whewell was, of course, far removed, subjectively, from either
this program or the conceptual constructs with which it is being implemented.
But, objectively speaking, his book, owing to the influence it exerted on Mill’s
Logic , is a landmark on the long road that leads toward logical positivism.

[(c) J. S. Mill’s Logic.] These scanty remarks have prepared us for a discussion
of the work in which we are primarily interested. From our standpoint, J. S.
Mill's Logic must hold a place of honor, not only because we claim the author
for our own, not only because we economists are much more likely to turn to
it than to any other methodological treatise of that time, but also because it
was one of the great books of the century, representative of one of the leading
components of its Zeitgeist, influential with the general reading public as no
other Logic has ever been. A less striking patch of color in our picture than is
the Origin of Species, it is hardly a less indispensable one — although it does
not stand out, as does the Origin of Species, when we look back on the his-
torical sequence of performances and ideas that produced the situation of today
in the respective fields, and although Mill’s 8 book is dead in a sense in which
Darwin’s is not.

The best way of explaining, to economists, the nature of Mill’s per-
formance is to point out the family likeness that exists between his
Logic and his Principles of Political Economy, which will be fully dis-
cussed in the appropriate place below (ch. 5). With admirable modesty.
Mill disclaimed, in both cases, any pretense ‘of giving the world a new
theory of intellectual operations’ or of economic processes (see the
prefaces to the first editions of both books). In both cases, his aim was

words and therefore does not really constitute mathematical economics (there is no
mathematical reasoning). But his rudimentary demand analysis, considering its date,
does not quite deserve Jevons’ contemptuous verdict that has since been repeated
many times. All this is mentioned here because the brevity of our sketch will not
permit notice of performances such- as Whewell’s in their appropriate places.

8 J. S. Mill, A System of Logic, Katiocinative and Inductive, being a Connected View
of the Principles of Evidence and the Methods of Scientific Investigation (1843). One
has in mind the success of this book, as much as or more than the success of its
author’s Political Economy, when one speaks of Mill’s sway over the generation of
English intellectuals that entered upon their careers in the 1850’s and 1860’s. Abroad,
part of the reading public was impervious to such influence. But the rest embraced
Mill’s message with even greater enthusiasm. The book was found in the house of a
peasant in Ireland. It was called the ‘book of books’ by an accomplished Viennese
woman (a Fabian and suffragist) who felt herself to be progress incarnate. It occupied
a place of honor not much below Plato’s in the mind of at least one philological
philosopher I knew as a boy — all of which I say in order to convey, first, that the
book was a living force in bourgeois civilization and, second, that the correlation
between individuals’ enthusiasm for it and their competence to judge it was not quite
satisfactory.

45° ni: from 1790 to 1870

to co-ordinate existing elements of knowledge, to develop them, and, as
he liked to put it, 'to untie knots’ ( scilicet in existing strings). In neither
case did he succeed completely; but in both he did eminently useful work,
work that was perhaps all the more pregnant with suggestions because it
contained stimulating discrepancies of doctrine.

Both works, besides being of the same class of performance, reveal in
a similar manner the mental stature and the — shall I say 'moral’? — pro-
pensities of their author. Within the range of his comprehension, he was
eminently fair and fully resolved to open the doors of his mind to ideas
of widely different origin — in the Logic he went so far as to pay (via a
quotation from Condorcet) a well-deserved compliment to scholastic per-
formance. He was 'matter of fact’: though his mind was not 'practical’
in every sense of the word, he was always 'practical’ and even pragmatist
in intention, the practically useful result attracting him before every-
thing else. In the case of the Logic, his practical purpose was to analyze
scientific procedures with a view, first, to establishing their validity ('to
appraise evidence’) and, second, to developing rules that might inspire or
guide research. This makes it very difficult to describe his fundamental
standpoint or standpoints in terms of modern 'empiricist’ and 'positivist’
logic, for the problems and methods that are characteristic of the latter
and divide its staff of workers (especially in the Grundlagenforschung of
mathematics) were largely beyond his ranges of vision and interest.
(Wherefore it is unjust, by the way, to criticize from a modern stand-
point occasional utterances of his that seem to be relevant to modern
controversies.) But this essentially practical purpose of the Logic also
renders it difficult to describe Mill’s fundamental views in terms of older
philosophies. The significance of the Kantian revolution he hardly
grasped. In a general way, it may be said that his philosophy had its
roots in the English empiricism of the Locke-Hume tradition and, in
particular, that it had an associationist psychological background. But I
believe, though I cannot prove here, that neither statement is entirely
correct. In any case, Mill was not narrowly empiricist or narrowly associa-
tionist: Hartleyan associationism comes in for criticism in the Logic,
especially at a strategic point in Book vi.

The purpose of the book almost makes it a complement of Whewell’s,
to which in fact it owes much. Let us put it like this: Mill’s Logic is pri-
marily a theory of scientific knowledge (inference), essentially theoretical
as compared with Whewell’s book and still more so as compared with
any treatise on any individual science; but it is primarily practical as
compared with any treatise on pure logic or pure epistemology (which
were, however, pretty much one and the same thing for Mill). As re-
gards logical fundamentals, Mill leaned heavily on R. Whately even
where he dissented from him. 9 *

9 Another revealing reference in the Logic (and. in the Examination of Hamilton) is
to Dr. Thomas Brown’s Lectures on the Philosophy of the Human Mind, which, edited
after Brown’s death (1820), had a most successful career. The interesting point is that

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451

Cautious and noncommittal as Mill was with reference to certain
points of philosophical fundaments, modest as he was with reference to
his personal contribution, in one respect he was neither cautious nor
modest: exactly as in his Political Economy, in a manner that strikes us
as curiously naive, he cheerfully claimed an entirely impossible degree of
finality for the results he expounded. He seems to say to us: why, I have
collected and systematized the best ideas of this enlightened age, the
principles either promulgated or conformed to by its ablest thinkers —
what more can there possibly be left to do? His confident teaching fared
in logic much as it did in economics.

Book 1, 'Of Names and Propositions’ (including Classification and Defi-
nition), in which there are passages almost suggestive of modern ‘seman-
tics,’ and Book 11, ‘Of Reasoning’ (Syllogisms; Deductive Sciences, which
Mill holds are really inductive in so far as their premisses are derived by a
process of induction from experience), cover ground on which Mill felt
that the going was easy: for him who hardly ever looked below the sur-
face, no serious problem arose to bar the way. He felt differently about
the ground covered in Book hi, ‘Of Induction’ (or generalization from
experience, the core of scientific procedure and the core of Mill’s per-
formance). It contains the axiom of the uniformity of the course of na-
ture, his theory of valid induction that is derived from it, his philosophy
of causation, his famous ‘four methods’ (of Agreement, of Difference, of
Residues, of Concomitant Variations), all of which is partly marred by
faults of thought or exposition that can be explained on only one hy-
pothesis: that even there, though writing on subjects that gripped him
intensely, he wrote as he always did — in haste. But precisely because of
this, substantial improvement can be effected in several cases without
injury to his main positions. On the whole, there cannot be any doubt
that Book hi constitutes one of the great contributions to the theory of
scientific knowledge. The many points of interest in the essentially sub-
sidiary Books iv and v must be passed by, blit Book vi, ‘On the Logic of
the Moral [Social] Sciences’ is of first-rank importance to us. It should be
perused together with Mill’s older (pre-Comtist) essay on the method of
economics (1836) that has been included in the volume on Some Un-
settled Questions.

In order to do justice to this methodology of the social sciences, two
things must be borne in mind. First, as an inevitable consequence of
more fundamental shortcomings of Mill’s general epistemology, there are
many things in Book vi to which objections may be raised. But they do
not impair its argument very much. Thus, his extension of the methods
of the physical to the social sciences, including the concepts of scientific

this Scottish physician and philosopher, though he accepted sensationalism to a large
extent, never abandoned ‘intuitive’ knowledge and had no empiricist theory of causation.
The significance of Mill’s strong recommendation of the book is not entirely destroyed
by his qualifying objections to its argument.

452 in: FROM 1790 TO 1870

law and of causation, are not nearly as objectionable as one might think
because he watered down physical causation so radically as to make its
extension to the social sciences practically harmless: his 'naturalism’ was
naturalism with its teeth pulled. Second, we must not forget that the
fame and influence of Mill’s work gave wide currency to his views so
that much that reads trite and stale — like quotations from Hamlet —
does so by virtue of his own achievement.

When all this is borne in mind, nothing remains but admiration. In
a running battle with Comte, Mill triumphantly vindicated the actual
procedure of economists while conceding — in fact, absorbing — all that
should be conceded or absorbed. The standard method of economics
was what he called the Concrete Deductive Method supplemented by
the Inverse Deductive or Historical Method for research into historical
changes of the social set-up as a whole. Had this been properly appre-
ciated, the pointless later squabble of economists over induction versus
deduction would have been avoided. The 'purely theoretical’ set of prob-
lems was taken account of by his 'abstract or geometrical’ method, the
misuse of which for direct application to practical problems he made the
target of scathing 6 * * * 10 criticism. The 'empirical laws,' nicely divided into
uniformities of coexistence and uniformities of change, are assigned a
place with which we can find but little fault. The impossibility of uni-
versally applicable, practical maxims was fully recognized as was the
necessity of studying actual human behavior in all its local and temporal
varieties — which should have taken off the curse from the economic man
for all times. The axiomata media of his Ethology offered suggestions that
are not fully exploited even now. The distinction that had to be fought
for, sixty years later, between the problems of the effects that follow from
a given cause under given social conditions and the problems of the
'laws’ that determine those social conditions themselves is there. In fact.
Mill unfolded a program that harnessed the purest of pure theory and
the most concrete of institutional research into peaceful co-operation
and this without emasculating either. Of course, Jevons reads fresh and
Stimulating even where he utters a platitude; Mill never reads fresh and
stimulating even where he speaks valuable wisdom. That was the fault
of his early training. But as regards this Book vi, though it contains noth-
ing that was not said better later on — for example, by the elder Keynes —
I conclude with advice to the reader to go back to it.

6. Pre-Marxian Socialism

In Chapter 2 above, we have said almost nothing about the socialism and

the socialist groups or movements of the period. Painting in the large, we

10 This adjective is I think justified, though Mill’s invariable courtesy, in some cases

reinforced by filial respect, made him tone down his wording. It will read surprisingly
but can be strictly proved that the methodological doctrine that Mill preached does not
differ at all from the position eventually (though not at first) adopted by Schmoller.

THE INTELLECTUAL SCENERY

453

had hardly an opportunity for doing so. The omission can be repaired in a
few words. 1 The second half of the eighteenth century produced a number of
isolated socialist (or semi-socialist) writings but, before the French Revolution,
nothing that can be called a movement. The French Revolution itself was
bourgeois in origin, character, and ideology. The disintegration after 1791 of
both its political set-up and its political thought was, however, associated with
a literature that, though of very little importance in itself, was both indicative
of a more than momentary socialist humor in a sector of the intellectual
world of France, and instrumental in keeping it subterraneously alive during
the Napoleonic regime. This provided a basis far the burst of propagandist
activity, literary and other, of a socialist (or semi-socialist) nature that we ob-
serve in France until the advent of the second empire. 2 The revolution of
1848, though also bourgeois in origin, was quickly to show the existence of
a sort of general staff of a revolutionary socialist army and even the existence
of more or less definite plans for running a socialist state. Frightened to
death, bourgeois groups did what Louis XVI could never be prevailed upon
to do, that is, they suppressed the revolution by military force before it was
too late. Thus, France holds priority in time as regards modern socialist litera-
ture; and among the business classes of all countries, the French business class
was during that period the only one to face socialist revolution as a serious
possibility. English Chartism, both in 1836-9 and 1840-48, 3 never amounted
to anything like that, although it had a basis in early trade union organization
that made it more serious in another and more fundamental sense. The only
other socialist labor movement of importance was the German one that pro-
duced two organized parties: Lassalle’s Allgemeiner Deutscher Arbeiterverein
(1863) and Bebel’s and Liebknecht’s Socialdemokratische Arbeiterpartei (1869),
which amalgamated in 187 5.* The foundation and career of the First Inter-

1 The interested reader has at his command plenty of sources of further information
from which to supplement the jejune remarks that follow. He must remember that,
from the standpoint of the aims of this hook, we are not directly interested in social
movements and their ideologies per se. In this particular case, brevity is excused in
addition by the fact that our statements in this paragraph are not controversial. For
general reference, Professor Alexander Gray’s Socialist Tradition (1946) is recommended.

2 The literary component of the movement supplied, however, part of the ideas of
the socialisme authoritaire of Napoleon III, as has been mentioned already, just as
socialist and semi-socialist workmen supplied part of the political support that raised
him to power.

3 The People’s Charter itself, it should be remembered, was drawn up by William
Lovett and Francis Place, the Bentham disciple, and was Benthamite and not at all
socialist. In fact, its 'six points’ embody nothing but radical parliamentary reform.

4 Neither A. Bebel’s nor W. Liebknecht’s achievements come within the scope of this
book. But the exploits of Ferdinand Lassalle (1825-64; the reader’s attention is called
to the biography by George Brandes, there are also several others) in sociological and
economic analysis cannot go unmentioned though there will be no occasion to refer to
them again. A highly cultivated man of brilliant abilities and indomitable energy, he
was first and last a man of action whose intellectual, let alone scientific pursuits —
though always attended to with zest — were always secondary to the excitements of a

454 111 : from 1790 to 1870

national (1864) is mentioned here only because of Marx’s famous Inaugural
Address. 5

[(a) Associationist Socialism .] Now, the one thing that is important for us
to keep in mind is that the Marxist phase of socialist thought did not dawn
before the beginning of the subsequent period. 6 The socialism of the period
under discussion was non-Marxist and associationist. 7 This term is to denote
all the varieties of socialist planning that adopt the principle of running pro-
duction by workmen’s associations — of social reconstruction through pro-
ducers’ co-operatives. Associationist socialism is, therefore, extra-scientific, be-
cause it does not concern ’'itself primarily with (critical) analysis — as does
Marxism — but with definite plans and the means of carrying them into effect.
In addition, associationist socialism is unscientific because these plans involve
assumptions about human behavior and administrative and technological pos-
sibilities that cannot stand scientific analysis for a moment. On both counts,
Marx was quite justified in including associationist writers in his category of

fascinating life. An exception should be made, perhaps, for his most finished per-
formance, Das System der erworbenen Rechte (1861), a brilliant piece of legal sociology
that dazzled many a professional jurist. However, if we do make this work an exception
and if we do assume that it was the product of genuine concentration, then we must
also recognize that, along with very' considerable philosophical and legal learning and
strong critical ability, it displays lack of originality. His other writings display the same
lack of originality, but unrelieved by learning, though still coupled with ability far and
away above the common run of writers, socialist or other. The three most important
economic publications, the Arbeiterprogramm (1863), the Offenes Antwortschreiben
(1863), and Herr Bastiat-Schulze von Delitzsch, der okonomische Julian (1864), are all
of them brilliant pamphlets that embody, so far as analysis is concerned, a somewhat
superficial but ably exploited Ricardianism — which accords with Lassalle’s own view
inasmuch as he described the only economics that seemed worth while to him as an
'immanent development’ of Ricardo’s teaching. This, by the way, is all his theory has
in common with Marx’s. To describe Lassalle either as a popularizer or as a disciple of
Marx is quite erroneous. As regards agitatorial tactics and practical proposals, he was
the very antipode of Marx — which is what caused the schism that impeded the progress
of German political socialism until 1875 (Gotha Congress), when to Marx’s infinite
disgust, fusion was accomplished on a program that made large concessions to Lassalle’s
views.

5 But no Marxist will take pride in this particular performance. Its contents reveal
the effects of compromises that were perhaps inevitable but were of the sort that
roused Marx’s wrath when . indulged in by other people. In fact, it was — as Marx him-
self pointed out with a mixture of humor and bitterness — thoroughly un-Marxist.

8 Let me point out at once that, so far as analysis is concerned, the Marxist phase
not only began but also ended with the subsequent period. This statement may seem
surprising because we attach quite naturally high importance to the further revivals of
Marxism in Russia and New York. But it will be substantiated below (Part iv, ch. 5,
sec. 8).

7 The term is convenient and I beg leave to use it, although I am aware of the awk-
wardness involved in using the same phrase in the same book in two entirely distinct
meanings (psychological associationism — socialist associationism).

THE INTELLECTUAL SCENERY

455

Utopian Socialists 8 and in fighting them bitterly. For he realized that they
were discrediting serious socialism. By 1840, they had in fact succeeded in
imparting to the very word Socialism a connotation of freakishness that helps
to explain the attitude toward it that was specific to French economists: 9 to
them, and not without reason, socialism came to mean two things, violence
and nonsense. Some of the ‘utopist’ ideas were in fact unalloyed nonsense —
in several cases, definitely pathological nonsense — and hardly any of them can
be taken quite seriously, though an exception should perhaps be made in favor
of L. Blanc (1811-82). 10 For us this is indeed not quite enough to warrant
our neglecting them: freaks and dreams may yet enshrine sound pieces of
analysis. Search undertaken in this spirit, however, yields but meager results.
Not that we do not find sound reasoning and sound observation here and
there; but most of what there is of it is trivial. Hence I shall mention only
the outstanding examples of Robert Owen (1771-1858) and Charles Fourier
(1772-1837), 11 who with Saint-Simon shared in a huge wave of American en-
thusiasm.

8 Marx described as utopian any form of socialist thought but his own, which he
called ‘scientific.’ The defining characteristic of his scientific socialism is, however, the
scientific proof of the inevitability of socialism, so that with him the phrase ‘utopian’
should not have meant the same as ‘not serious,’ though it did. By a ‘bourgeois econo-
mist,’ Marx denoted an economist who fails to see this inevitability or, much more re-
strictively, an economist who believes in indefinite survival of the capitalist order. If
the reader observe that these definitions do not coincide with the meanings usually
attached to the terms, he will save himself many misunderstandings.

9 Engels attributed the fact that Marx chose Communist instead of Socialist for use
in the title of the Marx-Engels manifesto to Marx’s dislike of a term that had acquired
a flavor of ‘respectability.’ It is more likely, however, that Marx disliked it because it
had acquired a flavor of oddity.

10 Louis Blanc ( Organisation du travail, collected articles first published in 1839)
was no doubt also an associationist of humanitarian and rhetorical propensities that
earned him semi-benevolent contempt from later critics, bourgeois and socialist. But his
proposals differed from, say, Owen’s by an element of practicability that shows especially
in the more than supervisory role assigned to the bureaucracy (state). This element sug-
gests possible influence upon Lassalle. Blanc once made the proposal that emerged again
with some socialists, in and after 1930, to hand over to workmen factories that had
closed down. Distribution according to the principle ‘to everyone according to his needs’
was a pet idea of his (though not adhered to), and he may be responsible for its currency
among the socialists of his and a later time.

11 The interested rearder will find bibliographies of (and on) both in any work of
reference. As regards Owen, there was good reason for the emergence of a large litera-
ture about him for, quite independently of his plans and experiments of the New
Harmony type, his ideas as well as his practice were of seminal importance in very many
different ways that had little to do with one another. Thus, his fundamentally paternal-
istic measures at New Lanark created a model for the labor policy of the modern
large-scale concern and, more important than this, initiated a new attitude toward
wage questions. His emphasis on the value of strikes and trade unions versus political
action makes him a classic in the history and theory of trade unions. His ideas on
artisans’ co-operatives have made him the patron saint of one of the significant move-
ments of that and a later time. Not only was ‘moral grandeur' (Torrens) his but

456 III: FROM 1790 TO 1870

This is our opportunity for a glance at the American (and not only U.S.) Social-
Science Movement. 12 The word Science, when used in connection with this move-
ment, must be taken in a sense akin to the one it carries in the phrase Christian
Science rather than in the usual one, for there was little genuinely scientific effort. A
society that produces a comparatively prosperous stratum more quickly than it produces
a cultural tradition is open to unbalancing infiltrations of ideas, even apart from the
influence of physical immigration. A small number of people enjoyed leisure — lettered
ease’ it was with some — and had open minds, which compensated shrewdness in busi-
ness by enthusiasms and radicalisms, as generous as they were uncritical, in everything
else. One of the most characteristic of these enthusiasms was the layman’s enthusiasm
for 'science’ — and especially for social alchemy because, to the untrained mind that
vibrates with unemployable energies, the real thing is not half so exciting as is the
fake. This is the sociology of the movement. Its real importance for the impulse it
gave to American economics and sociology is as difficult to appraise as is the real im-
portance for serious research of the romanticist movement in Europe, of which, in
fact, the social-science movement may be interpreted as the specifically American
counterpart. I can see no relation between it and the performances that eventually
established both economics and sociology in the United States, and am inclined to
think that its petering out around the epoch of the Civil War was more favorable
to social research than was its emergence. But the reader will easily see all that can
be adduced for the opposite view.

But how can we account for the presence of sponsors of associationism
whose claims to being taken seriously are not open to doubt? Well, for one
thing, there is the influence of the literary fashion that the French association-
ists certainly succeeded in creating. For another thing, there is the support
that associationist socialism as a plan for comprehensive social reconstruction
derived — quite illogically, of course — from the actual co-operative movement
and its literature. Both these elements will, I think, account for the asso-

also, within the sphere of thought and action defined by our examples, sound and
even shrewd common sense (as his own business success suffices to prove). But as
soon as he stepped out of this sphere, which was truly his own, his complete lack
of analytic ability of the more subtle kind showed up immediately. Neither his ideas
of the Labor Note that was to replace 'money’ nor his ideas of an Equitable Labor
Exchange are nonsense in themselves, but he just did not know how to protect his case
against the most obvious criticisms.

As regards Fourier, the reader is referred to the one really enlightening item I have
come across in the large literature about him: E. S. Mason’s ‘Fourier and Anarchism,’
Quarterly Journal of Economics (February 1928). Two points must be made: first,
Fourier did base his plan (of which the Brook Farm colony was the most famous
embodiment) upon an elaborate analysis of human nature, in general, and of the nature
of society, in particular, but it was all conceived in the worst style of eighteenth-century
speculation; second, his phalanstere organization has but a qualified claim to being
called socialist, and it is amusing to note that with the ignorance of actual conditions
that characterizes so many of those prophets, he actually reserved for interest and profits
a larger relative share than goes to them, on the long-run average, in capitalist reality.

12 The U.S. branch of it has been described in L. L. and J. Bernard, Origins of
American Sociology: The Social Science Movement in the United States (1943).

THE INTELLECTUAL SCENERY

457

ciationism of Lassalle — his scheme of productive associations that were to be
subsidized by the state and, by virtue of this advantage, to compete private
industry out of existence. 13 But there is something else: to Marx and to many
of us, associationism may be nonsense; but it was not nonsense to the Ben-
thamite mind. In fact, a glance at the . utilitarian views on the human mind
and on the nature of social relations suffices to show that, once these assump-
tions concerning the quality — and substantive equality — of individuals are
granted, associationist hopes cease to be absurd. And this accounts for the
cautious associationism of J. S. Mill. 14

[(b) Anarchism.] If we extend the principle of associationism to the political
sphere and visualize the dissolution not only of industrial concerns into work-
men’s co-operatives but also of national states into voluntary ‘communes/ we
have Anarchism — of which by far the most articulate, but not the most or-
thodox or most consistent, exponent was P. J. Proudhon. 15 Here we are inter-
ested neither in his political anarchism nor in his philosophy, which he himself
described as Hegelian, though I find it more easy to link it up with Fichte's.
And we are interested in his economics only because it affords an excellent
example of a type of reasoning that is distressingly frequent in a science with-
out prestige: the type of reasoning that arrives, through complete inability to
analyze, that is, to handle the tools of economic theory, at results that are
no doubt absurd and fully recognized as such by the author. But the author,
instead of inferring from this that there is something wrong with his methods,
infers that there must be something wrong with the object of his research, so
that his mistakes are, with the utmost confidence, promulgated as results.
Proudhon’s Systeme des contradictions economiques ou philosophie de la
misere (1846) is the outstanding monument to this frame of mind. He was,
among other things, unable to produce a workable theory of market value.
But he did not infer: ‘I am a fool/ but: ‘Value is mad’ {la valeur est folle).
Marx’s scathing criticism ( Misere de la philosophie, 1847) was fully deserved,

13 Moreover, though the man is to be taken seriously, it is fairly open to question
how far his scheme is. Nobody can study that life of high endeavor and tragic failure
without becoming aware of the fact that he is studying an important aspect of the
German tragedy. In other words: Lasalle was a born political leader, conscious of
superlative powers, and there is as little point in proffering the all-too-easy objections to
his plan as there is in pointing out logical weaknesses in Disraeli’s early thought. The
real counterargument would have been to appoint him to cabinet office. But this is
precisely what Prussia was congenitally unable to do.

14 On the extent to which J. S. Mill should be considered a socialist, see below,
ch. 5, sec. 1. Mill may have influenced Lassalle.

15 Of the Proudhon literature, I mention only a work of indubitable scholarly
quality, though there are -several others that come within this category: Karl Diehl’s
P. J. Proudhon, seine Lehre und sein Leben (1888-96). In Joseph Proudhon (1809-65)
we behold a phenomenon that is as rare among socialist thinkers as are horse-drawn
vehicles in New York: a real, live proletarian. He was self-taught and this lack of
training shows on every one of his many pages. Some of his ideas had been previously
published by English socialists. But it is practically certain that he did not know of
them.

458 III: FROM 1790 TO 1870

though not well aimed in every respect. It should be observed, however, that
Proudhon’s claim to be called an anarchist in his own sense is questionable.
For though, repeating an eighteenth-century phrase, he described property as
theft in the pamphlet that founded his fame ( Quest ce que la propriety?, 1 840),
his big idea was gratuitous credit rather than abolition of private property:
loans free of interest to be issued in the notes of a public bank so that everyone
might have access to means of production and become a proprietor — an idea
that was to be revived by some latter-day projects of Social Credit.

Mikhail Bakunin (1814-76), Marx’s pet aversion, has no place in a history
of analysis, as he himself would have been the first to admit. 16 But there was
another anarchistic communist or communistic anarchist who did present a
piece of analysis: Weitling, the founder of ‘Communia’ in Wisconsin. 17 His
particular plan does not concern us, but his theory of poverty does because
it seems to enjoy a kind of immortality: it always turns up again. It is of
the type of social criticism that, like Henry George’s or F. Oppenheimer’s,
traces poverty to private property in land. 18 According to Weitling, there is
no objection whatever to private property in other means of production and
to private-business management of industry as long as there is free land ac-
cessible to everyone — all the trouble arises and any kind , of property becomes
a curse only when land becomes scarce, hence an object of property rights.
The lessons I want the reader to learn from this are two. The first is one in
the sociology of economic thought. Even so critical a thinker as Locke had
no compunctions about the analytic value of the proposition: God gave the
earth in common to all men. And this idea asserted itself in all ages, though
in very different forms, even in writings that purport to present results of
strictly empiricist thinking. The other lesson is one in faulty analysis. In many
cases, actual and possible, the institutional structure of the agrarian sector may
indeed be responsible for misery of the masses in the sense that their standard
of life is lower than it would be with a different structure. In order to prove
this possibility, we need only imagine a state of things in which land is so
plentiful as to be capable of being a free good but is monopolized, in the
technical sense of the term, by a single land-holding corporation that sets a
monopoly price on its use. Cases somewhat more realistic than this then be-
come verifications for the quite different proposition that the mere fact of

16 The best-known communist thinker of the subsequent period, P. A. Kropotkin
(1842-1921), is a different case. He made non-negligible efforts at analysis and his soci-
ology of law is not without interest, though sufficiently so to warrant his exclusion from
our report. Of course, for a history of economic and political thought (as contrasted
with analysis), both he and Bakunin are of immense importance. And still more so for
a sociology of economic and political thought. How tsarist society came to produce —
in its higher and highest circles — revolutionary communism is in itself a fascinating
problem: a crack cavalry regiment was not the worst of nurseries for communist
impulses.

17 Wilhelm Weitling (1808-71), Die Menschheit wie sie ist und wie sie sein sollte
(1838); Garcmtien der Harmonie und Freiheit (1842).

18 Not all agrarian socialists do this, of course.

THE INTELLECTUAL SCENERY

459

private property in land reduces, of necessity, total real wages. This general
proposition can be refuted by a rather elementary argument, which anyone
is bound to encounter if he takes a few minutes to consider the question why
private property should have that effect. But nobody who has this bee in his
bonnet ever takes these few minutes, and if he did he would — like Rousseau
in the matter of miracles — go mad rather than give up the idea that feeds
his emotional life. And some such ‘bee/ though not necessarily this one, is
the most cherished possession of a distressingly large number of the people
who write on economic subjects. 19

If we leave the national state untouched and organize economic activity not
into small free groups that on principle are self-sufficing but into vocational
groups that are more like (though not necessarily quite like) the artisans’ and
merchants’ guilds of the Middle Ages, we get the idea of the Corporative
State. Such an idea was developed by Fichte and by many Catholic writers
such as Baader. The main point is that these plans do not assume that the
state should manage the corporations but rather the other way round: 20 they
should hence not be identified with modem fascism; unlike the latter, they
are anti -etatiste in conception. None of these writers bothered much about
economic aspects. It is their cultural vision that is interesting. From our stand-
point, there is no comment to be made.

In this connection, we may notice in passing the work of Karl Mario, 21 an
author who has been much commended by nonsocialists such as Roscher and
Schaffle. Not a thorough-going socialist, he planned to sail between the Scylla
of liberalism and the Charybdis of communism, to insure true equality and
tme liberty and so on by means of a large amount of nationalization of in-
dustry and of corporative organization for the part of economic activity that
is not to be nationalized. A strong sense of responsibility that accounts for the
bourgeois praise and is quite surprising in a man who was primarily a planner
shows in Mario’s concern about the productivity of his system, about popula-
tion, and about insurance. But the only point that interests us here is his
analysis of competitive capitalism. On the one hand, he drew a picture of the
condition of the working class that was as gloomy as was Engels’. 22 On the
other hand, he attributed this condition not to the historically unique condi-
tions that prevail frequently, though not necessarily, in the earlier stages of
capitalist evolution but to the inherent logic of the capitalist system that, if
allowed to operate, will always and increasingly depress labor’s lot. We observe,
first, that the factual picture is biased even ex visu of about 1850. For even

19 Some readers may wonder why, speaking of communism, I do not mention Cafiet.
But there is nothing to be said about him from our standpoint.

20 At least, if certain co-ordinating or supervisory functions are left to government,
the corporations are to retain a large measure of autonomy.

21 Nom de plume of Karl G. Winkelblech (1810-65): JJntersuchungen iiber die
Organisation der Arbeit . . . (1848-59).

22 This is our opportunity to mention again a book that influenced social thought, in
Germany at least, far beyond the circle of socialist orthodoxy: Friedrich Engels, Die
Lage der arbeitenden Klasse in England (1845; English trans. 1887).

460

m: FROM 1790 TO 1870

then statistics were available that any layman could have read to prove that
talk about enslavement and starvation, and still more talk about increasing
misery of the masses, lacked foundation in fact except so far as sporadic in-
stances were concerned. We observe, second, that the analytic effort is biased
in the same direction. For Mario’s analysis of competitive capitalism entirely
failed to consider the obvious alternative to the proposition about enslavement
and systematically omits to take account of those mechanisms in the capitalist
process that tend to work the other way. But this systematic bias is evidently
not like the bias of an index number or the bias in a particular source of in-
formation. It is typically the bias of ideological delusion, the kind of bias that
springs from a writer’s extra-analytic convictions and is impervious to either
fact or argument. Refuting fact and argument would be met by moral indig-
nation.

This is the point that made it worth our while to mention Mario at all.
Though individually of no great importance or influence, he was one of the
many writers who helped, around the middle of the nineteenth century, to
crystallize the ideology of the capitalist process. The main traits. of this ideology
had all emerged by 1776. They gained in definiteness through the efforts of
writers such as the Ricardian socialists, Engels, Mario, and many others in the
next three-quarters of a century or so. Then the picture had become fixed.
That is to say, it had, for considerable sectors of both the economic literature
and the public, reached the status of ‘as-everybody-knows’ and was no longer
questioned but was taken for granted by an increasing number of people. It
was, in the thought of these people, substituted for the capitalist reality that
increasingly diverged from it. It was the picture that Marx analyzed. It is the
picture on which sophomoric radicalism feeds- to this day. 23

[(c) Saint-Simonist Socialism .] We could go on indefinitely but, having
learned from three examples all that is to be learned for our purpose from
this literature, we should not gain sufficiently by doing so. 24 One name, how-

23 There should really be little difficulty in realizing that Crystallization of Ideologies
is the only explanation for the existence of honest belief in the misery, helplessness, and
frustration of the working class at a time of the political and economic dominance of
the labor interest. Examination of the rationalized arguments only serves to strengthen
this diagnosis. But crystallized ideologies that satisfy deep-seated urges defend them-
selves with desperate energy.

24 A man who might have served us just as well as did Weitling, though less so than
the more serious Mario, is Charles Hall, The Effects of Civilization [i.e. Technological
Progress], 1805. The problem to be discussed with respect to him, similar though
it is in all other respects, would display another, though cognate, aspect that is not
without importance to the social psychology of the social sciences. It may be put
by means of the following question: since by all accounts this man was an able
physician, how was it possible for him to use, in the field of social criticism, modes
of thought that would have prevented him from passing his M.D. exams? I do
not mean his recommendations, but the formal properties of his reasoning and his
handling of facts. Another such man is J. F. Bray, Labour’s Wrongs and Labour’s
Remedy (1839; London School Reprint, 1931). All I wish to say about him is that
Marx should not be insulted by its being said that Bray anticipated him in any point:

THE INTELLECTUAL SCENERY

461

ever, must be added, that of Saint-Simon . 25 In the main, this pathological
genius — Emile Faguet’s fou tres intelligent — affords only another example that
illustrates the difference between a man’s importance for a history of economic
thought and his importance for a history of economic analysis. Saint-Simon’s
name stands in the history of economic thought because of a message of a
semi-religious character and because disciples turned this message — not without
altering it — into the creed of a sect. Much has been written about Saint-Simon’s
posthumous success: not only in France but also in England, Germany, and
especially in the United States and in Latin America, Saint-Simonist groups
emerged and even a Saint-Simonist intellectual fashion of much wider range.
But the groups consisted of small nuclei that quickly repelled serious members
and brought discredit upon themselves by freakish developments of the creed.
Around these nuclei there were more numerous adherents whose allegiance
was not very close and was chiefly phraseological. As to the question how
much importance should be attached to the intellectual fashion, men will,
as in all similar cases, differ till doomsday. The fashion itself is explained as
soon as we visualize the two salient features of the message that combined
to produce something that was not to be had from any other creed: on the
one hand, its glowing humanitarian optimism; on the other hand, its glorifi-
cation of ‘science’ (technology) and of industrialism. Where other humani-
tarians were sour and doubtful about what sort of a future capitalist industry

any argument that works with exploitation must bear misleading witness to some
affinity with Marx. The work of F. Huet ( Le K'egne social du Christianisme, 1853),
whose proposal of division among the young generation of biens patrimoniaux, land
especially, as they are released by death, suggests that Saint-Simonist ideas found favor
also in Catholic centers. The ‘Ricardian’ socialists will be briefly considered later. On
Engish Christian socialists, see C. E. Raven, Christian Socialism , 1848-54 (1920), and
L. Brentano, Die christlichsoziale Bewegung in England (1883). See also, J. O. Hertzler,
History of Utopian Thought (1923).

25 Claude-Henri de Rouvroy, Comte de Saint-Simon (1760-1825) was a Rouvroy and
therefore of the — genealogically speaking — best hut also most degenerate blood of
France; Oeuvres choisies (1859); biography by M. Leroy (1925); many works on the
Saint-Simonist ‘system’ of thought and the, Saint-Simonist sects, e.g. S. CharEty, Histoire
du Saint-Simonisme, 1825-64 (1896). On an aspect of special importance for us, see
E. S. Mason, ‘Saint-Simonism and the Rationalisation of Industry,’ Quarterly Journal
of Economics (August 1931). The question which of his writings I should recommend
to the reader embarrasses me greatly: it must be answered quite differently for men of
different interests and tastes. As for myself, I know only those contained in the Oeuvres
choisies. In a general way, I believe that economists will profit from a perusal of
Du Systeme industriel (1821) more than from a perusal of his last and most famous
work. Nouveau Christianisme (1825), which falls somewhat out of line with the rest
and contains chiefly preachings of an utilitarian character — increase of the welfare of
the most numerous and poorest class and so on — that are more Benthamite than Saint-
Simonian. Perhaps I should also mention B award’s Exposition de la doctrine de St. Simon
(1830), which is remarkable for clearness. Nothing need be said, for our purposes, of
his followers (Enfantin and Bazard were the most important) beyond the general com-
ment on them in the text.

462 in: FROM 1790 TO 1870

would provide for humanity at large, Saint-Simon gave comfort. Where other
enthusiasts of industrial progress were harsh and unsympathetic, he preached
the golden age for all. It was this combination of features that made Saint-
Simonism so popular, for a time, with financiers of the promoter type such
as the brothers Pereire of Credit-Mobilier fame. But can the reader be so
thoroughly imbued with intellectualist misconceptions as to believe that, with-
out Saint-Simon’s teaching, the Credit Mobilier would not have been founded
and managed exactly as it actually was, and would not have crashed exactly
as it actually did?

There is something else, however. Saint-Simon’s vision was not implemented
by analytic work but nevertheless it is relevant for us in two respects. First,
there is a conception of social change that may be said to adumbrate an eco-
nomic interpretation of history. Saint-Simon felt the breakdown of the ancien
rdgime and the advent of a new epoch with a pungent sense of reality — to
use William James’s phrase — that could not have come so naturally to anyone
who was not a Rouvroy. Simplifying this into a breakdown of the feudal world
and the advent of the epoch of industrialism under pressure from economic
( technological ) developments , he grasped some essentials of the eternal flux
of social organizations and, within it, of the struggle of economic classes, his
idea being that he was to lead humanity out of this struggle by means of the
wonderful achievements of 'science’ — rant, partly, but rant interspersed with
flashes of profound understanding . 26 Second, there is a perception or a glimpse
of the true nature of the capitalist process that acquires particular importance
from the fact that neither Marx nor his bourgeois peers had it: Saint-Simon
saw the pivotal importance of industrial leadership. He confused, it is true,
the entrepreneur with the 'scientist' who devises new technologies. And he
used his vision in the construction of a new form of social organization and
not, as Marx would have done in his place, in any attempt to explain social
processes as they are. Still, he did introduce a new factor that might have revo-
lutionized ‘classic’ economics and might have put an end to analytic — as dis-
guished from normative — equalitarianism. However, nothing resulted from his
vision except that his socialism — if indeed his 'system’ can be called socialist
at all — was hierarchic 27 and not equalitarian. And economists ' completely
failed to exploit this mine.

26 I do not think, however, that this impairs materially the case for Marx’s originality
as regards the economic interpretation of history. For I find it difficult to conceive that
anyone who had not had the idea himself could have been inspired to construct it
from the suggestions proffered by Saint-Simon’s writings. At worst, Saint-Simon was in
this respect a forerunner in the same sense as Buffon and Erasmus Darwin were fore-
runners of Charles Darwin.

27 This comes out very nicely in a letter addressed by Enfantin and Bazard to the
President of the Chambre des deputes in 1830, a reprint of which the reader will find
in Professor Gray’s Socialist Tradition, p. 168. Let me add one more point: Saint-
Simon, too, spoke of ‘association’ but this has nothing to do with the associationism
discussed previously.

CHAPTER 4

Review of the Troops

1. The Men Who Wrote above Their Time 463

2. The Ricardians 469

3. Malthus, Senior, and Some of Those Who Also Ran 480

(a) Malthus 480

(b) Archbishop Whately and Professor Senior 483

4. France - 490

5. Germany 501

6. Italy 510

7. United States 514

8. Factual Work 519

[(a) Tooke’s History of Prices] 520

[(b) Collection and Interpretation of Statistical Materials] 521

[(c) Development of Statistical Methods ] 524

According to plan, we shall survey the general layout of this period’s analytic
economics in Chapter 5, taking up headquarters in J. S. Mill’s Principles. The
review of the more important men and groups in the present chapter is for
the benefit of readers who are unfamiliar with any but the greatest figures. It
will not contain more names than are necessary for a general orientation.
Others will be introduced as we proceed.

1. The Men Who Wrote above Their Time

We have emphasized the relative maturity that economics gained during
the period under survey. Its relative immaturity might be measured by the
number of important performances, the powerful originality of which was rec-
ognized later but which the profession completely, or almost completely,
failed to recognize at the time. This happened in the cases of Cournot and
of the various writers, especially Dupuit, Gossen, and Lloyd, who discovered the
marginal utility principle. We shall transfer them to Part iv, merely observing
for the moment the melancholy implications of this neglect: it shows a lack of
alertness and of purely scientific interest among the economists of the period
that goes far toward explaining why economics did not advance more quickly. 1

1 We may adduce mitigating circumstances, but substantially the indictment stands.
Cournot was not unfavorably placed for getting a hearing. If he failed to get it, this
was wholly due to the mathematics in the book. But precisely — what sort of a profes-
sion was this that laid aside a work because it was a little difficult of access? Dupuit
elicited at least some criticism. Gossen was unfavorably placed and, if he did nothing
to circulate his book among professors, the latter’s sin may have been venial. But

463

464 III: FROM 1790 TO 1870

In addition, there were other performances that fared a little better but also
proved to be above their time in the sense that they failed to receive the at-
tention and exert the influence which, enlightened by hindsight, we should
deem appropriate. Of these, the most noteworthy are the writings that devel-
oped the marginal productivity principle. Since some leaders of the day occa-
sionally did move within its orbit, 2 we shall at once make our bow to two
early exponents of that principle who are particularly important, Longfield
and Thiinen. And I shall append a notice of still another man who wrote
above his time, John Rae.

Mountifort Longfield (1802-84) was a lawyer by training and the first
incumbent of the chair of political economy — a foundation of Archbishop
Whately’s — at Trinity College, Dublin. He also wrote on the Poor Law
and other subjects, but the only publication of his we need notice is
Lectures on Political Economy (delivered 1833, publ. 1834, London
School Reprint 1931)- Anyone who cares to glance at this book will
readily understand why, in spite of its merits of exposition and matter, he
failed to make a mark, so that he had to be unearthed, along with
others, by Professor Seligman in the justly famous article 'On Some
Neglected British Economists/ Economic Journal , 1903, 3 for which all
students of the history of economics have every reason to feel lasting
gratitude. But this neglect is readily understandable only if we realize
what it is that will impress professional opinion and what it is histo-
rians of economics usually look for, namely, on the one hand, a man’s
views on the practical issues of his day and, on the other hand, the way
in which he handles the theoretical tools that are common currency in
his day. New ideas, unless carefully elaborated, painstakingly defended,
and -pushed’ simply will not tell. Longfield’s case illustrates so well the
important question ‘what takes effect and how and why/ because Long-
field did not fail to keep contact with Ricardian teaching — he gave Ri-
cardians every opportunity to be led to a more perfect analysis gently and
without any violent break — and because he did find successors: he really
founded a local ‘school’ (on this, see R. D. Black, ‘Trinity College, Dub-
lin, and the Theory of Value, 1832-1863/ Economica, 1945). His suc-
cessor in the Whately chair, Isaac Butt (Rent, Profits, and Labour, 1838),

W. F. Lloyd was 'Student of Christ Church and Professor of Political Economy’ at
Oxford. His argument on marginal utility was quite straightforward and there was
nothing deterrent about it. Several writers brushed against it, e.g. Senior. It must have
become known to a number of people. The only construction that it is possible to put
upon the fact that Lloyd’s argument exerted no influence is that the economists who
read it were blind to the analytic possibilities enshrined in it.

2 Later on, it will become clear to the reader that it would have been quite impos-
sible for them not to do so. Also, it will be explained later why I do not think that
they, Ricardo especially, should be credited with more than is implied by the phrase
in the text.

3 Reprinted in E. R. A. Seligman, Essays in Economics (1925), ch. 3.

REVIEW OF THE TROOPS

465

was his professed disciple and — correctly as I believe, if we consider pure
theory only — put him on the same level as A. Smith.

Longfield’s merits may be summed up by saying that he overhauled
the whole of economic theory and produced a system that would have
stood up well in 1890. Among other things, his argument against the
labor theory of value is one of the best ever penned. However, we must
confine ourselves to his two original contributions. He was one of those
who anticipated the essentials of Bohm-Bawerk’s theory (by making the
‘roundabout’ process of production the pivot of his analysis of capital).
And he presented a reasonably complete and reasonably correct theory
of distribution based upon the marginal productivity principle, not only
the marginal cost principle. That is to say, he explained both ‘profits'
(return upon physical capital) and wages in terms of the contributions
to total product that result from the addition to the productive set-up of
the last element of capital (tools) or labor. Thus at least it seems fair to
interpret him, though in details his argument is open to many criticisms
(among other things he failed, as did many writers even after 1900, to
distinguish clearly between the last laborer added and the least efficient
laborer). The argument is still worth reading because it shows nicely the
operations by which economists’ minds paved their way toward the use
of the general marginal principle. But we cannot stay to work this out.

Johann Heinrich von Thiinen (1783-1850), the man whom A. Mar-
shall professed to have ‘loved above all my other masters’ ( Memorials of
Alfred Marshall , 1925, p. 360), meant, of course, much less to his age
than did Ricardo. But this is due to the latter’s brilliant advocacy of
policies. If we judge both men exclusively by the amount of ability of
the purely theoretical kind that went into their work, then, I think,
Thiinen should be placed above Ricardo or indeed above any economist
of the period, with the possible exception of Cournot. He was a North
German Junker and followed the typical profession of the North Ger-
man Junkertum (the correct translation is ‘gentry’): for most of his life
(after having completed his education at an agricultural college supple-
mented by two semesters at the University of Gottingen), he farmed the
indifferent soil of his medium-sized estate, just about managing to make
both ends meet and, sacrificing everything else, to keep up his intellectual
interests in wintertime. This practical farmer was a born thinker, how-
ever, and quite unable to supervise the teams that ploughed his land
without working out the pure theory of the process. His thoughts roamed
toward wide generalizations from an early age but, first of all, he was
an agriculturist, schooled in the ideas of Thaer, and an agricultural
economist. As such he did enjoy recognition in his own country. Later
on, he was also recognized more generally but in a peculiar way. Roscher,
for example, considered Thiinen’s work to be one of the most important
that had been written in Germany in the field of exact economics. Yet
he entirely failed to grasp its true meaning. Reviewers were compli-

466 in: FROM 1790 TO 1870

mentary. Yet none of them understood the work except the part of it
that is listed below under (111). For the rest Thiinen, unlike Cournot,
never came into his own. For though he continued to be quoted, the
marginal productivity theory of distribution was independently rediscov-
ered later, and his message was fully understood only at a time when all
that would strike the reader was its shortcomings. The first volume of
his Der isolierte Stoat in Beziehung auf Landwirthschaft und National-
okonomie was published in 1826 (2nd ed., 1842); the first part of the
second volume, in 1850. The rest of the second volume and a third were
published, from unfinished but well-advanced manuscripts, by H. Schu-
macher in 1863. There is a new edition with an introduction by Hein-
rich Waentig in Sammlung sozialwissenschaftlicher Meister (vol. xiii,
1910). The third volume contains 'Principles for the Determination of
the Rent of Land, the Optimal Period of Rotation, and the Value of
Timber of Different Ages for Firs' [This is a literal translation by J. A. S.].
The standard biography is also by Schumacher (1868), but the reader
finds the relevant data in Professor E. Schneider's article ‘Johann Hein-
rich von Thiinen' in Econometrica, January 1934.

Thiinen's contributions may be summed up as follows. (1) He was the
first to use the calculus as a form of economic reasoning, (n) He derived
his generalizations, or some of them, from numerical data, spending ten
laborious years (1810-20) in carrying out in detail a comprehensive scheme
of accounting for his farm in order to let the facts themselves suggest
the answers to his questions. This unique piece of work, undertaken in
the spirit of the theorist, makes him one of the patron saints of econo-
metrics. Nobody, before or after, ever understood so profoundly the true
relation between ‘theory' and ‘facts.’ (hi) Nevertheless, this man who
was so fact-minded knew at the same time how to frame ingenious and
fertile hypothetical schemata. His peak achievement in this art is his con-
ception of an isolated domain of circular form and uniform fertility, free
from all obstacles to or special facilities for transport, with a ‘town’ (the
only source of demand for agricultural products) in the center. Given
techniques, cost of transportation, and relative prices of products and
factors, he deduced from this the optimal locations (which under those
assumptions would be ring-shaped zones) for the various kinds of agrarian
activities — dairying, forestry, and hunting included. A theory of rent, in
some points superior to that of Ricardo, results as a by-product. Though
many people objected to such bold abstraction, this was the part of his
work that was understood and recognized in his time. For us, it is im-
portant to realize its brilliant originality. Ricardo or Marx (or whoever
it is among the theorists of that period who holds the place of honor in
the reader's scale) worked on problems that presented themselves from
outside by means of analytic tools that had been forged before. Thiinen
alone worked from the unformed clay of facts and visions. He did not re-
build. He built — and the economic literature of his and earlier times

REVIEW OF THE TROOPS

467

might just as well not have existed at all so far as his work is concerned,
(iv) In quite the same spirit, he was the second (the first was Cournot,
by date of publication at least) to visualize the general interdependence
of all economic quantities and the necessity of representing this cosmos
by a system of equations, (v) He introduced explicitly the tool of anal-
ysis, actually used of course by Ricardo, that may be termed the 'steady
state’ of the economic process — Marshall's long-run normal — that was
akin to statics rather than to the stationary state of ‘classical’ theory,
(vi) As fully as Longfield, and somewhat more correctly, he developed a
marginal productivity theory of distribution, at least for the relation be-
tween capital and labor, interest and wages. But the fundamental idea
itself (which he correctly puts, in words, in terms of partial differential
coefficients, Waentig edition, p. 584) is almost a secondary element in
the wealth of problems he grouped around it. No idea of these can be
conveyed. Instead we must touch on another point, not because it is
worth our while in itself, but because it has attracted attention beyond
its deserts: Thiinen’s famous formula for the ‘natural wage.’ He must
have thought a lot of it, because he had it engraved upon his tomb-
stone.

For simplicity, consider a one-year productive process, the only ex-
pense of production being wages. Call the dollar value of the national
net product p, the total pay roll w, so that total profits (which Thiinen,
like others, identified with interest) are p — w, and the rate of profits

(interest) is

p - w

. Suppose that the wage receivers spend a fixed amount,

a , per year, investing the rest, w — a, at the current rate of interest, P w .
On this investment, they will evidently earn ^ w

(w - a) - p

— — -f- a. If this expression is to be a maximum, we must have 4 (p and
a being treated as constants),

d(p

w -& + a)

= -1 +

w 2

= o

from which follows Thiinen’s formula, w 2 = ap, or w = ^ ap. This wage
would maximize workers’ income from investment. The idea is not with-
out interesting suggestions and might be used among other things in cer-
tain schemes of profit sharing. But, of course, this wage is not ‘natural’
in the sense that the free-market mechanism tends to produce it. The
formula does not embody Thiinen’s theory of wages. Nor is it an essen-
tial part of it. The wildly unrealistic assumptions should not, however,

4 In order to have a maximum and not a minimum, it is further necessary that the
second derivative be negative. But this is all right, since it equals (-■*£)'* (, ' and
w being essentially positive.

468 in: FROM 1790 TO 1876

prompt us to declare the argument wrong, Under its assumptions it is
quite right.

John Rae (1.796-1872; not to be confused with the other John Rae
mentioned in this book, the biographer of A. Smith), a Scotsman whose
intellectual refinement— he had emerged from the Universities of Aber-
deen and Edinburgh as a good classical scholar and mathematician and
as a biologist and physician who was at least half trained — and nervous
sensibility made him a failure at everything he touched. From 1821 on,
he rOamed about in Canada, the United States, and other countries, the
Hawaiian Islands included, where he had to rough it (two spells of
Schoolmastership being by far the most congenial of all the employments
he tried) until, shortly before his death, he drifted with broken masts
into the haven of a friendly house in Clifton, Staten Island. Yet, all the
time, he also Struggled with what Under the circumstances was the
greatest misfortune of all, an unmanageable wealth of ideas on the sub-
jects of biology, philology, ethnology, aeronautics, and what-not — all, or
most of them, parts of a grandiose plan, conceived in his youth, of a
‘philosophical history’ of humanity. Up to this point the reader will feel
that he is recognizing a well-known type. He is wrong. For one achieve-
ment, complete and workmanlike, yet of striking power, refutes the idea
the reader may have conceived. This achievement happened to be in our
field. In vision and originality, Rae far surpassed the economists who were
successful.

The Statement of Some New Principles on the Subject of Political
Economy Exposing the Fallacies of the System of Free Trade and of
Some Other Doctrines Maintained in the ‘ 'Wealth of Nations ’ was pub-
lished in Boston in 1834. In this note we shall try only to appreciate the
nature and importance of the performance and record its fate,

Rae had not more than a saving knowledge of economics. It is evident
that he owed such training as he had mainly to the work he attacked.
But this he had mastered in all its ramifications, premisses, and implica-
tions as only a kindred spirit can, and after having developed his own
ideas in constant reference to it, he proceeded to erect a structure simi-
larly conceived. For it is this that we must see in his work: another
Wealth of Nations or, more correctly, something that with ten addi-
tional years of quiet work, graced by an adequate income, could have
grown into another— -and more profound — W ealth of Nations. It follows
that it would be quite inappropriate to dwell on the many minor good
things the work contains — a few will be mentioned in the proper places.
The essential thing is the conception of the economic process, which
soars above the pedestrian view that it is the accumulation of capital per
se that propels the Capitalist engine. The conceptual apparatus devel-
oped in the First Book is glorified by the new vision but not otherwise
remarkable and need not detain us any more than needs the Third Book,
which deals with The operations’ of that imaginary entity, the ‘legislator.’
Naturally, Rae’s dissent from Smith’s anti -etatiste views will primarily

REVIEW OF THE TROOPS 469

interest the student of economic thought. The Second Book, however, has
attracted most of the attention that later economists devoted to the work.

It may be called a theory of capital, conceived in unprecedented depth
and breadth. To say that it presents the whole of Bohm-Bawerk’s theory
is to display inability to understand Bohm-Bawerk. But two cornerstones
of the latter’s structure — one of them also a cornerstone of Senior’s — are
in fact there: the proposition that 'lengthening’ the process of production
(postponement) will usually increase the physical amount of final prod-
uct (ch. v), and the proposition that 'the actual presence of the im-
mediate object of desire’ will give to it, in our valuation, a decisive ad-
vantage over an exactly similar object that is expected to become avail-
able at some future date, even if this expectation be perfectly certain.

As a rule, a work presenting novel ideas will not elicit response if it
lacks the support which comes from being written by a well known au-
thor. We ought, therefore, to be surprised at the response it met with
rather than at the fact that it did not meet with more. J. S. Mill
noticed it, and — perhaps in consequence of this — there was an Italian
translation in 1856. How, then, can it have been necessary to ‘discover’
Rae, as Professor Mixter rightly claimed it was? (Cf. C. W. Mixter, ‘A
Forerunner of Bohm-Bawerk,’ Quarterly Journal of Economics, January
1897 and ‘Bohm-Bawerk on Rae,’ ibid. May 1902, and the same author’s
(rearranged) edition of Rae’s work under the title Sociological Theory
of Capital, 1905, prefaced by the biography from which the data above
about Rae’s life have been taken.) The answer might serve as a motto for
a chapter of the sociology of science. J. S. Mill was invariably fair and
even generous. Sensing the quality of the work, he was glad to mention
it in a friendly spirit, not only to accept from it a phrase that happened
to fit into his line of thought (‘effective desire of accumulation’) but also
to quote it copiously (Book 1, ch. 11). He even went so far as to compare
Rae’s performance on accumulation with Malthus’ performance on popu-
lation. And all this, written in what was to be for forty years the most
influential textbook of economics, was insufficient to introduce Rae to
the profession or to rouse any curiosity concerning the rest of his book!

Or, alternatively, if this impression is wrong and any considerable number
of Mill’s readers did take it up, there was not one among them to realize
its true importance. However, it may be of some significance to note that
Senior knew the book (see ‘John Rae and John Stuart Mill: a corre-
spondence,’ Economica, August 1943, p. 255).

2. The Ricardians

Of all the groups that formed and dissolved during the period under survey,
the Ricardian circle alone deserves separate treatment. The brilliance of its
central figure, the international prestige it enjoyed for a time, its prominence
in public debate, its achievements and failures — all this and more can be ad-
duced in justification of the attempt to make readers visualize it as clearly as

470 III: FROM 1790 TO 1870

possible. Moreover, the group was a genuine school in our sense: there was one
master, one doctrine, personal coherence; there was a core; there were zones
of influence; there were fringe ends. Let us first look at the core. It really
consisted only of Ricardo himself, James Mill, and McCulloch. But we add
West and De Quincey. For reasons to be explained later, we do not add
J. S. Mill. A fortiori, we do not add Fawcett or Cairnes.

David Ricardo (1772-1823) entered upon a business career at the age
of fourteen (he was first a broker, then a jobber and operator on the
stock exchange, always a man of the money market) and made a consider-
able fortune. This is relevant for us because it means (1) that, though
he came from a cultured home, he was all but uneducated in the scho-
lastic sense; (2) that, since such a career is absorbing, only the dregs of
his intellect arid energy were available for analytic work until 1814 when
he retired at forty-two. Nevertheless, he had done the bulk of his analytic
work by then, as far as the workshop of his mind (not publication) is
concerned. This is a striking proof of his splendid powers, but also the
reason why his work, lacking as it did the benefit of full concentration
during the third decade of life, which is of decisive importance in a think-
er’s career, never penetrated down to the deepest depths, besides remain-
ing badly finished in a formal and technical sense: we have before us the
record of a wrestler who fought his matches with his right hand tied be-
hind his back. After this, the reader will not suspect me of inadequate
admiration for the man when he reads some of my comments upon the
work. I shall go further. There is point in defending a figure of which
we are justly proud against certain aspersions that are completely un-
founded. Some writers have not been ashamed to suggest that his pe-
cuniary interest — as a ‘bear’ — determined the part he took in the contro-
versies of his time on currency policy. I reply that Ricardo was able
enough to make money on rising as well as on falling markets; and I
repeat, in addition, that such writers do not seem to realize what it is
they are really saying when resorting to such ‘explanations,’ since the
only schemes of motivation that are open to their direct observation are
their own. With less indecency, others have interpreted Ricardo as a rep-
resentative of the ‘moneyed interest’ and as inspired by a ‘hatred’ of the
landowning class. This, besides being irrelevant for the scientific contents
of his writings, is of course sheer nonsense and only proves, if anything,
the inability of these interpreters to understand a piece of analytic work.

If I cared to waste space, I could prove this inability in each individual
case. 1

1 There is more excuse for the indictment that Ricardo was indifferent to the interests
of labor. For though nothing can be farther from the truth, in his almost unbelievable
carelessness of formulation he used, on two or three occasions, turns of phrase that
seem to support this indictment. Ricardo was constantly complaining of being mis-
understood (in this respect in a letter to J. B. Say) and not without justice. In part,
however, he had only himself to blame. But, in this so-called indifference, there was

REVIEW OF THE TROOPS

47 1

Some day, perhaps, we may see completion of Professor Sraffa’s com-
prehensive edition of Ricardo's works, which we have been eagerly await-
ing these twenty years [the first five vols. had appeared by April 1952.
Ed.]. Meanwhile, there is McCulloch's edition of the Collected Works
(1st ed., 1846) prefaced by a memoir of Ricardo. At the moment, since we
reserve publications on money for the last chapter of this Part, we are
concerned only with Ricardo’s Essay on the Influence of a Low Price of
Corn on the Profits of Stock (1815) and his Principles of Political Econ-
omy and Taxation (1817; 3rd ed., the one to use, 1821; the reader will
presumably resort to E. C. K. Conner’s edition, 1882, last printing,
1929). Any thorough study should be supplemented by perusal of his
letters to Say, Malthus, Hutches Trower, and McCulloch (for editions, see
article on Ricardo by J. H. Hollander in the Encyclopaedia of the Social
Sciences, which gives a brief but correct sketch and appraisal of Ricardo’s
work) and by his Notes on Malthus ’ Principles (ed. J. H. Hollander and
T, E. Gregory, 1928; see review by E. S. Mason, 'Ricardo’s Notes on
Malthus,’ Quarterly Journal of Economics, August 1928). Of all general
interpretations, the most important are: K. Marx in T heorien iiber den
Mehrwert ; J. H. Hollander, David Ricardo (1910); and K. Diehl, Sozial-
wissenschaftliche Erlauterungen zu David Ricardos Grundgesetzen (2nd
ed., 1905). Still more instructive for our purposes are E. Cannan’s com-
ments in his Theories of Production and Distribution (3rd ed., 1917).
The literature on Ricardo is immense, especially if we count in, as we
should, all the references to him in theoretical works such as Bohm-
Baw'erk’s or Taussig’s. I wish, however, to single out two relatively re-
cent studies by excellent theorists that illustrate the extent of the range
within which critics of the highest competence may differ as regards the
nature and value of Ricardo’s performance: Professor F. H. Knight’s ar-
ticle on the 'Ricardian Theory of Production and Distribution’ in the
Canadian Journal of Economics and Political Science, vol. 1 (February
1935), and Dr. V. Edelberg’s article, 'The Ricardian Theory of Profits’ in
Economica, vol. xm (1933).

The discussion above goes some way toward explaining the character
of Ricardo’s work. In utmost brevity, I shall add the following com-
ments, if only to give the reader some points to reflect upon. Ricardo is
usually described as a utilitarian, but he was not one. This is not because
of his having had another philosophy but because that busy and positive
mind had no philosophy at all. He was on good terms, mainly through
James Mill, with the philosophical radicals. Presumably, he often ex-
pressed assent to utilitarian tenets. Historians are apt to exaggerate the
importance of such things. But they do not mean much. Similarly, he
had not an inadequate sociology, but none at all: there were certain
economic problems that fascinated his powerful intellect but the socio-

also an element of virtue: he was above the unctuous phrases that cost so little and

yield such ample returns.

la:

47 2 III: FROM 1790 TO 1870

logical framework he took for granted — no matter of reproach this, but
simply a matter of division of labor. Given its nature, his theory would
not have been improved by being caparisoned sociologically; the critic
who misses institutional disquisitions has simply called at the wrong ad-
dress. But of course this applies only to his theory as theory, it does not
apply to his recommendations. In these we do miss insight into the mo-
tive powers of the social process and, in addition, historical sense. 2

Two other points, however, bear directly upon Ricardo's theory as
theory. First, Marx’s contrary view notwithstanding, Ricardo’s was not
the mind that, like Thiinen’s, works from the clay. His method of work
was essentially to take hold of the problems that the day presented to
him, and to attack them by means of tools that he derived by criticism.
The one is obvious at first sight from all his writings except the Principles
(where it is only less obvious). The other is obvious from the Principles.
Even if we did not know that Ricardo’s thought was inspired by the
Wealth of Nations , which he took up in 1799 when boring himself at a
health resort, we could not help seeing that the argument of the Prin-
ciples starts with a criticism of A. Smith, which really runs through the
whole book. With a high degree of confidence, we may reconstruct the
development of his thought so far as it was not determined by his in-
terest — analytic and practical — in current events: he studied the Wealth;
he was shocked at what seemed to him to be a logical muddle; he set
about straightening out this muddle; and the Principles was the ultimate
result of this work of creative criticism. Let us make a note of this:
Ricardo’s theoretical structure represents a particular way of recoining the
Wealth; Malthus’ theoretical structure represents another way of doing
this. As a corollary, I venture to state that Ricardo owed very little to
any other writer, though his later study of Say and Malthus and his dis-
cussions with both and with James Mill no doubt served to clarify his
ideas — of this more in a moment. Second, Ricardo’s was not the mind
that is primarily interested in either fundamentals or wide generaliza-
tions. The comprehensive vision of the universal interdependence of all
the elements of the economic system that haunted Thunen probably
never cost Ricardo as much as an hour’s sleep. His interest was in the
clear-cut result of direct, practical significance. In order to get this he
cut that general system to pieces, bundled up as large parts of it as pos-
sible, and put them in cold storage — so that as many things as possible
should be frozen and ‘given.’ He then piled one simplifying assumption
upon another until, having really settled everything by these assump-
tions, he was left with only a few aggregative variables between which,
given these assumptions, he set up simple one-way relations so that, in

2 I do not think that Ricardo ever did much historical reading. But this is not what
I mean. The trouble with him is akin to the trouble I have, in this respect, with my
American students, who have plenty of historical material pushed down their throats.
But it is to no- purpose. They lack the historical sense that no amount of factual study
can give. This is why it is so much easier to make theorists of them than economists.

REVIEW OF THE TROOPS

the end, the desired results emerged almost as tautologies. For example,
a famous Ricardian theory is that profits ‘depend upon’ the price of
wheat. And under his implicit assumptions and in the particular sense
in which the terms of the proposition are to be understood, this is not
only true, but undeniably, in fact trivially, so. Profits could not possibly
depend upon anything else, since everything else is ‘given,’ that is,
frozen. It is an excellent theory that can never be refuted and lacks
nothing save sense . 3 The habit of applying results of this character to the
solution of practical problems we shall call the Ricardian Vice.

Presently, we shall try to size up the success of the school. Now we want
to define the personal success of Ricardo and to see how he succeeded in form-
ing that school. The first step is easy: 'no doubt it is possible that, with the
public as well as with his fellow economists, his reputation was made by his
writings on the great economic issues of his time — in the first instance, by his
writings on monetary policy, in the second instance, by his writings on free
trade. In all the questions he touched, he was on the side that would have won
out anyhow, but to the victory of which he contributed usable argument, earn-
ing corresponding applause. Though others did the same, his advocacy was
more brilliant, more arresting, than was theirs: there is no superfluous sen-
tence in his pages; no qualification, however necessary, weakens his argument;
and there is just enough genuine analysis about it to convince practically and,
at the same time, to satisfy high intellectual standards but not enough to deter.
His polemical talent, which combined to an altogether unusual degree readi-
ness, force, and genuine politeness, did the rest. People took to his theory be-
cause they agreed with his recommendations. He became the center of a circle
that looked to him for guidance and in turn defended his opinions. It is
neither his advocacy of winning policies per se, nor his theory per se, that,
to this day, makes of him, in the eyes of some, the first economist of all times,
but a felicitous combination of both . 4

But what about his contribution to scientific economics? By far the most
important one was, I think, the priceless gift of leadership. He refreshed and
irritated. In either case, he shook up. The fruits of his reasoning intrigued all
the people who did not see the mechanics I have tried to characterize above.
His teaching, in its middle and higher layers, established itself as the new
thing, compared with which everything else was inferior, obsolete, stale. Very

3 Speaking of Lord Keynes’s theory, Professor Leontief has called this procedure
Implicit Reasoning. The similarity between the aims and methods of those two eminent
men, Keynes and Ricardo, is indeed striking, though it will not impress those who look
primarily for the advice a writer tenders. Of course, there is a world between Keynes
and Ricardo in this respect, and Keynes’s views on economic policy bear much more
resemblance to Malthus’. But I am speaking of Ricardo’s and Keynes’s methods of
securing the clear-cut result. On this point they were brothers in the spirit.

4 The reader is invited to observe this additional affinity between him and Lord
Keynes. Every word in the paragraph above might be written with reference to the
latter.

474 ni: from 1790 to 1870

quickly his circle developed the attitude — so amusing but also, alas!, so melan-
choly to behold — of children who have been presented with a new toy. They
thought the world of it. To them it was of incalculable value that only he
could fail to appreciate who was too stupid to rise to Ricardian heights. And all
this meant controversy, impulse, new zest, new life, and these constitute valu-
able contributions in themselves . 5 But there was something else. Economic
theory is not a stock of political recipes but, to use Mrs. Joan Robinson’s felici-
tous phrase, a box of analytic tools. And these tools are not a heap of discon-
nected elements but form an engine. This engine grinds out results, within
wide limits, no matter what the concrete problem is that is fed into it. It
works the same way, formally, whether the problem is the effect of a tax or of
a wage policy, or of a piece of regulation, or of protection and what not. Hence
the engine, within those limits, may be constructed once for all to stand ready
for use whenever needed for an indefinite variety of purposes. This has always
been felt instinctively. Cantillon and the physiocrats brought the idea out into
the open. But nobody before Ricardo grasped it as vigorously as he did. In the
first two chapters of the Principles, he undertook to build such a general-
purpose engine. This spelled decisive advance. But, of course, if a defective
engine meets with success, that advance may easily prove to be a detour. And
let me state at once: a detour Ricardian analysis was.

Construction of such an engine of analysis entailed the consequence that the
individual elements that make up general economics were welded together
into a systematic unit as they never had been before. However unsystematic
Ricardo's Principles is in form, it is a systematic performance of the first order
in substance. Among those elements themselves there is none for which pri-
ority of publication could be ascribed to Ricardo with certainty. Above I have
expressed myself to the effect that Ricardo, though he owed much to A. Smith,
owed very little to other authors . 6 I believe, in fact, that his subjective origi-
nality was of a high order. Moreover he was frank and generous in acknowl-
edgments: though I have criticized A. Smith and shall criticize A. Marshall for
inadequate acknowledgment, I do not think that any such criticism should be
made with reference to Ricardo . 7 But objectively, all the ideas of the Principles

6 See preceding footnote.

6 Barton may he an exception (see below, ch. 6, sec. 6h). Ricardo’s preface mentions
Turgot, Steuart, Smith, Say, Sismondi 'and others’ (besides Malthus and West’s essay,
see next footnote). But only Smith’s influence is of first importance. Say influenced
Ricardian teaching only in one point (Law of Markets). I find no trace of any influence
of Turgot, Steuart, or Sismondi.

7 Claims were raised against him, however, especially in three instances. West com-
plained with some bitterness that Ricardo failed to recognize his priority as regards the
theory of the falling rate of profits. Ricardo said in the original preface to the Principles
that 'in 1815, Mr. Malthus . . . and a Fellow of University College, Oxford [West]
presented to the world . . . the true doctrine of rent. . .’ It is true that he failed to
make a similar acknowledgment about profits. But it may be replied that this matter
is covered by the acknowledgment of West’s priority as to the theory of rent. Torrens
was inclined, though mildly, to vindicate a title to priority as regards the theorem of
comparative costs. He may have, been right. But even if he was, there is a difference

REVIEW OF THE TROOPS

475

are individually met with before, and we cannot attribute more than effective
synthesis to Ricardo, unless (1) we decide to say that, after having gone out
with A. Smith to hunt beaver and deer, Ricardo did twist Smith’s sugges-
tion into a labor theory of value that was his own, and (2) we decide to dis-
allow Torrens’ claim, mentioned in footnote 7.

A Reader’s Guide is easy to give but, owing to Ricardo’s lack of system (in the formal
sense), much less easy to follow. The analytic engine is displayed in the first two
chapters of the Principles. Every line is important, and sections 4 and 5 of the first
chapter are as difficult to absorb as is anything the reader may run up against in
economic literature. Chapter 31, ‘On Machinery’ added in the third edition, to which
alone this guide refers, complements those fundamentals in one important point. All
the rest is really only development (chs. 3-6), application (chs. 8-18 and 29, all on
taxation), defense and criticism (chs. 20, 21, 24, 26, 30, 32), but, unfortunately, con-
tains so many obiter dicta on fundamentals as to make it very hazardous to skip. For
example. Chapter 27, ‘On Currency and Banks,’ which together with Chapter 28
deals with matters that the student of Ricardo’s general theory might feel inclined
to neglect, contains passages that shed much-needed light on Ricardo’s handling of
the theorem that marginal cost equals price, and on the sense in which he was in
full possession of it. Foreign trade is dealt with in the famous Chapter 7, which is
also really a supplement to the fundamental ones (and is itself supplemented by chs.
22, 23, and 25). Chapter 19 (and, in a sense, also 21) pledged Ricardo’s allegiance to
Say's law.

So brilliant a light will attract moths — there are a certain number of ob-
scure Ricardian writers. Moreover many people, noneconomists included, will
profess themselves votaries of the light even though they have but a dim
perception of it — -just as today there are many Keynesians and Marxians who
have never read a line of Keynes or Marx. In addition, some of the independ-
ents, even a few dissenters such as Torrens, will still profess decent respect
for the eminent fellow economist from whom they dissent, and be quite ready
to use phrases and propositions of his wherever they feel they can. Finally,
economists of later generations — conspicuous instances were J. S. Mill and
A. Marshall — may pay homage to a great name of the past in such a way
as to hide from . themselves and others the full extent of the gulf that sep-
arates them from him. All this is apt to mislead the retrospective glance and
to make the influence of Ricardo and his school look greater than it actually
was. In the interest of a true picture of the history of economic analysis, it is
necessary to reduce this influence to its proper proportions. 8

between an author’s behavior in such matters in a hasty sketch such as the Principles —
no contradiction to the statement about the systematic nature of Ricardo's performance!
— and an author’s behavior in such matters in fully matured works that had been
elaborated with infinite care such as A. Smith’s Wealth and A. Marshall’s Principles.
The third claimant was J. Rooke, Claim to the Original Publication of certain new
Principles . . . (1825), unearthed by Professor Seligman. So far as I can see, he has
no case at all.

8 It cannot be repeated too often that for any purpose other than that of a history
of analysis there would be no need for any such operation, and that the influence we
mean to appraise is influence upon scientific economics only.

47 6 III: FROM 1790 TO 1870

We have already seen that the core of the school consisted of only four men
besides Ricardo himself. By this I mean that James Mill, McCulloch, and De
Quincey were the only unconditional adherents and militant supporters of
Ricardo’s teaching who gained sufficient reputation for their names to sur-
vive. West 9 — partly because he went to India — stood apart. He was, and felt
himself to be, no member of any school but the peer of Ricardo and the
independent discoverer of the essentials of Ricardian doctrine. His evident re-
sentment against Ricardo was probably unjustified. But his regret at being
ousted from what he conceived to be his place, by the latter’s superior force
and brilliance, was not. For the Essay contains in fact not only a formulation
of the ‘Ricardian’ theory of rent but also the application of the law of dimin-
ishing returns to a theory of profit, hence the pivot of the Ricardian system.
Therefore, though we have no choice but to include him in the ‘Ricardian’
school, we shall temper this injustice by speaking occasionally of West-
Ricardian doctrines.

James Mill must certainly be recognized as a man of light and leading, irre-
spective of what we may think of the value of the light he shed and of the
leads he gave . 10 McCulloch 11 has been so roughly handled by Marx and others,

9 Sir Edward West (1782-1828), one of the foremost scientific economists of the age,
has never received his due. His Essay on the Application of Capital to Land . . . (1815,
reprinted in Professor Hollander’s series of economic tracts, 1903) is much more than
a mere statement of the law of diminishing returns, which is how it is usually described
in the history of economics. His second book. Price of Com and Wages of Labour . . .
(1826), is marked by the same independence of thought.

10 We have met James Mill (1773-1836) twice already, both times in strategic posi-
tions: as the author of the Analysis of the Phenomena of the Human Mind (1829) and
as the exponent of the official Benthamite doctrine on government. We have to add his
monumental, and indeed path-breaking, History of British India (1817), which post-
humously grew into ten volumes and was the cornerstone of his reputation with the
general public, and his two economics books (a third, the earliest one, I do not know),
viz. Commerce Defended (1808) and Elements of Political Economy (1821; 3rd ed.,
the one to be used, 1826). The author in the preface described the latter as a ‘school-
book’ and as devoid of originality (not quite true, though the original points were not
all improvements. As has been recognized, e.g. by Marx, the book represents an effort
that was by no means contemptible). The standard biography by A. Bain (1882) fails
to do justice to the economics of James Mill and also to solve the enigma of the man
— that intellectual machine that did not know how not to work.

11 John Ramsay McCulloch (1789-1864) was a journalist, academic teacher, and
civil servant and, though the most unphilosophical of men, may be counted in with
the philosophical radicals. Neglecting for the moment his factual work, I shall mention
only his Principles of Political Economy (1825; 5th ed., 1864); his Literature of Political
Economy (1845), a fairly comprehensive annotated catalogue and immensely useful as
such (the comments on each author, written from the standpoint of a naive and
unquestioning faith in Ricardian doctrine, are a revelation for anyone who wishes to
grasp the spirit of the Ricardian school); and the Essay on the Circumstances -which
Determine the Rate of Wages (1826), his most ambitious effort in economic theory.
Both his letters to Ricardo and Ricardo’s letters to him have been published, in 1931

REVIEW OF THE TROOPS

REVIEW OF THE TROOPS 477

Bohm-Bawerk among them, that it seems right to emphasize his merits rather
than the fact that his ability, though of a most useful kind, was not of a high
order. His factual work, an important achievement, will be mentioned later.
His zest for social reform — into which entered an element that spells some
analytic merit: he was a leading exponent of the ‘wage-fund theory’ but realized
that this theory does not prove the futility of trade-union wage policy —
should recommend him to modern critics. Moreover, he rose to be one of the
best-known figures of the profession in his day, and succeeded in keeping the
flag of Ricardianism flying when practically all other economists had deserted
it: and this is something. Finally, he wrote the textbook that was the most
successful general treatise England produced in the first four decades of the
nineteenth century, and this, all the shortcomings notwithstanding, is not
negligible either ; 12 the book was more directly influential with the public than
was Ricardo’s and really created what we might call lower-level Ricardianism.
De Quincey, of Opium Eater fame, is a different case. His delight in refined
logic makes him the very antipode of the rough and ready McCulloch. But he
touched economics peripherically only. And his contribution, though interest-
ing, was sterile . 13

None of the three added anything substantial, and the touches they did

and 1895 respectively, by Professor J. H. Hollander. They are one of the most important
sources for the study of that time’s methods of theoretical reasoning.

12 Speaking of texts, we should not pass by Mrs. Jane Marcet’s Conversations on
Political Economy (1816), which enjoyed a great success (7th ed., 1839). James Mill’s
was an elementary, but not an easy, text on pure theory. McCulloch’s was the saleable
stuff for the college course in general economics. Mrs. Marcet’s was economics for what
we should call high-school girls. The reader should really look at it and note two
interesting points about it. The first is the date: the book appeared before Ricardo’s
Principles and, though not orthodox Ricardianism in every particular and though lacking
Ricardian rigor, yet presents many of the most important tenets of the Ricardian school.
This is significant, and greatly enhances the interest of the performance, at which it is
quite out of place to sneer. Second, if nevertheless so many later economists did sneer
at it, this was due not only to male prejudice but also to the nature of the publication:
not for a moment did Mrs. Marcet doubt not only that the definitive truth about eco-
nomics and economic policy had been discovered at last but also that this truth was
so delightfully simple as to be capable of being taught to every school girl. This frame
of mind was then common and is highly characteristic of that age — exactly as a similar
frame of mind is common among modern Keynesians and not less characteristic of our
own age.

13 'Dialogues of Three Templars on Political Economy,’ London Magazine , April
1824— let us bow to the editor who published such material and to the reading public
that did not thereupon discontinue subscription — and Logic of Political Economy
(1844). The book survives, I think, only through J. S. Mill’s generous quotations from
it. I cannot see in it anything original. The concept of Difficulty of Attainment is
Ricardo's, and had already been formulated by the latter in a much more suggestive
way ('the real value of a commodity is regulated ... by the real difficulties encoun-
tered by that producer who is least favoured,’ Principles , ch. 27).

478 III: FROM 1790 TO 1870

add — James Mill and McCulloch especially — were mostly of doubtful value. 14
They did not even succeed in summing up Ricardo correctly or in conveying
an idea of the wealth of suggestions to be found in the latter's Principles.
What they did convey was a superficialized message that wilted in their hands
and became stale and unproductive practically at once. It was not their fault
that Ricardo’s system failed from the first to gain the assent of a majority of
English economists — and not only, as the Ricardians tried hard to believe, of
the. dunces and laggards. This was owing to its inherent weaknesses. Nor was
it their fault that the system was not made for a long career. But it was their
fault that defeat came so quickly. Ricardo died in 1823. In 1825, Bailey
launched his attack that should have been decisive on the merits of the case.
Actually it was not, for schools are not destroyed so easily. But the decay of
the Ricardian school must have become patent shortly after, for in a pamphlet
published in 1831 we read that ‘there are some Ricardians still remaining.’ 15
In any case, it is clear that Ricardianism was then no longer a living force.
The prevailing impression to the contrary can be easily accounted for. There
were the henchmen who continued to stand by their guns and to teach ex-
ploded doctrine as if nothing had happened. There was the lag of public opin-
ion, which is as slow to realize the passing of an obsolete doctrine as it is to
realize the birth of a new one. And there was something else that is still
more important and will explain why few if any historians will agree with me:
there was Ricardo’s personal prestige, the great name that survived the work.
As has been pointed out already, Ricardo, though not particularly fortunate
as regards his immediate followers, has been all the more fortunate in another
respect. J. S. Mill emphasized his early Ricardianism throughout and neither
realized himself nor made it clear to his readers how far he had actually
drifted away from it by the time he wrote his Principles. And, to a lesser ex-
tent, even Marshall and Edgeworth did the same thing. Moreover, Ricardo’s
fame does not rest on his theoretical structure alone. On the one hand, there
were his contributions to the theory of money and monetary policy and his
theory of international trade. On the other hand, certain individual elements
of that structure proved more durable than did the whole. The most important
instance is his theory of rent, in spite of the fact that logically it should have
been scrapped with the rest.

Foreign zones of influence present, in part, a different picture. 16 Marx and
Rodbertus did much to keep Ricardian thought alive. Partly by virtue of their
influence, partly because of the weakness of domestic competition — and, later
on, also because of the prevalent dislike for the Austrian theory — Ricardo re-
mained to the end of the century the great theorist for most of those German
economists who had any theoretical ambitions at all: the names of Wagner,

14 Ricardo is, e.g., not chargeable with either James Mill’s or McCulloch’s theories
of interest or with the whole of the latter’s wage-fund theory.

15 This phrase from C. F. Cotterill, Examination of the Doctrine of Value . . .
(1831), is quoted by Professor Seligman (op. cit. sec. 3), to whom I owe this reference.

16 For influence of Marx and Rodbertus, see below, sec. 5.

REVIEW OF THE TROOPS

479

Dietzel, and Diehl are illustrative examples. For the period under discussion,
but not beyond it, an analogous statement holds — or almost holds — for Italian
economics. There are strong traces of Ricardo’s influence in the writings of
Ferrara and in the textbooks. Rossi affords another instance if we count him
as an Italian, but almost the only one of importance if we call him a French
economist. France, following her own tradition, resisted Ricardian influence
more than did any other country. In the United States, McCulloch’s textbook
conquered a large amount of ground — tying with Say’s for first place in teach-
ing. And thgre was also Ricardian influence on a higher level far into the next
period — of front-rank names, Taussig’s is an illustration.

What I meant by ‘fringe ends’ of the Ricardian school may be best
illustrated by indicating the most important group that comes within the
meaning of this term, the so-called Ricardian socialists. Of course, Marx
was the greatest of Ricardian socialists, but the group is usually defined
more narrowly; namely, so as to comprise a number of writers who,
mainly in the 1820’s and 1830’s, argued the case of the working class
on the proposition that labor is the only factor of production. Though
this proposition harks back to Locke and Smith and not to Ricardo, it is
likely that the Ricardian theory of value did encourage these socialist
writers and also offered suggestions to them. Since the writings of this
group, which of course is entitled to a great place in the history of so-
cialist thought, offer but little that is relevant to a history of economic
analysis, we shall confine ourselves to mentioning the two names that
seem to be, for us, more important than others. William Thompson’s
Inquiry into the Principles of the Distribution of Wealth . . . (1824)
is a fair example, on its higher level, of the group’s argument, of its tem-
pered equalitarianism, and of its habit of considering ideals of distribu-
tion, irrespective of the repercussions that realization of these ideals
might have on production. Benthamite influence is strongly marked.
Thomas Hodgskin’s Labour Defended against the Claims of Capital
. . . (1825) and Popular Political Economy (1827) display at least traces
of genuinely analytic intention. 17 It should be observed that as soon as
an author combines the idea that labor is the only source of wealth and
that the values of all commodities can be represented in terms of labor
hours with the idea that labor itself is a commodity, he is inevitably
drawn to the conclusion that the market mechanism robs the workman
of the difference between the labor value of ‘his’ product and the labor
value of the amount of work invested in that product. This, barring de-
tails, is the Marxist theory of exploitation. Accordingly, several Ricardian

17 J. F. Bray’s Labour's Wrongs and Labour's Remedy (1839) has been reprinted by
the London School (1931) and has thereby been transformed from the least into the
most accessible of these writings. This is my only reason for mentioning it. See M. F
Jolliffe, ‘Fresh Light on John Francis Bray,’ in Economic History , A Supplement of the
Economic Journal, February 1939.

480 in: FROM 1790 TO 1870

socialists have been called forerunners of Marx. The phrase ‘forerunners’
may mean much or little, and if it is not made to mean too much, that
statement may be allowed to pass muster, though I cannot find any in-
stance (not even in Thompson and Hodgskin) that would amount to
full anticipation of all that Marx’s theory of exploitation means within
his system. But the charge of plagiarism is unfounded, if for no other
reason, because that combination of ideas is bound to occur to any
student of Ricardo who develops his teaching in the direction in which
Marx wished to develop it. It is significant that this charge, though often
repeated by economists, was in the first instance raised by a wtiter who
was not an economist himself, Anton Menger (1841-1906; brother of the
economist), to whose Recht auf den vollen Arbeitsertrag (1886; the Eng-
lish trans.. Right to the Whole Produce of Labour, 1899, has an impor-
tant introduction by H. S. Foxwell) the reader is for the rest referred.

The theory of the more important writers of the group stands out better
in Esther Lowenthal, The Ricardian Socialists, 1911.

3. Malthus, Senior, and Some of Those Who Also Ran

In spite of our objections to speaking of national schools, we shall review by
countries the rest of the men still to be mentioned. For England, since we
have noticed Longfield already and since we reserve J. S. Mill and Caimes
for the next chapter — and Jevons, of course to the next period — we are left
primarily with Malthus and Senior. But we must not confine ourselves to the
performances that are known to history and leave all others in the shade.

This would create a wrong picture. For historical performances are rarely like
erratic blocks in a plain. They are more like peaks that rise from clusters of
smaller eminences. In other words, a science develops by small accretions that
create a common fund of ideas from which, by chance as well as by merit,
emerge the works that enter the hall of fame. Therefore we must add at least
a few of those writers who, though they failed to achieve historic fame, yet
did important work and exerted an influence upon developments in analysis
that are anonymous but not negligible. In taking some account of them, we
shall also establish our proposition that the West-Ricardo school was never |

dominant in English economics. 1 J

(a) Malthus . 2 Marx poured on him vitriolic wrath. Keynes glorified him. J

1 Let me repeat that writers whose perfomiance was wholly in the fields of money,

banking, and cycles will be dealt with separately. |

2 Thomas Robert Malthus (1766-1834) was a clergyman and a professor of history |

and political economy at the East India College at Haileybury. As we already know he

leapt into fame, from complete obscurity, in 1798 when he published his Essay on the
Principle of Population (2nd ed. 1803; 3rd 1806; 6th 1826). Of his numerous other
writings (neglecting those on money), the following are, for us, the most important:

(1) . . . High Price of Provisions . . . (1800); (2) Letter to Samuel Whitbread on . . . |

the Poor Laws (1807); (3) Observations on the Corn Laws (1814); (4) Inquiry into the : j

Nature and Progress of Rent (1815); (5) Grounds of an Opinion on the Policy of Re- |

REVIEW OF THE TROOPS

481

Both the vituperation and the eulogy are readily seen to be due to prejudice.
Marx — or the laicist bourgeois radical in him — hated nothing so much as the
clerical cloth. Moreover, though he never gave any credit to the men who
stood for free trade in food, he had nothing but withering scorn for those
who did not. These were just hirelings of the landed interest for Marx and, of
course, for his obedient followers. This way of disposing of Mai thus’ contri-
bution is no better than other people’s method of disposing of Ricardo’s on
the grounds that he was a Jew and 'for the money interest.’ But Keynes’s par-
tiality for Malthus, though morally admirable — for those are few who extol a
forerunner and Keynes believed Malthus to have been a forerunner of his —
went to lengths that are not much less unreasonable than was Marx’s hatred . 3
And right from the publication of the Essay on Population to this day, Malthus
has had the good fortune — for this is good fortune- — to be the subject of equally
unreasonable, contradictory appraisals. He was a benefactor of humanity. He
was a fiend. He was a profound thinker. He was a dunce.

The man whose work stirred people’s minds so as to elicit such passionate
appraisals was ipso facto no mediocrity. The man who realized that some eco-
nomic problems are like the problems 'de maximis et minimis in fluxions’
[calculus] was no dunce. His case illustrates the difference between ability
and brilliance. Soundness would be the word for him if it were not for a fail-
ing that he shared with many — most? — economists. He had a few pet ideas,
which he was bent on applying to practical problems. And when he did so, his
usual common sense was apt to turn out nonsense . 4 Moreover he was not a
good controversialist.

striding the Importation of Foreign Com (1815); (6) Principles of Political Economy
(1820; i.e. one year after Sismondi’s Principles ); (7) Measure of Value (1823); and (8)
Definitions in Political Economy . . . (1827) — (4) and (6) being in turn the most
important of these. See especially J. Bonar, Malthus and His'Work (1885, 2nd ed., 1924;
the standard work on Malthus, a little unsatisfactory with respect to pure theory), and
Lord Keynes’s charming essay on Malthus in Essays in Biography (1933), which the
reader is sure to enjoy and which makes it superfluous for me to say anything concerning
the subject of ‘backgrounds and formative influences.’ Let me notice briefly the three
accusations of plagiarism that have been leveled at Malthus by Marx. The first we
know already: it refers to Malthus’ forerunners, Townsend especially, in the theory of
population. The second concerns his theory of rent (diminishing returns). Marx was
quite sure that Malthus had plagiarized Anderson but failed to produce any substantial
reasons why: the type of argument that makes Malthus a plagiarist in this case would,
if admissible, also make a plagiarist of Marx. The third concerns the theory of gluts:
Malthus is supposed to have plagiarized Sismondi. Apart from the considerable differ-
ences between the theories of the two, there is no reason why Malthus could not have
arrived at the position he took in the Principles from ideas that were present in his
mind at least as far back as 1814 (see Keynes, op. cit. p. 141).

3 A passage in the essay referred to above actually reads as if Lord Keynes attributed
to Malthus the ‘beginning of systematic economic thinking’ (p. 125).

4 The outstanding instance of this is his Letter to Samuel Whitbread (see last foot-
note but one). In this piece he argued against a housing program of Whitbread’s (cot-
tages to be built by the parish authorities) on the ground that this would encourage

482 in: FROM 1790 TO 1870

For the public and also for a majority of the profession, Malthus was and is
primarily the Malthus of the Essay on Population. His second title to fame,
his contribution to monetary analysis, has almost escaped the attention of his-
torians. His third title, the one that has brought his name to the fore in our own
time, is his theory of saving and investment or his theory of 'general gluts/ 5
For the moment, we are concerned with a fourth title to fame only, namely,
as the author of a system of economic theory that recoined the theory of the
Wealth of Nations in a manner that was the alternative to Ricardo’s recoin-
age. Deferring consideration of his theory of rent and of other points of com-
parative detail, we must now make sure of this point.

We have seen that Ricardo’s work, so far as general theory is concerned,
started from the Wealth of Nations and recoined the latter’s theoretical con-
tents by a method that centered in the concept of value. Exactly the same
thing is evidently true of the work of Malthus as presented in his Principles.
Except for his theory of saving and investment, which on the face of it seems
to be Malthus’ own , 6 all the elements that enter into the analytic apparatus
of that work, and even its terminological arrangements, point to the First
Book of the Wealth of Nations. Only, whereas Ricardo recoined the doctrine
of the Wealth by means of the labor-quantity theory of value, Malthus re-
coined it by means of the theory of value that A. Smith actually used, namely,
the theory of supply and demand , 7 also following A. Smith’s example in choos-
ing labor as a unit of value ( numeraire ). Therefore, Malthus adopted the line
that won out ultimately and pointed much more directly to the Marshallian
system than did Ricardo’s, notwithstanding the fact that it was with the
latter and not with the former that Marshall endeavored to keep in contact . 8

improvident marriages. Even Keynes had nothing to say for this. He treated this just as
an incident and condoned it good-humoredly. This means, however, that he failed to
see its implications concerning the recommendations that emanate even from front-rank
economists. Is the public really to be blamed for not taking them seriously?

5 For the discussion of these three phases of Malthus, see above, ch. 1 and below,
chs. 6 and 7.

6 Unless we choose to hunt for forerunners far back in the eighteenth century, the
only author that might qualify as a forerunner in this respect is Lauderdale. Sismondi
is not a forerunner but a competitor though, so far as his teaching coincides with
Malthus’, he holds priority as to publication. [J. A. S. had penciled a note — ‘Quesnay?’]

7 We shall see later that the labor-quantity and the supply-and-demand theories
should not, in logic, be put into opposition. But both Ricardo and Malthus took them
mistakenly for alternatives. I adopt this view for the moment, because they do serve
nevertheless to characterize the two different apparatus of analysis.

8 This tendency of Marshall’s, which runs throughout his Principles, has done much
to obscure the actual situation. Here I shall only state by anticipation that, in spite of
all that Marshall said, it is the supply-and-demand apparatus which dominates the
analysis of his Fifth Book. There is, however, another confusion to which I want to
draw attention at once. Analysis that works by means of supply and demand has no
difficulty in covering short-run phenomena as well as long-run phenomena. It has been
repeated over and over again that Malthus, unlike Ricardo, was primarily interested in
short-mn phenomena. To some extent this is true. But it has been assumed too readily

REVIEW OF THE TROOPS

4 8 3

This also holds with respect to another difference between the two. We have
seen that Ricardo’s analytic apparatus is geared to the problem of distribu-
tion — to the explanation of relative shares. Malthus, again returning to A.
Smith and again anticipating A. Marshall, geared his apparatus to the analysis
of the whole economic process. Hence he treated total output (Marshall’s 'na-
tional dividend’), not, like Ricardo, as a datum, but as the chief variable to
be explained . 9 Therefore, Malthus should indeed, though for a reason that
does not coincide with that which induced Lord Keynes to arrive at a similar
result , 10 stand in the history of analysis not only as the author of a valid
alternative to Ricardo’s theory but as the sponsor (or rather as one of the
sponsors) of the victorious one. This is much. At the same time, it is all. It is
perfectly compatible with recognition of these facts that much less ingenuity
went into Malthus’ than into Ricardo’s analytic schema, and that the former
was throughout in the most unenviable position an economist can be in,
namely, in the position of having to defend plain sense against another man’s
futile but clever pirouettes.

(b) Archbishop Whately and Professor Senior. Next, we look at Senior and
the man who had been his tutor, Whately. The latter’s 11 importance for us is
as great as it is elusive. He was not profound or very learned. He was not orig-

that it was because of this interest in short-run phenomena that he selected supply and
demand as the pivot of price analysis. This is not true. As should be clear from the text,
his difference with Ricardo on the subject of value was much more fundamental than
that — which Ricardo failed to realize. [It is possible that J. A. S. intended to eliminate
this footnote. There was a faint line through it.]

9 Incidentally, this different point of view involved a different conceptualization and
naturally led him to find fault with Ricardo's. This he made particularly clear in his
Definitions. Once more he expressed himself inadequately. He reproached Ricardo with
a use of terms that was both unusual and inconsistent, as if this were all. But, just as
before, there was something more fundamental at stake than terminology. What he
should have objected to this time was Ricardo's analytic intention of which the
terminology was but the consequence. This intention was open to objection on the
ground that it neglected the really relevant problems for the sake of propositions that
were partly less relevant to the purposes of economic analysis and partly sterile.

10 For Keynes, the decisive point was Malthus’ attitude toward saving. For us, it is
his sponsorship of the Smith-Marshall output analysis, which, as these two names
suffice to show, is not necessarily bound up with that attitude.

11 Richard Whately, D.D. (1787-1863), was an Oxford don who became (Anglican)

Archbishop of Dublin, where he founded the chair of political economy and rendered
innumerable services of the same type. But they do not sum him up or characterize him.
Primarily, he was a theologian and a leader of Anglican Church policy and opinion.
But this does not sum him up either. Nor does, finally, his extensive activity in the
Sozialpolitik of his age and country. His Introductory Lectures on Political Economy
(1831; enlarged ed., only one known to me, 1855) and his Easy Lessons on Money
Matters (1833) would not suffice to place him high as an economist. More interesting
is an appendix to his Logic, ‘On certain Terms which are peculiarly liable to be used
ambiguously in Political Economy’ (republished in the Library of Economics Reprint of
Senior’s Outline). There is an instructive life by Miss E. J. Whately (1866) that pictures
not only a man but also an environment and an epoch. . *

484 III: FROM 1790 TO 1870

inal or even brilliant. But his clear and strong intellect grasped calmly and
firmly whatever it did grasp within an unusually wide range of interests. And
in his age, country, and world, he was a leader of the formative type, an ideal
illustration of what is meant by a key man. He led quietly, without seeming to
do so, by the weight of his personality and of his advice which was never
more valuable than when it was obvious. For in ecclesiastical politics, as in
economics, the obvious is sometimes precisely what people are most reluctant
to see. His most important service to economics was, however, that he formed
Senior, whose whole approach betrays Whately’s influence.

Senior 12 has been treated with comparative neglect by many economists
and with uncalled-for scorn by some. In reaction to this, others have made a
'genius’ of him, which he assuredly was not, if I understand what this word
means. In our picture he will enter a triumvirate with Malthus and Ricardo:
he was one of the three Englishmen whose works are the main stepping stones
between A. Smith and J. S. Mill. But J. S. Mill had, logician though he was,
no eye for Senior’s great performance. To the latter’s eternal honor — which he
may have to share with Whately — it must be recorded, in the first place, that
he attempted to unify and present economic theory according to the require-
ments of the postulational method, that is, as a series of deductions from four
induced or empirical postulates, which we shall discuss in Chapter 6. This, even
if the result fell considerably short of perfection, makes him indeed the first
‘pure’ theorist of that period — always excepting Cournot and Thiinen, per-
haps also Longfield — and suffices by itself to condemn those who refuse to
pay their respects to him. In the second place, he adumbrated a much im-
proved theory of value and a much improved theory of capital and interest.
In the third place stand various smaller merits, some of which will be men-
tioned in their proper connection (population, decreasing returns, rent). In the
fourth place, his brilliant contributions to the theory of money, to be men-
tioned in the last chapter of this Part, are, considered as purely intellectual
performances, not inferior to Ricardo’s. I should put his subjective originality
quite as high as Ricardo’s. Objectively, he had been anticipated, like Ricardo,

12 Nassau William Senior {1790-1864) was a highly educated Oxford man of whose
uneventful life, financed mainly by modest independent means, two facts only need
be recorded here: he held the Drummond Professorship at Oxford twice (1825-30 and
1847-52); and he worked on several important royal commissions. His work with these
commissions amounted to a respectable quantity of factual research and should also
clear him from any suspicion of having been a doctrinaire laissez-faire man. Besides his
lectures on money, now available in the London School Reprints (1931), only his
Outline of the Science of Political Economy (1836; Library of Economics Reprint,
1938) is essential for us. We owe to Dr. Marian Bowley an excellent interpretation of
Senior’s work and of its place in the history of economics ( Nassau Senior and Classical
Economics, 1937), to which I wish to call my readers’ attention and which enables me
to cut short this note. Differences between her interpretation and mine are few and not
important. Her tendency to distance Senior from the ‘classic’ economists — to whom he
belongs according to the terminology adopted in this book — creates, however, some
differences that are more apparent than real.

REVIEW OF THE TROOPS

485

on most of the individual points he made. Why, then, will so few economists
agree with an estimate that puts Senior on a par with Ricardo, and why has
his influence been restricted, substantially, to what J. S. Mill took over from
him?

There are three excellent reasons for this that illustrate the difficulty of
even as much comparative appraisal of economists as is inevitable, if . we are
to get a picture of a scientific situation at all. First, even if we are firmly re-
solved to estimate analytic merit only, we are apt to forget that Ricardo
speaks to us from a pedestal, the pedestal of a reputation made in public dis-
cussion of political issues. There is no such pedestal under the figure of Senior.
He counts as an analytic economist only. His work on problems of policy is
buried in bluebooks. that hardly anyone reads. His public utterances made no
mark and he was a nobody, or almost so, to the general public. Second— and
this was entirely the fault of his mental make-up — he was, what is the word?
Lazy? By this I do not mean to suggest that he did not do a lot of work, but
rather that he lacked the kind of energy that will run purposefully to definite
conclusions. Ricardo was the horse that will take hold of the bit, put out its
nose, and gallop for what it is worths Senior Was the horse that drops the bit,
puts its nose down, and refuses to stretch. His Outline, still worse in arrange-
ment than Ricardo’s Principles, discusses, criticizes, hesitates, swerves. It fails
to impress, as the latter does, by ardor. Worse still. Senior’s reader gets the
impression, nay, he is told in so many words, that all economic analysis
amounts to is the search for, and consistent use of, a convenient terminology.
Was this Whately’s fault? 14 In any case, nothing could be further from the
truth and nothing could have been more uninspiring. Other economists — in
fact most of them throughout the nineteenth century — used and defended the
hunt for the meaning of words as a method of research. But nobody went as
far as Senior, who seemed inclined to solve all problems of his ‘science of po-
litical economy’ by laying down definitions. We shall have no difficulty in
understanding how such a ‘method’ must have impressed hostile critics. And,
third. Senior had a curious talent for ‘putting his foot in it.’ Even good Homer
dozes off occasionally, as an old slogan avers. But Senior dozed off, that is,
uttered ineptitudes, rather too frequently. He was careless. And though able
he was not clever. Thus, to quote only the most famous instance, he actually
wrote (Letters on the Factory Act . . . 1837) a statement to the effect that

13 J. S. Mill’s opinion of Senior was even higher than we might infer from his refer-
ences to him: Mill had his copy of the Outline interleaved with sheets on which to
note his own comments. These comments, published by Professor von Hayek in
Economica, vol. xix, August 1945, are of the utmost interest.

14 With his usual common sense, Whately pointed out (in his Elements of Logic )
that many of the issues economists quarreled about were purely verbal and that loose
use of terms, both a cause and a consequence of loose thinking, was a fertile source of
misunderstandings. But he overshot the mark, when he seemed to consider the posses-
sion of ‘a vocabulary of general terms as precisely defined as the mathematical,’ not only
as an important desideratum but practically as the only thing needful.

486 III: FROM 1790 TO 1870

the profits of cotton mills, assumed to be 10 per cent, would be completely
wiped out by a reduction of the working day by one-eleventh because the
whole of those profits was produced in the last hour. This could not have
happened with Ricardo, though we might put Senior above him in other re-
spects. 15

(c). Some of Those Who Also Ran . For the reason explained at the begin-
ning of this section, I shall now add a few more names. Other writers would
no doubt riiention other names, in part at least, but my selection is this:
Bailey, Chalmers, Lauderdale, Ramsay, Read, Scrope, and Torrens. 16 Their
performances differ widely in nature and are difficult to co-ordinate, though
they do round off our picture. However much I wish to avoid cataloguing, I
nevertheless present them in alphabetical order.

Bailey, 17 as already mentioned, attacked the Ricardo-Mill-McCulloch analysis
on a broad front and with complete success. His Dissertation, which said, as
far as fundamentals are concerned, practically all that can be said, must rank
among the masterpieces of criticism in our field, and it should suffice to secure
to its author a place in or near front rank in the history of scientific economics.
Nor did his work pass unnoticed. Several writers. Read among them, acknowl-

15 That Senior arrived at this absurd result after a careful examination of facts,
only makes matters worse, as far as his competence in applied theory is concerned. On
the other hand, Marx’s scathing attack upon Senior’s argument in the first volume of
Das Kapital does not enhance our idea of Marx’s competence either. In all the pages
of vituperation that he bestowed upon it, he failed to adduce the decisive criticism,
which he does not seem to have perceived. He overlooked also another thing, namely,
that Senior’s argument would have been correct (at least in principle), if Marx’s own
theory had been. The reasoning of both Senior and Marx may, however, give pause
to those who refuse to recognize the advance in analytic technique that has occurred
since. And the case also serves to illustrate another point that cannot be impressed
upon the reader’s mind too often. The essential thing is that both Senior and Marx
committed mistakes, revelatory of inadequate technique. These mistakes were mistakes
quite irrespective of the cause for which they argued. To note that Senior was ‘for’ and
that Marx was ‘against’ the mill owners is entirely irrelevant. And to blame the one
and to praise the other, according to the side we take ourselves, is childish.

16 It was Professor Seligman’s paper ‘On Some Neglected British Economists’ (men-
tioned above), which drew my attention to Read; Dr. R. Opie’s paper (in the Quarterly
Journal of Economics, November 1929) which drew my attention to Scrope, who until
then had impressed me only by his contributions to monetary theory and policy; and
Marx’s Theorien iiber den Mehrwert which drew my attention to Ramsay. Two impor-
tant names, those of Jenkin and of Jennings, are being transferred to Part rv. Of course,
West was quite typically one of those who ‘also ran.’ But it seemed better to couple
him with Ricardo.

17 Samuel Bailey (1791-1870). The only publication of his that need be mentioned
is A Critical Dissertation on the Nature, Measures and Causes of Value; chiefly in
Reference to the Writings of Mr. Ricardo and His Followers (1825; London School
Reprint, 1931)- Perhaps I should add his reply to a grossly unfair criticism in the
Westminster Review, ‘Letter to a Political Economist,’ 1826. Both in unfairness and
lack of understanding of Bailey’s points, the Westminster reviewer was however outdone
by Marx ( Theorien iiber den Mehrwert).

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487

edged indebtedness to him and followed his lead, and it is safe to assume that
his influence extended beyond the range of explicit recognition. Nevertheless,
historians who to this day fail to give Bailey his due are only accepting the facts
of the case as it presented itself at the time. Writing in 1845, McCulloch did
not risk provoking laughter when he wrote in his Literature of Political Econ-
omy that Bailey had not properly appreciated the Ricardian theory and had
not 'succeeded in any degree in shaking its foundations/ in the face of the
fact that a poll of writers on value from 1826 to 1845 would produce a con-
siderable majority for Bailey. These aie the explanations I have to offer. First,
in science as in art and especially in politics, there is such a thing as coming
too soon; and failure, much more complete than was Bailey’s, is the usual
result of premature action. Second, Bailey’s criticism was indeed constructive
and did suggest by implication how the system he attacked could have been
replaced by a more satisfactory one; but he did not try to do so, and those
who followed in his wake and tried were no match for the shadow of Ricardo.
They no doubt undermined his system and thus helped toward J. S. Mill’s
transformation of it, but they did so by a slow process of attrition rather than
by spectacular victory.

In this process of attrition, Chalmers’ 18 influence counted for a good deal,
at least in Scotland. As a theorist, he was thoroughly un-Ricardian and fol-
lowed the line of what we have called Malthus’ recoinage of the Wealth of
Nations. He also followed Malthus in matters of general gluts and oversupply
of capital. If it were possible to speak of a Malthusian school in general theory
(which I doubt), Chalmers would have to figure as its McCulloch — which is,
after all, not so left-handed a compliment as it may seem to the reader.

Lord Lauderdale 19 stands somewhat out of line and holds only a secondary
position in the history of economics, but one that is fully deserved and inde-
pendent of the additional recognition that should now be extended to him on
account of his argument against debt redemption ( Three Letters to the Duke

18 The Rev. Thomas Chalmers (1780-1847), whose activities included teaching of
moral philosophy and political economy (at St. Andrews) and divinity (at Edinburgh),
was a man of many merits. We cannot claim more than a fraction of him for analytic
economics. Only two of his works need be mentioned: his Enquiry into the Extent and
Stability of National Resources (1808), partly incorporated in his On Political Economy
(1832). The latter is a book of considerable importance, but not easy to appraise. It
presents a curious mixture of sound insights and technical shortcomings. And these
shortcomings sometimes account for patently untenable results such as the proposition
that a loss of foreign markets is almost a matter of indifference to a country — which
overlooks the whole of the division-of-labor argument — though it may be interpreted
as an overstatement of the true proposition that (after adaptation) the loss of foreign
markets need not affect employment. We shall have to mention the book again.
Chalmers seems to have coined the phrase, though of course not the concept, 'margin
of cultivation/ and is the author of the argument, much appreciated by J. S. Mill,
that explains why ravages of wars are in general quickly repaired.

19 James Maitland, eighth Earl of Lauderdale (1759-1839), Inquiry into the Nature
and Origin of Public Wealth . . . (1804). This is the only publication of his that
counts as an analytic performance.

488 in: FROM 1790 TO 1870

of Wellington . • . 1829), which was based upon an argument against excess
saving and for excess expenditure. 20 The topics of value, capital, and interest
owe something to him, as we shall see, but more important than are these
contributions in themselves is the invigorating impulse he gave: he was a man
who thought for himself and was not prepared to accept fundamentals as
handed to him by the Smithian tradition. Though a dilettante and, from the
standpoint of the nascent profession, something of an outsider, he was a writer
of force and, in most cases, of sense. 21

The only author who fver did justice to Ramsay is Marx, who dealt fully
with him in the Theorien iiber den Mehrwert . 22 Even Professor Seligman, who
revived his memory (op. cit.) emphasized his dependence upon French writers
more than I think justified. It is true that, especially in his theory of enterprise
and profits, he had been anticipated by Say. It is also true that he was not the
first to introduce those ideas to English economics, and that he might even
have 'borrowed’ at second hand. But he synthesized better than did others and,
more important, many suggestive details were his owrt. It is easy enough to see
that he made no mark. But it should be added that he came near to doing so
and that his lack of success has perhaps more to do with his unpopular oppo-
sition to the repeal of protection to agriculture than with his most serious
shortcomings. There is thus no reason to think little of him. 23

Read 24 impaired his chances of success by certain oddities, especially by his
doubtful speculations about the 'Right to Wealth.’ His attacks upon the
Ricardian socialists are of little interest to us. Nevertheless his work is of some
importance for us, first, because it bears witness to the influence of Bailey,
whom Read followed in his Ricardo criticism, and to the anti-Ricardian cur-
rent that was running strong around 1830; second, it has some merit and in
turn exerted some influence of its own, particularly in the analysis of profit

20 On this, see F. A. Fetter, ‘Lauderdale’s Oversaving Theory,’ American Economic
Review, June 1945.

21 Of late, an attempt has been made to ‘explain’ both his analysis and his recom-
mendations in terms of his interests as a landlord. We know what to think of the
explanatory value of this.

22 Marx’s recognition of Ramsay must, of course, be appraised with reference to his
habits of criticism. If these are taken into account, this recognition means a lot. Also
it speaks highly of Marx’s scholarship, for when he wrote Ramsay was practically for-
gotten. Sir George Ramsay’s (1800-1871) only relevant work is his Essay on the Distri-
bution of Wealth (1836).

23 Ramsay’s case is food for thought, particularly in one respect: when a writer has
failed to make the right contact with his contemporaries — excepting those rare cases in
which a valiant champion arises to laud him to the skies posthumously — historians
assume a strange attitude of hostility toward him and set up standards that would dwarf
A. Smith, whereas, in more fortunate cases, they quite commonly sponsor absurd claims
to originality or other merits that are never revised.

24 Samuel Read (no personal data that I know of); the only work that needs to be
mentioned here is his Political Economy. An Inquiry into the Natural Grounds of Right
to Vendible Property or Wealth (1829). E. R. A. Seligman (op. cit. sec. 4) has noticed
all the points about it that matter to us.

REVIEW OF THE TROOPS

4 8 9

and interest. Among the writers it influenced directly, the most eminent one
is Scrope, 25 the monetary reformer of index-number fame, who was not only
the author of numerous pamphlets on money and banking, poor laws, agricul-
tural labor, and other topics but also an economic theorist of some importance.
His Principles of Political Economy (1833) was, however, written for popular
consumption and did not develop his analysis at all satisfactorily. It is easy to
notice his original ideas on population and the ‘tabular standard/ But these
are not what I mean just now. Much more important for us is the insight into
the nature of economic equilibrium: he saw how the mechanism of demand
and supply, turning on everybody's tendency to maximize returns, solves both
the problem of allocation of resources (production) and the problem of in-
come formation (distribution), thus disposing, incidentally, of the whole West-
Ricardian construction. In the analysis of interest and profits, too, he made
headway: it is there that he seems to have owed something to Read.

All the performances so far mentioned in this section — and our list is very
incomplete — were un-Ricardian or anti-Ricardian; and it would be quite im-
possible to draw up a parallel list of Ricardian writings. Moreover, the antag-
onism to the West-Ricardian schema that all of them display was primarily
scientific and not political: Read’s hostility to the Ricardian socialists may
have set him against the Ricardian theory of value, but for the rest I cannot
find motivating political antagonisms between these writers and the Ricar-
dians. 26 The theory that resolves all differences between economists into dif-
ferences of their politics and always looks to ‘what a man stands for’ fails in
this case as it does in the case of the victory of the marginal utility theory in
the next period. Finally, the writings of which we have noticed examples put
later developments in a new light: a continuity of effort reveals itself to any-
one who pays attention to these writings that is completely lost in the usual
story of a prevalent Ricardianism — J. S. Mill figures as a Ricardian in this story
— spectacularly shattered by ‘revolution’ around 1870.

The last author I am going to mention, Torrens, 27 cannot be described as

25 George Poulett Scrope (1797-1876) was one of those delightful Englishmen of
laborious leisure to whom our science, like others, owes so much. Among other things,
he was an authority on volcanoes and a M.P. His reputation as an economist rests mainly
on his work on central-bank policy and on stabilization of the price level. But there is
also analytic merit — and striking independence and originality — in some of his pamphlets
on other practical questions. Though accepting the fundamental slogans or principles
about the ‘system of natural liberty' current in his time, he bravely swam against the
stream in such matters as his unemployment-insurance scheme and his advocacy of
public works. When dates are considered, the insight — I repeat: the analytic insight —
implied in this places him high above the common run of the economists of his time.

26 Ramsay’s qualified support of the com laws, e.g., can be defended also on a
Ricardian basis. This is why I italicized the word motivating.

27 Another strong, interesting, and sympathetic type! Colonel Robert Torrens (1780-
1864), a professional soldier who had seen service, finding himself on half-pay after the
Napoleonic Wars, proceeded forthwith to make for himself a fresh career in politics
and finance and a name as an economist as well. He is chiefly known for his advocacy
of Peel’s Act: excepting Lord Overstone, he was the only economist of standing who

49 ? HI: FROM 1790 TO 1870

anti-Ricardian. But neither can he be described as a Ricardian. Professor Selig-
man has argued the case for Torrens' independent discovery of the 'Ricardian'
theory of rent, with priority over Malthus and West, and of the principle of
comparative cost, with priority over Ricardo. On the one hand, this is enough
to secure him a place in the history of analysis; on the other hand, this seems
to include him in the Ricardian group. His exploits in general theory, how-
ever, are distinctly un-, if not anti-, Ricardian. But they are difficult to ap-
praise because Torrens was careless in formulation and not a good technician
and offers his wheat much mixed with chaff. He did not accept the central
Ricardian doctrine that issues in the proposition that profits depend exclusively
on wages. But his argument against it strongly suggests that he failed to grasp
the sense in which Ricardo held it. What he put into its place may have been
substantially valid as he meant it. But as it stands, it is not particularly en-
lightening. He needs an interpreter to do for him what the Ricardo admirers
of around 1890 did for Ricardo. Until such an interpreter appears and suc-
ceeds it is premature, to say the least, to rant him, as has been done in one
instance — presumably in reaction to the contemptuous treatment he received
on other occasions — with Ricardo and Malthus as one of the 'founders of the
classic school.'

4. France

If French economics of that period is to be seen in its true proportions,
two facts must be borne in mind. First, as we know, the Parisian scene was
colored until 1848 by the activities, literary and other, of socialist groups to
an extent for which there is no contemporaneous parallel anywhere else. Not
so spectacular but equally important in the long run were the activities, also
literary and other, of Catholic critics of economic and political liberalism ('the
principle of 1789’), which went, however, beyond criticism toward the goals
of Catholic social reform. 1 Laicist bourgeois of ultraliberal persuasion formed
a third group. All this mates fascinating material for the sociology of political
and social ideas. But it makes poor material for the history of scientific eco-

identified himself with it. Like Scrope, he wrote a great many pamphlets and 'letters’
on topics of the day. The marvel is that he also ascended into the rarified air of pure
theory. The writings that are important in this respect are: An Essay on the External
Com Trade (1815); An Essay on the Production of Wealth (1821); On Wages and
Combinations (1834). See Seligman and Hollander, 'Ricardo and Torrens,’ Economic
Journal , September 1911.

1 1 am going to use this opportunity to mention Alban de Villeneuve-Bargemont (1784-
1850; especially: iSconomie politique chretienne, 1834), a central figure in a broad move-
ment. It is extremely difficult to do justice to his work. Those — laicist liberals in par-
ticular — who look at his social philosophy and his politics, decide whether they like it
or not, and appraise him accordingly have indeed an easy task. But ours is not so easy.
We have to realize, first, the depth and social significance of his convictions; the wisdom
of many of his practical recommendations; the scientific value of much of his sociology;
and, at the same time, the defects of his technical economics, which was in fact rudi-
mentary. These defects should not decrease in the least our respect for the man or his
thought; only, they happen to be relevant from the standpoint of this book.

REVIEW OF THE TROOPS

49 1

nomics. Second, excellent factual work was done during the period, the great
performance of Le Play topping a highly creditable record. For the rest, how-
ever, there are only two first-rank men to mention (besides Cournot of course),
namely, J. B. Say and Sismondi.

Jean-Baptiste Say (1767-1832) was one of those men who illustrate
two important though slightly paradoxical truths: first, that, in order to
appraise a man properly and to put him into the. right place, it is some-
times necessary tp defend him not only against his enemies but also
against his friends and even against himself; second that there is a funda-
mental difference between superficiality of exposition and superficiality
of thought. 2 Superficiality is in fact what strikes Say's reader first. His
argument flows along with such easy limpidity that the reader hardly
ever stops to think and hardly ever experiences a suspicion that there
might be deeper things below this smooth surface. This brought him
sweeping success with the many; it cost him the good will of the few.

He sometimes did see important and deep-seated truths; but when he
had seen them, he pointed them out in sentences that read like trivial-
ities. He never bent — as even Ricardo did — to the task of hammering
them out so that they might be recognized by everyone for what they
were and stand criticism and wear and tear. Also he invariably misman-
aged his case in controversy by replying to criticism in a desultory man-
ner, without bestowing the requisite amount of work on it. Hence, the
historian must restate his argument for him and, in doing so, must often
neglect infelicitous wording or even discard downright silly bits of reason-
ing that only carelessness will account for. Everyone realizes that this
must also be done for Ricardo and Marx because, in their cases, the
roughness of the surface invites digging. But the economists were few
indeed who' were able and willing to rendei this service to Say.

Thus he never got his due. The huge textbook success of his Traite —
nowhere greater than in the United States — only confirmed contempo-
raneous and later critics in their diagnosis that he was Just a popularizer
of A. Smith. In fact, the book got so popular precisely because it
seemed to save hasty or ill-prepared readers the trouble of wading
through the Wealth of Nations'. This was substantially the opinion of
the Ricardians, who treated him with some respect because of the Law
of Markets, which they accepted from him, 3 but for the rest put him
down as a writer — see McCulloch’s comments upon him in the Litera-
ture of Political Economy — who had been just able to rise to Smithian,
but had failed to rise to Ricardian, wisdorfi. For Marx he is simply the
‘insipid’ Say ( der fade Say). For later critics he was merely one of the

2 Let me illustrate this: nobody will call Hegel’s exposition superficial, but some (mis-
guided) individuals may think that his elaborate show of profundity covers many shal-
lows. J. B. Say, as will be argued in the text, presents an instance of the opposite kind.

3 Even as regards this law, they displayed some inclination to assert claims of their
own (on behalf of James Mill), although Say’s priority is beyond the possibility of doubt.

49 2 III: FROM 1790 TO 1870

exponents of economic liberalism to be disregarded on this count alone.
Where he did live on, in the theory of cycles, his law was voted either
wrong or else a valueless tautology. In our own time he experienced a
curious kind of renaissance. His Law of Markets was declared — mis-
takenly as we shall see — to be the basis of the whole structure of classic
economics in the Keynesian sense of this term (see above, eh. 1, sec. 1).
This gave him sinister importance — but at least it gave him importance.

But even his friends were taken in by that deceptive semblance of
superficiality. Even for those French historians who were ready enough
to protect his memory, he was primarily the exponent — one of them said
‘vulgarizer’ — of A. Smith’s teaching. To this merit, it is true, they added
various others, of which we may take notice by anticipation: Say cast
the subject matter of economics into the schema — production, distribu-
tion, and consumption; its methodology owes something to him; he
pointed toward a utility theory of value; he helped to establish the triad
of factors — land, labor, and capital; he emphasized the figure of the entre-
preneur, using the term (which occurs in Cantillon); and, of course, he
was Say of Say’s Law of Markets. All of this, as usually put, makes only
a modest case since some of these merits are per se of minor importance
or even of doubtful value. We shall comment on all of them in due
course. At present, we are concerned with the fundamental error that
vitiates appraisal of Say’s position in the history of economics, namely,
with the usual interpretation of his relation to A. Smith.

Say’s work grew from purely French sources, if we consider Cantillon
a French economist. It is the Cantillon-Turgot tradition, which he car-
ried on and from which he could have developed — whatever it was he
actually did — all the main features of his analysis including, by the way,
his systematic schema and his entrepreneur. 4 The most important of these
features, and his really great contribution to analytic economics, is his
conception of economic equilibrium, hazy and imperfectly formulated
though it was: 5 Say’s work is the most important of the links in the
chain that leads from Cantillon and Turgot to Walras.

Only two facts about his life are relevant to our purpose. Barring some unimportant
cases during the French Revolution, he was the first French academic teacher of
economics, first at the Conservatoire National des Arts et Metiers (1819), later at the
College de France (1830). And, for a considerable part of his life, he was a practical
businessman and thus enjoyed the advantage of having first-hand knowledge of what
he was writing about. Intellectuals who know business only from newspapers are in
the habit of congratulating themselves on their detachment. But obviously there is

4 Although I am pleading for justice to him, I must emphasize that, to some extent,
this reduces his claims to originality. The Cantillon tradition had never died out in
France.

5 In part, the imperfections alluded to are due to the fact that the task is an essen-
tially mathematical one, which he was not equipped to handle. This adds to the diffi-
culties of doing justice to him also in other respects: his Law of Markets is expressed
in loose words that may be made to carry different exact meanings.

REVIEW OF THE TROOPS

493

also another side to the matter. The principal items in his list of publications for us
are his Traite d’economie politique (1803; Prinsep’s trans., 1821, is from the 4th edi-
tion which, however, it is dangerous to use without also referring to the 1st, for Say
had a way of forgetting what he really meant) and his letters. The Corns complet
d’economie politique practique (1828-9) does not add a great deal. His works ( Oeuvres )
form vols. ix-xit of the Guillaumin Collection des principaux economistes (1840-48).
The Traite needs no reader’s guide. But I wish to reiterate the warning that profitable
perusal is much more of a job than it looks.

J. C. L. Simonde, who called himself 'de Sismondi' (1773-1842), was something of
a practical farmer and an amateur politician- — excellent exercises in realism — but pri-
marily a laicist intellectual, who enjoyed living on the fringe end of le monde, and a
historian. His main achievement is, I think, his Histoire des republiques italiennes du
moyen age (1807-18). Of these 16 volumes, I have a skipping knowledge, which is,
however, more than I can say with reference to the 31 volumes of his Histoire des
Frangais (1821-44). Of the rest of his historical work, which also covers literary his-
tory, I know only his Histoire de la chute de V empire romain . . . (183$), the schol-
arly shortcomings of which are partly compensated for, to an economist, by interesting
sociological vistas and analyses. His economics are much more English than French.
His Richesse commercials (1803), is indeed not quite the Smithian brew it has been
made out to be, even if we disregard the un-Smithian recommendations in the sec-
ond volume. The real Sismondi, the Sismondi of later years, shows occasionally. On
the whole, however, the traditional opinion is sufficiently near the truth. Sismondi’s
reputation as an economist rests on his Nouveaux Principes d’economie politique . . .
which appeared in 1819® But we know that the essentials of this work had actually
been written by 1815 for an article that Sismondi contributed to Brewster’s Edinburgh
Encyclopaedia, though this article was not published until after the Nouveaux Prin-
cipes . By then — at the latest — he was in possession of all the elements of doctrine
that are associated with his name. His later works, such as his Etudes sur Veconomie
politique (1837-8), emphasized and developed the main points — and his claims — but
do not add anything essentially new. 7

Sismondi’s work received critical notice immediately, especially from
the Ricardians. As the tide went against the latter, Sismondi’s fame in-
creased steadily until, with social reformers and opponents of laissez-faire
in general, he was eventually raised to one of those positions to which it
becomes etiquette to pay respect. In part, this was owing to attitudes
that have little to do with analytic achievement; he preached the gospel
that the true object of economics is man and not wealth. He attacked
Ricardianism as mere ‘chrematistics’ and as unrealistic chrematistics to
boot .- 8 He advocated once more the intervention of the state in eco-

6 The 2nd edition of the Nouveaux Principes came out in 1827 with not insignificant
changes.

7 Selections of Sismondi’s works have been published in German with an introduction
and comments by Professor Amonn (1945-9). See also A. Aftalion, L ’Oeuvre economique
de Simonde de Sismondi (1899); and H. Grossman, Simonde de Sismondi et ses theories
6 conomiques (1924).

8 Sismondi never lost an opportunity to extol A. Smith at the expense of the 'new
school’ (the Ricardians). In matters of method, he diagnosed A. Smith’s as truly scien-
tific and 'experimental’ (meaning empirical), whereas he condemned Ricardo’s as abstract

494 in ; from 1790 to 1870

nomic affairs. And he was thoroughly pro-labor. Whoever did any or all
of these things was as sure of applause from some quarters as he was of
adverse criticism from others. But it must be added that he was in fact
one of the most important forerunners of later Sozialpolitik and that
some of his recommendations — for example, the recommendation that
employers" should be made to guarantee their workmen security against
unemployment, sickness, and destitution in old age — are among his most
genuinely original contributions. 9 As regards analytic economics, his repu-
tation rests primarily upon his argument against Say's law and his under-
consumption theory of crises (if indeed his theory should be thus labeled;
see below, ch. 7, sec. 6). But even if the uncritical recognition that was
extended to him on this score — mainly by economists whose strength
was not in economic theory — were more justified than it is, these points
would not express his true importance in the history of analysis.

The distinctive feature of Sismondi's analysis is that it is geared to an
explicit dynamic model in the modern sense of this phrase. The terms,
Static and Dynamic, we have met already. We shall use this opportunity
to take a first step toward a closer acquaintance with their meaning. For
this purpose, let us start with a famous statement of Ricardo’s, made in
a letter to Malthus: 10 'You always have in mind the immediate and tem-
porary effects ... [I] fix my whole attention on the permanent state of
things which will result from them.’ This is not quite true, but if it were,
it would mean this: suppose we have before us an economic process that
is perfectly balanced and ideally adapted to its data; then let us impose
arbitrarily some change in some element or elements of it, say, in some
prices or quantities; this disturbance will produce immediate adaptations,
some of which will in turn produce further disturbances; but in the end,
when everything has had time to straighten itself out, a new perfectly
balanced state of the economic organism will result that is again ideally
adapted to its data. 11 Ricardo was evidently of the opinion that the im-
portant thing is to investigate the properties of this new 'normal’ state
in comparison with the properties of that 'normal’ state from which we
started: the new 'permanent’ incomes, prices, and quantities are com-
pared with the old incomes, prices, and quantities. For this procedure,
the term Comparative Statics came into use later on (see below, Part

speculation that had lost contact with reality. It should be observed, however, that his
arguments, so far as they are valid against Ricardo, are just as valid against Smith.

8 The more limited modem idea of the 'guaranteed wage’ may with justice be said
to have been visualized by him. The originality of his suggestions stands out in one
point especially: his idea was to turn the social costs of labor-saving improvements into
business costs of employers.

10 Professor Hollander quoted this letter in his Introduction .to Ricardo’s Notes on
Malthus ’ Principles (ed. 1928, p. lxxxviii).

11 This is by no means always so and, even if it is, requires proof that raises a
number of delicate questions. Just now we neglect this, just as Ricardo himself neglected
it.

REVIEW OF THE TROOPS 495

iv, ch. 7, sec. 3). It implies, of course, both that the sequence of inter-
mediate or ‘transitional' states through which the system has to pass on
its way to the new ‘normal' state does not affect the latter — that is to
say, that the new ‘normal' state depends only on the old ‘normal', state
and on the nature of the disturbance but not on that sequence of transi-
tional states-— &nd also that the transitional states are relatively unimpor-
tant, at least in the sense that they do not present any very interesting
problems to the analyst.

Sismondi admitted, just as uncritically as had A. Smith and Ricardo,
that such a new equilibrium state — he used the term equilibrium — will
eventually emerge. But he urged that the road toward it may be so long
and lead through such severe upheavals — he said: ‘terrible sufferings' —
as to make it practically impossible for the analyst to deal cavalierly with
the incidental phenomena. So far, so good. Malthus did (independently)
the same thing. But Sismondi took a further step, credit for which he
does not have to share with Malthus or anyone else except, possibly,
with QueSnay. He realized that the most important of the reasons why
transitional phenomena are of the essence of the economic process — and
hence not only relevant to its practical problems but also to its funda-
mental theory — is that the economic process is chained to certain se-
quences that will exclude certain forms of adaptation and enforce others.

Ah example will help. If the money income generated by a given process
of production were always to be spent on the output of this same process
of production, we should have a reason to believe 12 that the public's
‘purchasing power' and the output of goods and services would, barring
individual errors, always correspond to one another so that, at least as a
possibility, the latter could always be sold at cost-covering prices. But
suppose that the economic process is chopped up into periods in the fol-
lowing way: the money income of any period t is generated by processes
of production, the output of which becomes available in period t + 1;
and this same income is spent in period t on the output of the period
t — 1. In this case, we lose one of the reasons we have for believing that
income and output will correspond to each other in the sense mentioned
above: the money income of period t is the result of decisions taken in
period t, whereas the output offered in period t is the result of decisions
taken in period t — 1, "hence taken in possibly different circumstances — a
fact that evidently may be a source of difficulties in adaptation and of
new phenomena incident thereto. The example is oversimplified and
otherwise unrealistic. But it suffices to show that the economic process is
a system of periodicities and lags and, by virtue of this alone, harbors a
world of problems that simply do not exist for Ricardian economics or
any other economics of the same type. Analysis that takes account of
this fact and attempts to deal with these problems is called dynamic

12 This condition would not be sufficient. However, in order to make my point as
simple as possible, I neglect this fact here.

496 III: FROM 1790 TO 1870

analysis. We shall have to attend to it later on (Part iv, ch. 7 and Part
v). Now we shall break off an argument that has, for the moment, no
other purpose but to define the distinctive feature of Sismondi’s analysis.

No, body can ever have been unaware of the facts at which we have just
glanced. A long list of pieces of analysis could be compiled, from mer-
cantilist times on, that contain, unsystematically and rudimentarily, some
dynamic elements. Even Ricardo would be represented in this list. But
Sismondi’s great merit is that he used, systematically and explicitly, a
schema of periods, that is, that he was the first to practice the particular
method of dynamics that is called period analysis. Moreover, he saw
clearly the difference this makes and in particular the disturbances, dis-
crepancies, and' hitches that result from the fact that economic life is
bound to sequences of which every unit is determined by the past and
in turn determines the future. At the same time, this great analytic merit
is his only one. He handled his own tool — like other ideas of his — so
clumsily as seriously to impair its usefulness. And all the other argu-
ments he adduced against the Ricardian system, and for the propositions
that he tried to put in place of it, were technically so faulty as to make it
easy for the Ricardians to dispose of them and even to take him not
quite seriously. Thus, we have before us, once more, one of those situa-
tions where a man was rightly defeated and, on another level of dis-
course, was nevertheless right. The Ricardian judgment about him pre-
vailed also with the non-Ricardians of the second half of the nineteenth
century. And the applause of those who appreciated his fervent social
sympathies or the mere fact that he found hitches in the capitalist proc-
ess was, so far as scientific economics is concerned, no compensation for
this — for the competent theorist this applause was rather in the nature of
a verification of his own adverse opinion. 13

In the chair at the College de France, 14 Say was succeeded by the Italian
Rossi, Rossi by Chevalier, 15 whose tenure extended to 1879, and Chevalier, in

13 As an illustration of Sismondi’s technical incompetence, I refer the reader to his
numerical argument on pp. 374-84 of the first volume of the Nouveaux Principes. Sis-
mondi correctly perceived that his period analysis greatly weakened the ‘classic’ argu-
ment about free competition. But then he tried to show by a numerical example how
the competitive struggle leads to deadlock; and what his figures actually show is exactly
the contrary — they display the mechanism by which the hitch will in general be
avoided.

14 The College de France is neither a college nor a graduate school in the American
sense, though somewhat more like the latter than like the former. Appointment to a
chair is an honor that spells recognition of the appointee’s leading position rather than
an opportunity for inspiring and directing research. Lectures are addressed to a wide
public and sometimes are (or were) frequented by le monde.

15 Michel Chevalier (1806-79) was undoubtedly one of the most eminent economists
of that period — known to fame as the Chevalier of the Cobden-Chevalier commercial
treaty between England and France (i860), which was followed by quasi-free-trade
treaties between France and a number of other countries. His various activities, often

REVIEW OF THE TROOPS

497

turn, by his son-in-law, Paul Leroy-Beaulieu, whose career covers practically
the whole of the next period. This academic succession should be noticed be-
cause it was also a succession in spirit and doctrine. In the high heavens. Say’s
true successor was indeed the great Walras. But on a less exalted level and
as to ‘applied’ economics, attitudes in economic policy, systematic arrange-
ment, and also as to the lower ranges of economic theory, these men (Rossi
less than the other two) may be considered as followers of Say and as the core
of a school which, if we date it from 1803, the year of the publication of
Say’s Traite, boasts of a history of about a century. We shall consider it in the
next Part. For the present, besides noting that interesting fact itself, we con-
fine ourselves to the following comments. First, so far as nonsocialist eco-
nomics is concerned, this group was not to meet significant opposition until
the next period. During the period under discussion and a little beyond, it
ruled supreme, controlling in particular the professional journals and institu-
tions, and also the Soci6te d’ficonomie Politique which was founded, like the
Journal des economistes, in 1842. Second, the school and all its members were
— partly, as has been mentioned before, owing to the presence until 1848 of a
strong socialist menace to bourgeois society — strongly liberal in the laissez-
faire sense and anti -etatistes . 16 This naturally accounts for the hostility of
modern critics that also reflects upon Say himself, but it should be unnecessary
to point out that their derogatory judgments are unhistorical. Third, the school
had many members of admirable character, strong intelligence, and great ex-
perience in practical affairs. But, fourth, owing partly to the practical turn
of their minds and their too exclusive concentration upon economic policy,
they lacked interest in purely scientific questions and were in consequence al-
most wholly sterile as regards analytic achievement. Their very existence as a

in the service of, but never in subservience to, the French government produced a
respectable quantity of valuable work of a factual nature and, occasionally, singularly
infelicitous predictions such as that gold would fall in value (in 1859!) and that universal
free trade would be realized before the century was out. That factual work may be
illustrated by his Lettres sur VAmerique du Nord (1836) and his Interets materiels en
France (1836), models of their type. It is, however, to be expected that, for sheer lack
of time, such a man cannot have contributed to the efficiency of the apparatus of
analytic economics, and that a history of analytic economics has to mention him mainly
for the purpose of explaining why that apparatus showed so little improvement for
decades together. It was not that economists were incapable. Chevalier, e.g., was beyond
doubt a very intelligent man whose work of factual analysis, were comparison admissible,
many of us would place above that of the mere analyst. But all the energies of many
of the able men who took to economics were absorbed by the immediately practical—
invested in a process of production that may be likened to primitive hunting. Chevalier’s
systematic work ( Corns d’economie politique, 1st ed., 1842-4; a volume La Monnaie
was added in 1850), the harvest of his lectures at the College de France that kept
strictly on the surface of things, bears saddening witness to this — though, for the kind
of performance it was, it merits admiration rather than contempt.

16 Some of its members, Chevalier included, experienced however a Saint-Simonist
spell in their youth.

49 8 iii: from 1790 to 1870

group will appear to the modern radical as a bar to ‘progress/ From a quite
different standpoint and in a different sense, it likewise appears so to us.

But a few more names must be mentioned in further illustration. First, I
shall mention two who stand out from the rest and illustrate the virtues of
the school at its best, though they also illustrate its weaknesses, Dunoyer
(1786-1863) and Courcelle-Seneuil. 17 Next we notice J. A. Blanqui and Joseph
Gamier, meritorious workers 18 who met with success in their own day as well

17 Admirable men both of them, who always stood uncompromisingly for what they
considered the right course for their nation to take! But in spite of all the genuine
brilliance — coupled with strong sense — that we find in Charles Dunoyer’s De la hiberte
du travail (1845), we cannot rank it as a scientific performance. Socialists will agree with
us on the ground that his every sentence was ideologically conditioned and served some
‘apologetic’ purpose. But it is not this which motivates our own judgment. If it were,
we should have to exclude practically all socialist writings that are not less ideologically
conditioned. The book adds nothing either to our knowedge or to our control over
facts. The case of J. G. Courcelle-Seneuil (1813-92) is different. His Traite theorique et
pratique d’ economic politique (1858); Traite . . . des entreprises industrielles, commer-
ciales, et agricoles (1855); Traite . . . des operations de banque (1853), to mention
only a few of the literary fruits of a busy life, were models of their kind and have served
as such. Even if one does not attach much importance either to his rudimentary graphs
or to certain unsuccessful terminological innovations of his (theory — plutology; applied
economics — ergonomy), there is in his works- that clear grasp of economic affairs that
comes from firsthand experience and that one misses so much in the modern literature.
At the same time, I do not think that it is possible to say more for him than this.
His work illustrates our old truth that it is one thing to be a good economist and
quite another to be a theorist.

18 J. A. Blanqui (1798-1854), the brother of the revolutionist of the ‘putschist’ type,
L. A. Blanqui, was also an academic successor of Say, viz. at the Conservatoire National
des Arts et Metiers. He is chiefly known for his Histoire de Veconomie politique en
Europe (1837), an interesting compilation that enjoyed international success because
of its indubitable usefulness. Much more important was his Resume de Vhistoire du
commerce et de Vindustrie (1826), a judicious abstract that seems to me to be very well
done (considering its date and the resources on which such an undertaking could then
draw) and his researches into labor economics. Joseph Gamier, 1813-81 (not the Comte
Germain Gamier, who is chiefly known as the translator of the Wealth of Nations,
1802, and as a late physiocrat and need not detain us further), was a pupil and close
associate of Blanqui and an indefatigable teacher, scholastic administrator, and writer.
His highly successful Elements de Veconomie politique (1845; entitled Traite from
i860 on; we may add his Elements des finances, 1858, which also grew into a Traite)
is chiefly interesting as a sample of French pre-Millian economics. His Elements de
statistique commands the same kind of interest. His annotated French edition of
Malthus’ Essay on Population (1845) is more significant. He had to be mentioned
because it has been said — and, to judge by quotations, not without reason — that he
enjoyed international reputation. It may be proper to add here the name of Charles
Ganilh (1758-1836), who also continued to be quoted in that type of theoretical litera-
ture. whose authors thought it necessary to preface whatever it was they had to say by
a complete survey of the older writers who had pronounced upon their subject. His
Systemes d r economic politique (1809), an early history of economic thought, deserves
to be noticed on account of its date as well as because it did not fall in, uncritically,

tBK

REVIEW OF THE TROOPS 499

as later: both, but especially Gamier, kept on being quoted. Third, Destutt de
Tracy, also, has been too often quoted, though mainly in the literature of his
own time, to be passed by completely. 19 A few others will be mentioned as
occasions arise. But no occasion will arise to mention Canard and Bastiat. So
their names may as well stand here.

Canard's performance (N. F. Canard, Principes d’economie politique,
1801, a curious revival of Cantillon's ■ Trois rentes ) is sometimes listed
among early contributions to mathematical economics (on the strength
of a few algebraic formulae that mean nothing) but would otherwise
partake of the blessings of deserved oblivion, had not a misfortune be-
fallen it. This misfortune consisted in its being ‘crowned’ by the same
French Academy that later on failed to extend any recognition to
Cournot and Walras. And those Olympians who felt their neglect the
more bitterly on account of the honor done to Canard visited him with
a scathing contempt that bestowed upon him an unenviable immortality:
in the history of scientific bodies. Canard is forever sure of a place. The
book is, however, far from being the worst that was ever written. It had
some influence on Sismondi.

with the prevailing current of Smith-Say free trade. His Theorie de V economic poli-
tique . . . (1815) is redeemed from complete insignificance by its ‘realistic’ or ‘factual’
quality.

19 A. L. C. Destutt, Comte de Tracy (1754-1836) was a figure of some importance
in the intellectual scenery of the Napoleonic Empire (and a little before and a little
after) — a thinker by the grace of nature, though the latter had failed to add the gift
of originality. He had, moreover, been formed in the eighteenth-century world; and
while such attention as his thought received is an interesting symptom of the survival
of eighteenth-century attitudes, his thought itself is a not less interesting example of
partially successful adaptation. Philosophically, he belongs in the Condillac tradition,
politically — in spite of a number of critical reservations — among the many heirs to
Montesquieu. His broadly conceived Siemens d’ideologie (the best translation I can
think of is one into Scottish: System of Moral Philosophy ) began to appear in 1801, a
Traite de la volonte being one of the installments. Another installment of what was to
remain a torso, was a treatise on economics, republished under this title ( Traite d’econo-
mie politique ) in 1823. With due respect for the spacious whole of which this treatise —
which belongs to the Say group — was a component part, I have to confess that I cannot
find in it anything to distinguish it except one feature: Destutt de Tracy was not a
philosopher for nothing. He had an eye for logical rigor. Hence he insisted on neat
conceptualization. One of his definitions — that production means change of form or
place; Ramsay added time — was taken up by some English economists. But, by stressing
what may be termed the physical aspect of production, it obscures the economic one.
He also insisted that value must be measured in a value unit, it being the essence of
measurement to compare the thing to be measured with a given quantity of the same
thing chosen as a unit (as, e.g., length is measured in meters). Ricardo quoted this state-
ment approvingly, but it is misleading. Other examples could be quoted in order to
show that his - preoccupation with logical foundations, which might have produced
useful results, remained sterile.

500 III: FROM 1790 TO 1870

Frederic Bastiat’s (1801-50) case has been given undue prominence
by remorseless critics. But it is simply the case of the bather who en-
joys himself in the shallows and then goes beyond his depth and
drowns. A strong free trader and laissez-faire enthusiast, he rose into
prominence by a brilliantly written article, "De l’influence des tarifs
frangais et anglais sur l’avenir des gleux peuples’ ( Journal des economistes,
1844), which was grist to the mill of the small group of Paris free traders
who then tried to parallel Cobden’s agitation in England. A series of
Sophismes economiques followed, whose pleasant wit — petition of candle-
makers and associated industries for protection against the unfair com-
petition of the sun and that sort of thing — that played merrily on the
surface of the free-trade argument has ever since been the delight of
many. Bastiat ran the French free-trade association, displaying a prodi-
gious activity, and presently turned his light artillery against his socialist
compatriots. So far, so good — or at any rate, no concern of ours. Admired
by sympathizers, reviled by opponents, his name might have gone down
to posterity as the most brilliant economic journalist who ever lived.
But in the last two years of his life (his hectic career only covers the
years 1844-50) he embarked upon work of a different kind, a first vol-
ume of which, the Harmonies economiques, was published in 1850. The
reader will please understand that Bastiat’s confidence in unconditional
laissez faire (his famous "optimism’) — or any other aspect of his social
philosophy — has nothing whatever to do with the adverse appraisal that
seems to me to impose itself, although it motivated most of the criticism
he got. Personally, I even think that Bastiat’s exclusive emphasis on the
harmony of class interests is, if anything, rather less silly than is exclusive
emphasis on the antagonism of class interests. Nor should it be averred
that there are no good ideas at all in the book. Nevertheless, its defi-
ciency in reasoning power or, at all events, in power to handle the ana-
lytic apparatus of economics, puts it out of court here. I do not hold that
Bastiat was a bad theorist. I hold that he was no theorist. This fact
was bound to tell in what was essentially a venture in theory, but does
not affect any other merits of his. I have said nothing of the charge that
he plagiarized Carey that was urged by Carey himself, and then by
Ferrara and Diihring. Since I cannot see scientific merit in the Har-
monies in any case, this question is of no importance for this book. But
readers who do take interest in it are referred to Professor E. Teilhac’s
balanced and scholarly treatment of it in Pioneers of American Economic
Thought (English trans. by Professor E. A. J. Johnson, 1936). His argu-
ment establishes, with considerable success, that much that seems at
first sight unrelieved plagiarism is accounted for by the French sources
that Bastiat and Carey had in common. Bastiat’s Oeuvres completes
with a biography were published in a second edition (1862-4).

REVIEW OF THE TROOPS

For the rest, we must be content to notice what I believe to be one of the
best textbooks of 'classic’ economics, Cherbuliez’ Precis . 20

5. Germany

In the German section of our picture we see first of all the old 'cameralist'
tradition — the tradition of the German Consultant Administrators — in a proc-
ess of partial transformation under the influence of A. Smith. Though trans-
lated for the first time immediately after publication (1776-8), the Wealth
of Nations took time to become effective. The profession of the Staatswissen -
schaft did not at first like it much, and, as has been mentioned before, some
were inclined to put Steuart’s Principles above it. But they experienced a very
thorough change of heart around 1800, when first a few and before long a
majority turned enthusiastically Smithian. This was in fact more natural for
them than had been the initial resistance because, as has also been men-
tioned, their own ideas had been moving on similar lines for many years be-
fore that.

The works of Hufeland, von Jakob, Kraus, and von Soden suffice to exemplify this
Smithian cameralism: Gottlieb Hufeland (1760-1817), Neue Grundlegung der Staats-
wirthschaftskunst . . . (1807-13; the second volume, on money, is rather interesting);
L. H. von Jakob (1759-1827), Grundsatze der National-okonomie (1805, enlarged and
improved later on); C. J. Kraus (1753-1807), Staatswirthschaft (1808-11); Count F. J.
H. vori Soden (1754-1831), Die Nationalokonomie (1805-24). Jakob and Kraus were
also philosophers (Kantians). All four were Smithians in the sense that almost all their
thought and work in economics fed and turned upon the Wealth of Nations. Kraus,
an influential teacher, who instilled his opinion into many future public servants, 1
embraced it with uncritical enthusiasm: he spoke of it as the only 'true, great, noble,
and beneficent system' and was one of those who compared it to the New Testament
in importance. Hufeland and Jakob, though Smithian enough, did not go quite so
far as this; von Soden was still more independent. His criticisms of A. Smith were
not well taken but he occasionally followed lines of his own. In particular, he adum-
brated the idea, later on developed by List, that the true aim of foreign trade or any
other policy was not so much immediate gain in welfare but rather the development
of the nation’s productive resources, a 'mercantilist’ point of view, which is of im-
portance not only for recommendation but also for analysis. All four were men of

20 A. E. Cherbuliez (1797-1869), a Swiss lawyer by training and for part of his life
by vocation, later a politician and professor of economics, was at first a political scien-
tist rather than an economist. He was past forty when he seriously turned to economics,
and he never produced anything original. But he excelled at exposition and his Precis
de la science economique . . . (1862), deserves notice as one of the high points of the
textbook literature of that period. Its success was considerable, but rather below its merit.

1 Some of those public servants co-operated in the Stein-Hardenberg legislation.
There is thus a not uninteresting relation between the Wealth of Nations and that
Prussian reformer, von Jakob, who taught at the University of Kharkov as well as at
the University of Halle, acted as a consultant to official commissions in St. Petersburg,
and did much toward spreading Smithian doctrine in Russia.

502

III: FROM 1790 TO 1870

some eminence, and I am prepared to defend my choice. But the reader should under-
stand that several other names might have served equally well.

Two men should be added who are not usually listed as German economists. The
one, Count G. F. Buquoy Longueval (1781-1851) was a very interesting man: a great
Austrian nobleman, very wealthy, very radical (as an old man he took part in the
revolution of 1848), a gifted dilettante in many fields, more than a dilettante in at least
two (theoretical mechanics and economics). He wrote, among older things, a Theorie
der Nationalwirthschaft . . . (1815; supplements 1816-19) and a tract on money and
monetary policy, . . . Ein auf echten Nationalcredit fundiertes Geld . . . (1819),
both of which are Smithian in their bases but contain several interesting and original
suggestions, that of a managed paper currency among others. Man and writings are
forgotten unjustly, so I think. '

The other man to be added fared better and, having been discussed in
his day in England- and France, has kept a place in the history of our
subject: H. F. von Storch (1766-1835), who, though a German by race
and training, is usually treated as Russian because of his career in the
Russian service. His historical and statistical studies on Russia should be
mentioned first (especially: Historisch-statistisches Gemalde [picture] des
Russischen Reiches am E nde des achtzehnten J ahrhunderts, 1797-1803). I
have ‘skipped' through the 9 volumes but am not competent to judge
how far Storch succeeded in exhausting the possibilities offered by his
materials. As regards his systematic work ( Cours d’economie politique
. . . 1815) and his venture in income analysis ( Considerations sur la na-
ture du revenu national, 1824) it should be pointed out that the factual
bent of the former and the ethical commonplaces contained in it do not
justify the habit of historians of doctrine of placing him — as a member or
as a forerunner — with the later historico-ethical school. He was not more
‘factual’ than A. Smith, and to separate him methodologically from his
English contemporaries only served to blur contour lines: Senior’s factual
work is in the reports of royal commissions instead of in his Political
Economy but this is no reason for speaking of irreconcilable methodolog-
ical differences between the two. If Storch doubted the possibility of
formulating universal laws about economic phenomena, he did so in a
sense that Senior and J. S. Mill would have heartily approved, that is,,
in the sense that the concrete economic phenomena, as historically given,
do not obey simple and universally valid rules. For the rest, his analysis
may be best described by the term ‘critical Smithianism’: his bases and
conceptual apparatus are substantially Smithian but Storch disagreed
with both Smith and Say on a number of important points. Particularly
as regards income analysis. Storch has some claim to being listed, along
with Lauderdale, Malthus, and Sismondi, as a forerunner of Keynesian-
ism and of similar tendencies that asserted themselves, on and off, later
on. However, if I understand his argument in the Considerations, there
is not much in it: like all the authors in that line, he neglected, as much
as other people overstress, the equilibrating mechanisms in the capitalist
process. But we shall return to this. For the present, I want to make sure

REVIEW OF THE TROOPS

5 ° 3

that the reader does not forget this man: though he does not rank high
as a theorist, he is a significant figure.

Smithianism, increasingly leavened with a little (often misunderstood) Ri-
cardo and relieved of some of the older stuff about eighteenth-century admin-
istrative policy — this is the formula that characterizes the common run of
German economics until and even a little beyond the end of the period under
survey. This material took the textbook shape that proved satisfactory for
decades in the work of Rau. 2 But from this level and far above it rose the per-
formances of two men of remarkable talent and force, Hermann and Mangoldt.
In deference to a curious habit of the German historians of economics, I add
Bernhard i.

Considering that Thiinen and Marx followed paths of their own that
were not within sight of that common run, we might feel inclined to
discount the reputation of F. B. W. von Hermann (1795-1868) on the
ground that he stands out for lack of competition. There is something
in this. Nevertheless, his Staatswirthschaftliche U ntersuchungen (1832;
enlarged ed. 1870; reprint 1924), though it has not made scientific his-
tory, largely merits the many compliments that have been paid to it,
even by A. Marshall. Hermann’s good sense saved him all the energies
that others spent on their doubts about ‘abstract methods’ and that sort
of thing, and his acute and balanced mind played unimpeded about the
fundamentals of economic theory. His method was as simple as it was
meritorious, considering the date of his book: he started from ‘supply
, and demand’ and proceeded to investigate the factors behind it. His neat
conceptualization did the rest and the success was considerable: it is
not generally realized that his work spelled a long stride beyond Ricardo.
This suffices to characterize his merits as a theorist in a general way. But
it does not do justice to his factual work (statistical and other), and it
does not do justice to the man, who as politician, civil servant, and
teacher has left his mark upon the formative years of Germany.

Hans von Mangoldt (1824-68) is much less well known. Nevertheless,
this civil servant and professor (at Gottingen and Freiburg) was among
the century’s most significant figures in our field. Apart from his his-
torical work on the industry of Saxony, there are two important con-

2 K. H. Rau (1792-1870), professor first in Erlangen and then in Heidelberg, cer-
tainly had sound common sense, learning, and mediocrity. But if any other qualities
are needed for the production of a successful textbook, he must have had them also.
The many editions of his Lehrbuch der politischen Okonomie (1826-37: 1st vol., theory
[the ‘laws’]; 2nd vol., applied economics or economic policy, or Polizeiwissenschaft ; 3rd
vol. — the best — public finance) are less indicative of its sweeping success than is the fact
that Adolf Wagner thought it worthy of being remodeled instead of being replaced by
an entirely new one. As a teacher, Rau must stand high in the history of economics,
although little can be said in favor of the book except that it marshalled a rich supply
of facts very neatly — and that it was just what the future lawyer or civil servant was
able and willing to absorb.

504 III: FROM 1790 TO 1870

tributions which we have to notice: his Die Lehre vom Unternehmerge -
winn (1855; substantially a rent-of -ability theory of entrepreneurial gain)
and his Grundriss der Volkswirtschaftslehre (1863; the 2n ^ ec U published
posthumously in 1871, leaves out the most original element in it, namely,
the geometrical apparatus that Mangoldt devised for the theory of inter-
national values; but Edgeworth brought it to light again).

Theodor von Bernhardi (1802-87) owes his reputation to Roscher’s
history of German economics. I have called the habit of listing his name
indefinitely a curious one because there is really no reason for it that
will stand examination. The title of the work in question I had better
give in translation: Critical Essay on the Arguments that are being ad-
duced for Large and Small Properties in Land (1849). Bernhardi, an ex-
tremely intelligent layman of wide culture and experience, discussed those
arguments no doubt very sensibly. But it was not this which aroused
Roscher’s enthusiasm. Bernhardi put his topic into a spacious — and
specious — framework of general considerations about the social and eco-
nomic backgrounds from which English ‘classic' doctrines arose, showing
their historical and sociological relativity and their limited validity — quite
successfully of course — but also showing inability to realize the difference
between views or recommendations on practical questions and theorems.

Since Thiinen and Marx (if the latter should indeed be called a German
economist at all) are noticed elsewhere, we are, for the rest, left with List
and Rodbertus, on the one hand — it is slightly disconcerting to observe that
Thiinen, Marx, List, and Rodbertus were all of them nonprofessorial econo-
mists — and with Roscher, Hildebrand, and Knies, the members of what has
been termed the Older Historical School, on the other.

Friedrich List (1789-1846) holds a great place both in the opinion and
in the affections of his countrymen. This is owing to his successful cham-
pionship of the customs union of the German States (Z ollverein), the
embryo of German national unity. What this association means to Ger-
mans cannot be understood by members of those fortunate nations for
which the right to national existence and national ambitions is a matter
of course. It means that List, like all those whose names are associated
with that long and painful struggle, is a national hero. Far be it for me
to criticize this attitude or to withhold admiration from List in any other
respect except the one that unfortunately happens to be the only one
that counts in this book. Even as a scientific economist, however. List
had one of the elements of greatness, namely, the grand vision of a na-
tional situation, which, though not in itself a scientific achievement, is
a prerequisite for a certain type of scientific achievement — that type of
which, in our own day, Keynes is an outstanding example. Nor was List
deficient in the specifically scientific requisites that must come in to im-
plement vision if it is to bear scientific fruits: his analytic apparatus was
in fact ideally adequate for his practical purpose. But the individual pieces
of this analytic apparatus were not particularly novel.

REVIEW OF THE TROOPS

List saw a nation that struggled in the fetters imposed by a miserable
immediate past, but he also saw all its economic potentialities. The na-
tional future, therefore, was the real object of his thought, the present
was nothing but a state of transition. He realized that, in an essentially
transitional state of this kind, policies lose their meaning when they are
geared to the task of administering an existing set of conditions that is
visualized as substantially permanent. This he expressed by his doctrine
of ‘stages' — a felicitous device, so far as his educational purpose was
concerned, but in itself not more than an old eighteenth-century idea.
Furthermore, he realized (like Soden) that emphasis upon the national
future modifies welfare considerations ex visu of the present. This he ex-
pressed by his doctrine of ‘productive forces' ( Produktionskrafte ) that in
his system hold place of honor as compared with the consumers' goods
that can be made available at a given level of the productive forces— not
unfelicitous, this, as an educational device but not much more than a
label for an unsolved problem. Finally, as regards his best-known contribu-
tion to the education of German public opinion on economic policy, the
infant-industry argument, this is clearly Hamiltonian and part of the eco-
nomic wisdom that List imbibed during his stay in the United States.

So fully Americanized had List become then that he actually advocated
financing railroad construction by the issue of banknotes, for which prac-'
tice there were only — and hardly wholly creditable — American precedents.

It should be remarked, in passing, that List’s argument about protection
issues into the free-trade argument: if this is not obvious, we can convince
ourselves of it by noticing the fact that J. S. Mill accepted the infant-
industry theory, evidently realizing that it ran within the free-trade logic. 3

This, I think, does justice to, and at the same time reduces to its proper
proportions, List's analytic gifts and performance. Those who insist on
making their hero the possessor of merits of all conceivable types have
put his thought into spurious relations of the kind that create spurious
history. He was an heir to eighteenth-century thought. He was an off-
shoot of romanticism. He was a forerunner of the historical school of
economics. There is not more in all this than that everyone is heir to
everything that went before him and a forerunner of everything that
comes after him. He was a great patriot, a brilliant journalist with def-
inite purpose, and an able economist who co-ordinated well whatever
seemed useful for implementing his vision. Is this not enough? Of all
his writings the Outlines of American Political Economy (1827) is the
most interesting for us because it displays his system in its earliest stage
of development. His mature work that grew out of this. Das nationale
System der politischeh Okonomie (1.841; English trans. 1885), remains
a classic in the eulogistic sense of the word, all the comments above
notwithstanding. A new and comprehensive edition of his works ( Schrif -

3 Incidentally, it may be remarked that to call List's plans ‘nationalist' or ‘imperialist’
is to play upon double meanings in both cases.

506 hi: from 1790 to 1870

ten , Reden, Briefe ) has been published (1927-32) by the German List
Society (List-Gesellschaft), which also publishes List-Studien.

Johann Karl Rodbertus’ (1805-75) name also owes something to cir-
cumstances: on the one hand, he did not meet either the competition
or the criticism he would have met in England; on the other hand,
though he spurned class struggle and revolution and was fundamentally
a conservative monarchist, he was also a votary of a certain type of state
socialism that was acceptable to a large sector of the public. For the rest,
his social and political philosophies, including the manual workers’ nat-
ural right to the whole product of industry (on the time-honored ground
that all commodities are products of, or cost, manual labor only), are
no concern of ours. But certain recommendations must be mentioned
because they shed light on the analysis from which they proceed. The
proposition that it is the institutional pattern alone that deprives labor
of part of ‘its’ product was reflected in his recommendation to change
this institutional pattern by state action such as taxation (one of the first
proposals, in the liberalist world of that age, to use taxation for purposes
other than revenue) and to fix not only prices and wages but also prop-
erty incomes. His theory of rent of land was reflected in, but is not es-
sential to, an extremely sensible proposal that has had some practical
effect in Germany, namely the proposal to substitute for the mortgage
that embodies a capital claim a mortgage that embodies only the right
to an annual payment. His theory of poverty and of cycles was reflected
in the proposal, which sounds so modern, to eliminate both by a redis-
tribution of incomes.

Rodbertus’ analytic schema can be most briefly and at the same time
most tellingly described in this way. Fundamentally, and in the same
sense as Marx, he was a Ricardian. His analytic effort was an effort to
develop Ricardian doctrine in a certain direction and was in essentials
parallel to, though different from, Marx’s effort. According to dates of
publication, Marx could have derived inspiration from Rodbertus, par-
ticularly as regards the unitary conception of all non-wage incomes —
Marx’s surplus value and Rodbertus’ ‘rent’ — which is a feature of both
schemata. In the main, however, Rodbertus’ example can at best have
taught Marx how not to go about his task and how to avoid the grossest
errors. Therefore, and also because Marx’s theoretical developments seem
to me to follow naturally from Ricardo’s formulations — given the direc-
tion in which those developments were to aim — I do not think that
there is any cogent reason for challenging Engels’ repudiation of the
idea that Marx had ‘borrowed’ from Rodbertus.

To call Rodbertus a Ricardian is, of course, to limit fhe range of his originality.
In addition, there is W. Thompson’s priority — such as it is — for any sort of exploita-
tion theory, and Owen’s for Rodbertus’ labor notes (currency ). 4 But neither amounts to

4 With both Owen and Rodbertus, and in essentially the same manner, units of labor
are not merely what units of gold are in a gold currency, but the mechanism of this
labor money also serves to 'correct’ values.

REVIEW OF THE TROOPS

507

much. For his own convenience, the reader should keep in mind the following three
points that I mention here by anticipation as specifically characteristic of the caliber
of Rodbertus’ theorizing (all of which have found admirers, however): (1) his thor-
oughly untenable theory of rent; 5 (11) his factually and theoretically equally inde-
fensible theory that the relative share of labor in the national dividend tends to fall
in the course of capitalist development; and (in) his underconsumption theory of
crises that is based upon the proposition that overproduction must periodically result
from labor’s inability to buy back a sufficient amount of its product owing to (n) — a
type of underconsumption theory that should be, but unfortunately is not, beneath
discussion. Sismondi, who has some passages that seem to point in the same direc-
tion, actually did much better than that. Rodbertus’ most important works are: Zur
Erkenntniss unsrer staatswirthschaftlichen Zustande (1842); Sociale Brief e an von Kirch -
mann (1850-51; English trans. as Overproduction and Crises, 1898; 2nd ed., 1908);
Zur Erklarung und Ahhiilfe der heutigen Creditnoth des Grundbesitzes (1868-9).
Other writings that are of interest to us, including letters that contain some important
clarification, have been posthumously published from time to time. There is a con-
siderable Rodbertus literature, mostly German. I mention only H. Dietzel’s Karl Kod-
bertus (1886-8), which makes up by analytic competence what, owing to its date, it
lacks in information. It was A. Wagner’s championship that brought Rodbertus to
the fore in the last two decades of the nineteenth century.

Reasons will be offered, as we go along, for believing that it is in the
interest of a realistic picture of developments in our field to confine the
concept. Historical School of Economics, to the age and to the group of
Gustav von Schmoller (see below. Part iv, ch. 4). This implies that it is not
good practice to speak of an Older Historical School, a term that has been
introduced, chiefly for use in the polemic against Schmoller’s ‘historism,’ to
denote a group of writers who, while appreciating the importance of historical
research, displayed no hostility toward ‘theory/ I maintain that such a posi-
tion does not constitute a distinctive characteristic and that the economists
who are usually mentioned in this connection do not, in any useful sense,
form a group, let alone a school. But we must notice these economists them-
selves: Hildebrand, Knies, and Roscher. The first, 6 a man of restless activity

5 Meaning now rent of land in the usual sense and not in Rodbertus’ sense, in which
rent means profits plus interest plus rent of land.

6 Bruno Hildebrand’s (1812-78) chief work. Die Nationalokonomie der Gegenwart
und Zukunft (1848; new ed. by Gehrig, 1922), displays hostility to the concept of
natural law (in the sense that makes economic laws epistemologically analogous to
physical laws); it places emphasis upon the moral-science character of economics (his
term was Kulturwissenschaft as opposed to physics, Naturwissenschaft ) and on other
features that recur in the programmatic pronouncements of the Schmoller school and
also in Windelband’s and Rickert’s methodologies of the social sciences. In addition, he
did historical research. But his own programmatic pronouncement at the head of the
first number of the Jahrbucher fur Nationalokonomie und Statistik, which he founded
in 1862, was remarkable for catholicity and obviously not intended to start or to espouse
a distinct methodological party. In any case, if we do wish to label him a historical
economist, he should be called a forerunner of the Schmoller school rather than a
member of that triumvirate that does not form any real unit at all.

508 III: FROM 1790 TO 1870

and considerable influence, comes nearest to having been a historical econ-
omist in the later and genuine acceptance of the term. Knies, one of the most
significant figures of German economics, will be mentioned in our survey of
the next period, to which his main work belongs. This work was in the field
of economic theory, however, and his only title to a place in the older his-
torical school rests upon a methodological professio fidei, which is very in-
teresting as such but, considering his own practice, does not mean very much.
It belongs in the period under discussion and will be noticed below (ch. 5,
sec. 2b). Roscher, 7 who taught at the University of Leipzig for forty-six years,
added to the influence which this implies the influence of many works that
never fell below a highly respectable level: honest scholarship and sound
common sense is written all over them, and the sympathetic understanding
that his gentle and highly cultivated mind extended to all types of scientific
effort helped to make them perhaps more useful to many generations of stu-
dents than would have been more original productions. Marx poked insipid
fun at him. There were those to whom he looked like an obstacle to advance.
On the whole, however, there is hardly another economist of that period who
enjoyed so nearly universal respect inside and outside of Germany. With
complimentary intention, writers who found it difficult to credit him with
original results have tried to find something original in his method or ap-
proach. This is how he got into the position of being considered either one
of the ‘founders’ of a historical school in general or a leader of the so-called
‘older’ historical school. He invited this by speaking frequently of his his-
torical method or standpoint. But we shall see latex that there is not much in
this and that he should be classified, so far as his analytic apparatus is con-
cerned, as a very meritorious follower of the English ‘classics,’ though a fol-
lower who happened to have a particularly strong taste for historical illustration.

I think the discussion above blocks out all the salient features of the
scenery that it is necessary to keep in mind for our purpose. Incomplete-
ness is essential in a venture of this kind and should need no excuse.
But all the same it seems desirable to atone for the absence of three
names that some readers may miss. I have already mentioned Lorenz von
Stein, in connection with the economic interpretation of history, and

7 W. G. F. Roscher’s (1817-94) indefatigable industry turned out a large number of
publications, of which we have already mentioned Zur Geschichte der englischen Volks-
■wirthschaftslehre im sechzehnten und siebzehnten Jahrhundert (1851-2) and Geschichte
der Nationalokonomik in Deutschland (1874), monuments of scholarship. Neglecting
all other items of an impressive list, among them two additional contributions of his
to the history of economics and several studies in economic history, I shall mention
only his extremely successful System der V olkswirthschaft published in five volumes:
Grundlagen der Nationalokonomie (1854; a 26th ed. appeared as late as 1922; English
trans. 1878); Nationalokonomik des Ackerbaues . . . (1859; 14th ed., 1912); National-
okonomik des Handels und Gewerbfleisses (1881; 8th ed., 1913-17); System der Finanz-
wissenschaft (1886; 5th ed., 1901); and System der Armenpflege und Armenpolitik
(1894; 3 r d ed., 1906).

REVIEW OF THE TROOPS

5°9

should perhaps have included him in this sketch because his most im-
portant works were all first published within the period. I haVe trans-
ferred him to the next, however, since his influence was to increase con-
siderably in the 1870’$ and 1880’s. A similar reason motivated my trans-
ferring Albert Schaffle. But I am going to use this opportunity to com-
ment briefly on Diihring who does not fit in anywhere else.

Eugen K. Diihring (1833-1921) had to abandon a lawyer’s career owing
to failure of eyesight quickly followed by complete blindness, and there-
upon embarked, on the one hand, upon an academic career and, on the
other hand, upon an intellectual effort that resulted in the conquest of
a vast domain extending from mathematics, mechanics, and theoretical
physics in general, to ethnology, economics, and philosophy. The truly
admirable — in fact almost unbelievable — feat was, however, that in sev-
eral stretches of that vast domain he attained the mastery requisite for
original achievement. In particular, he published a brilliant history of
mechanics ( Kritische Geschichte der allgemeinen Principien der Me-
chanik, 1873), which, when awarded an academic prize, drew from the
judges the curious comment that the level of the work was far above
what would have been necessary to win the prize; and, more important,
it was appreciatively noticed by Ernst Mach (see preface to first edition of
the latter’s Mechanics). In the history of the anti-metaphysical and
positivist currents of thought, moreover, he cannot fail to retain a promi-
nent place. In another sphere of thought — that philosophy of life
which corresponds to the earliest meaning of the term philosophy — he
developed an attitude or system which we may like or not, but which
is both interesting and original (he called it ‘personalism’). And there is
his social philosophy — or system of social reform — that is entitled to the
same comment (he called it ‘societary’; it has some affinity with that of
Rodbertus). The reasons why this significant thinker should have met
with little except rebuffs are to be found mainly in a temperament that
was at the same time generous and aggressive and that, by ferocious at-
tacks, made enemies of practically all the individuals and groups he no-
ticed at all. He experienced a revival, however, in the 1920’s. All this
had to be said to make it quite clear that any disrespectful attitude
toward him is entirely out of place, and also to protect what follows from
misunderstanding.

In the field of economic sociology he has indeed a considerable performance to his
credit, namely, the anti-Marxist theory — which is partly tenable — that many of the
property relations of the capitalist era have resulted not from the economic logic of
capitalism, but from an extra-economic sequence of political causation. But in no other
respect, since we exclude political thought and policy recommendations, is there, for
us, positive contribution to report. He was — strange to say, considering his achieve-
ment in mechanics — a bad technician. He had no awareness of the analytic weaknesses
of such an argument as that capitalist property (for institutional reasons) keeps the
working class at a level of minimum of existence and deprives it of the fruits of tech-
nological improvement (wherefore the state must step in to assure labor of its appro-

510 III: FROM 1790 TO 1870

priate share— again an affinity with Rodbertus). He had an unbounded enthusiasm for
Carey and went into paroxysms of rage about Bastiat’s plagiarism; but he displayed
no grasp of either the strong or the weak points in Carey’s system. And since this is
what matters to us, we shall have no occasion to mention him again. Of Duhring’ s
works the following are in our field: Carey s Umwalzung der Volkswirtschaftslehre
und Socialwissenschaft (1865); Capital und Arbeit . . . (1865); Kritische Grundleg-
ung der Volkswirtschaftslehre (1866); Kritische Geschichte der Nationalokonomie und
des Socialismus (1871); Cursiis . . . {1873). See E. Laskine, 'Les Doctrines dconom-
iques et sociales d’Eugene Duhring,’ Revue d’histoire des doctrines economiques et
sociales (1912) and G. Albrecht, Eugen Duhring . . . (1927).

6. Italy

The political and administrative structure of every nation reflects itself in
the organization of its scientific work. Thus, like everything else, scientific
work was highly centralized in France. In England, quite different conditions
produced a similar result: we find in every field, including economics, a rela-
tively small and closely knit group within which severe selection operated to
reduce to a few the names of real significance. Such structures are easy
to describe. German economics, being much more decentralized, presented
greater difficulties. Italian economics was still more decentralized. And I
confess my inability to draw, in the available space, any satisfactory picture
at all. All that can be said in general about the economic research, which
was done during this period in the various centers of national life, is that
it was not on the same level with the achievements of either the earlier times
of Beccaria and Verri or the later times of Pantaleoni and Pareto. This shows
in many ways, particularly in the dominating strength of foreign influence.
The leads given by A. Smith, Malthus, Ricardo, and Say, whether accepted
or subject to adverse criticism, were the starting points and material for work
that was often able but primarily derivative. Hence also the characteristic in-
terest both in Italian works of the past (the fifty volumes of Custodi’s collec-
tion of the Scrittori classici italiani di economia politica appeared 1803-16) 1
and in the translation of foreign works (the 1st and 2nd series of the Bib-
lioteca deU’Economista appeared, 1850-68). This is all the more remarkable
because examination of available facts reveals plenty of ability in the per-
sonnel of Italian economics. By way of illustration, I mention two men of
conspicuous brilliance, Rossi and Scialoja, whose careers also point to the
cause — we know it already and it is always the same story — of the relative
weakness of the scientific performances of strong men. 2 Two examples of

1 In Spain we find the same phenomenon; Juan Sempere y Guarinos’ Biblioteca
espahola economico-politica was published 1801-21.

2 I wish I could draw a picture of Pellegrino Rossi (1787-1848), whose failures in his
many political activities reveal more ability than do the successes of other people. This
Italian, who became a Swiss constitutional reformer and professor of Roman history,
then a professor of economics and constitutional law in Paris and a Peer of France,
then French ambassador to Rome, and then again Papal prime minister, produced
among other things a Cours d’economie politique (1840-54; the 3rd and 4th vols

REVIEW OF THE TROOPS 5 II

relative weakness of performance in economics that were simply due to width
of range are Valeriani and Romagnosi . 3

More concentrated effort produced significant performance in the cases of
Gioja and Fuoco in the earlier and of Messedaglia in the later part of the
period. Gioja’s 4 work may be described best as an attempt to rewrite the
Wealth of Nations from the standpoint of the united Italy he visualized.
Pearls are hidden in an unprofitable heap of rubbish — that is partly redeemed,
however, by the statistical work it contains. It is easier to do justice to Fuoco . 5
He was a theorist of note who does not merit oblivion. In some pieces, for
example the one on the use of the concept of limits in economics, he dis-
played considerable originality. His conception of economic equilibrium in
some respects marked progress beyond Say’s. He is regularly mentioned in
Italian histories — mainly, however, in connection with his preoccupation with
the theory of rent — but seems to have exerted no influence at all. This was
different with Messedaglia . 6 I have chosen him for mention because of the

were published posthumously) that merited its success but does not merit any further
mention in a history of analysis. All the vast cultural horizons, all the practical insights
that show throughout, do not alter the fact that, analytically, it was diluted Ricardianism
plus a little Say. Antonio Scialoja (1817-77) wrote a nondescript I principii della eco-
nomia sociale (1840) — that was, however, very well written and correspondingly suc-
cessful — and not much else. But he was 23 when this text came out! What could a
man have done who was able to accomplish such a feat in the absence of politics,
public service, and so on, all interspersed with imprisonment, exile, cabinet office.

3 L. M. Valeriani (1758-1828) was something of . a polyhistor and much admired in
his time and country. The little steam he reserved for economics was put to good use,
however, in his theory of prices ( Del prezzo delle cose tutte mercantili, 1806), which
could have taught Senior and Mill how to handle supply and demand functions.
Italian historiography credits him (and Scialoja) with haying used mathematics. But
his (and Scialoja’ s) merit in this respect hardly goes much beyond the perception of a
great possibility. Other Italians perceived this possibility, e.g. Fuoco. G. D. Romagnosi’s
(1761-1835) name survives in the history of law and criminology. He was also a
philosopher and something of a mathematician and physicist. But his economic
philosophies, which were of an ant i-etatiste but equalitarian nature, are not worth our
while — they may be described as the foothills of Italian utilitarianism.

4 Melchiorre Gioja (1767-1829). Opere principali (all I know) were posthumously
edited, 1838-40.

5 Francesco Fuoco (1777-1841), Saggi economici (1825-7) and Intwduzione . . .
dell’ economia industrial (1829). Another interesting piece of work that holds a position
in the long controversy on the productivity of credit, Magia del credito svelata, was
published in 1824, in pursuance of a curious business transaction by Welz, who posed
as the author.

6 Angelo Messedaglia (1820-1901) was professor of law and later on of economics and
statistics in Padua and Rome. His quiet professorial life, which suffered interruption by
political activity for a brief period only, had its share in his achievement as had his
bent for patient research. But the divine spark was not lacking. He affords an excellent
example for the study of the particular combination of gifts, tastes, and circumstances
that make for solid scientific success and are adequate for reaching any ranks but the

512 III: FROM 1790 TO 1870

strategic position he holds in the history of Italian economics and statistics.
Maffeo Pantaleoni expressed, I believe, the opinion of a large majority of
the Italian profession when he wrote that Messedaglia was one of the three
men — the other two being Cossa and Ferrara — whose teaching formed 'all' (?)
Italian economists of the subsequent period in which Italian economics was
again to shine so brightly. This solid achievement rests on no one of his in-
dividual performances taken by itself, though most of them are of a high
order of scholarship, for example, his monographs on public loans, population
— only those two belong to the period — statistical theory, and money. More
than by their individual contributions to their subjects, they influenced as
messages of the spirit of scholarship and as examples of research that refuses
to serve the day. We add Nazzani for the same reason that justifies inclusion
of Cairnes with the English economists of the period — he was perhaps the
most eminent Italian exponent of 'classic’ theory and his chief contributions
belong here in spite of their dates. 7

Besides being woefully incomplete, 8 this sketch suffers also from the im-
possibility of giving due weight to the factual work done by Italian econo-
mists, particularly on agricultural problems including problems of Ownership
and tenancy, which would affect our impression considerably. But little can
be done about this. Of texts, I shall mention, besides Scialoja’s, also Boc-
cardo’s and the one I personally like best, de Cesare’s. 9 The most conspicuous
figure of Italian economics of that period and perhaps for twenty years beyond
it, Ferrara, I left to the last. He was a great leader. He formed a school of
his own. But affection and admiration for him has crystallized so as to lend
to his figure enlarged dimensions.

Francesco Ferrara (1810-1900) was primarily a scholar and teacher.
But he was also a politician who played his role in the formation of a
united Italy and in the task of organizing the new national state. I men-
tion those activities and also his passionate interest in the issues of eco-
nomic policy for two reasons. First, they explain why, like Ricardo, he
speaks to us from a pedestal that did not consist of scientific achievement

highest. Any work of reference will supply the reader with a list of his publications,
a few of which will be mentioned later on.

7 Emilio Nazzani (1832-1904), Sulla rendita fondiaria (1872), republished with three
other essays (wages, profit, English ‘classics’) in one volume, .1881.

8 One of the many lacunae may be filled by mentioning the history of Italian eco-
nomics, Storia della economia pubblica in Italia (1829), by Conte Pecchio, whom
McCulloch — of all men — reproached for national bias!

9 G. Boccardo (1829-1904), Trattato teorico-pratico di economia politica (1853), the
answer to the student’s prayer before exams. Another Millian treatise. Carlo de Cesare’s
(1824-82) Manuale di economia pubblica (1862), though also 'classic' fundamentally,
was something more than that, much broader and deeper than Boccardo’s. It was the
work of an eminent man whose bibliography includes many an excellent report on
many a thorny question — of one of those men who are invaluable servants to their
nations, indeed so entirely given to this service that knowledge would never advance
by a yard if there were not other mental types.

REVIEW OF THE TROOPS 513

alone: Italians may well revere the great economist as one of the found-
ing fathers of their state. Second, those activities and his attitudes in dis-
cussion of practical issues are very revelatory of his character: we behold
a man of the most punctilious honor and conscience, impervious to any
temptation — in environments that offered many — a single-minded lover
of his nation, uncompromising to a fault; but we also behold a doc-
trinaire of almost unbelievable inflexibility. Economically and politically
he was an ultra-liberal in the sense defined in the second chapter of this
Part. And the slightest deviation from this ultra-liberalism was anathema
to him. In this respect, like many liberals, he was tyrannically intolerant
— a godsend for the opponent who knows how to make use of this trait.
He never seems to have so much as tried to understand any standpoint
but his own. Sozialpolitik simply roused his wrath. This is relevant for
us because as he was in politics, so he was in science. He entertained an
uncritical confidence in the powers of economic theory: hence the his-
torical school, also, simply roused his wrath. Such leadership evidently
has its dangers. But we must not forget its merits. Strength of conviction
convinces. And it can hardly avoid one-sidedness and narrowness. Ferrara
carried the flag of economic theory over an arid stretch of ground, keep-
ing it alive, inculcating interest in it as only ardor can, stimulating his
audiences, preparing the ground for better things to come. This was his
achievement and it was great indeed. But his own exploits in the realm
of theoretical analysis were, all the compliments of later writers and all
efforts at favorable interpretation notwithstanding, distinctly unsuccessful.
He saw clearly enough that economic phenomena and problems form a
coherent set and that it is the theory of value which unifies them. But
as the principle of this theory of value he adopted Cost of Reproduc-
tion in terms of labor, a principle that can be made general only by the
most desperate twists of logic and, in any case, tells us little more than
the old cost-of-production principle does if properly stated. There would
be no point in singling out for criticism examples of impossible pieces of
reasoning. Let us rather admire the strategist who won victories with such
defective equipment and add that both his learned discussions of older
authors and his pieces on banks, government fiat money, and other sub-
jects contain many valuable things. His most important work, the E same
storico-critico di economisti e dottrine economiche del secolo XVIII e
prima metd del XIX (1889-90) has been mentioned above. For a much
more favorable appraisal, see Professor G. H. Bousquet’s brilliant sketch,
‘Un grand economiste Italien, Francesco Ferrara/ Revue d’histoire eco-
nomique et sociale, vol. xiv, 1926, and also the introduction and notes
to Ferrara’s Oeuvres economiques choisies (ed. by G. H. Bousquet and
J. Crisafulli, 1938).

III: FROM 1790 TO 1870

7. United States

For the preceding period, we found that the small economic literature of
the United States did not quite deserve the low opinion that a majority of
American economists seem to entertain about it. For the period under survey,
however, the opinion that Dunbar expressed in 1876, namely, that American
literature had contributed ‘nothing towards developing the theory of political
economy’ 1 has not been invalidated by the information made available by
more recent research. It is indeed not true if we take account of problems
raised, suggestions made, and factual work done, but it is true if we em-
phasize the word theory. Since this is the opinion prevailing in the profession,
our account can be brief. Before presenting it, I wish to ask the question why
that should have been so.

Minds that are unfamiliar with the sociology of scientific effort take it for
granted that analysis follows the practical problem or, to put it differently,
that it is induced by the needs of life. But in this case there were plenty of
practical problems and they were eagerly discussed, sometimes with a degree
of passion that was quite out of proportion to their importance. Nevertheless,
we find hardly more than traces of an impulse to develop analytic tools for
dealing with them. Moreover, there was plenty of demand for economic teach-
ing — the quantity demanded was much greater than was the supply of com-
petent teachers — which called forth courses and textbooks in response. One
would think that giving a course or writing a textbook would induce a man
to do at least a little, thinking for himself, and that it would be difficult for
a man to do either without asking himself when reviewing his derivative ma-
terial: ‘Could I not do better than this?’ But evidently this is not so: the
demand for courses and textbooks produced courses and textbooks and not
much else. Does this not show that there is something to one of the theses
of this book, namely, that need is not the necessary and sufficient condition

1 C. F. Dunbar (1830-1900), ‘Economic Science in America, 1776-1876,’ North
American Review, 1876, reprinted in his Economic Essays (1904). For more information
that I am going to present, the reader is referred to E. R. A. Seligman, ‘Economics in
the United States,’ two articles that are combined into a chapter of his Essays in
Economics (1925); F. A. Fetter, ‘The Early History of Political. Economy in the
United States,’ Proceedings of the American Philosophical Society, 1943. Among other
American publications on the subject, I wish to mention particularly J. R. Turner, The
Ricardian Rent Theory in Early American Economics (1921); and the useful bibliogra-
phies in M. J. L. O’Connor, Origins of Academic Economics in the United States
(1944). The most important non- American contribution seems to me to be E. Teilhac,
Pioneers of American Economic Thought in the Nineteenth Century (trans. from the
French by E. A. J. Johnson, 1936), a scholarly book that I feel all the more bound to
recommend because its approach so completely differs from mine. [Had J. A. S. com-
pleted his History, he would have added Joseph H. Dorfman’s Economic Mind in
American Civilization, of which the first two vols. (1946) cover the period 1606-1863,
and the third vol. (1949) the period 1865-1918.]

REVIEW OF THE TROOPS

5*5

of analytic advance and that demand for teaching produces teaching and not
necessarily scientific achievement? The solution of the riddle seems simple,
however. We have it as soon as we observe that absence of creative research
was not peculiar to American economics of that period. We find the same
state of things elsewhere, for example, in the fields of mathematics and theo-
retical physics where there is nothing to record until we; reach the lonely
peak that was Willard Gibbs — although there was no lack of technological
problems, some of which, moreover, were solved with striking success. This
suggests a common cause, and I do not see how we can avoid finding it in
the conditions of the country and the aptitudes of her men: the task of ex-
ploiting the possibilities of the natural environment — which, given the social
structure, presented itself in the form of unparalleled opportunities for business
enterprise — both absorbed the creative talent of the country and drew to it
talent of this type. Circles that did cultivate intellect and scholarship were
quantitatively unimportant and sterile in scientific initiative. This, I believe,
agrees with what Dunbar meant to convey, although he expressed himself in
a manner that invites objection . 2

But I have emphasized the word theory, and what I meant by it was analytic
apparatus. No such emphasis is needed in the cases of any of the textbooks
I know, for they were commonplace, and worse, in any and every respect.
Teaching fed mainly on McCulloch and Say, and where home-grown texts
were used, it was McCulloch and Say again, except for some contributions of
the Carey school . 3 But as regards the most significant figure in that period's

2 Professor F. A. Fetter (op. cit., preceding footnote) has in fact objected to an
explanation by 'environment' (rightly, of course, because the word itself explains nothing)
and replaced 'environment' by two other factors: 'false authority' (of the English
'classics') and interested partisanship 'which blocks the path to disinterested scientific
effort.' But the first of these factors needs to be explained in turn: for the hold of
authority, false or not, is not a matter of course; the creative mind does not submit to
authority; and, following this line, we are led back to the environment that either does
not contain scientific talent or else absorbs it into other pursuits. As regards the partisan
spirit, it was surely not absent in England, where economic analysis did flourish all the
same. Nor does it in itself interfere with scientific effort. Finally, with great respect for
Professor Fetter’s high authority, I beg leave to remark that professors are not exempt
from bias and that I sense some in the attitude of many excellent men to the nationalist
school: surely, another interpretation may be put on the protectionist views of
American economists of that and later times than subservience to either pecuniary
interests or prejudice.

3 On Say's success in the United States and also on his influence upon Carey, see
Teilhac, op. cit.; the Prinsep translation of Say’s Traite was first published in 1821.
An American edition of McCulloch was published by J. McVickar, the first incumbent
of the chair of political economy at Columbia. Destutt de Tracy was introduced to
the American public, by no less a personage than Jefferson, in 1817. Of the home-
grown products, the Rev. Francis Wayland's Elements of Political Economy (1837)
was, I believe, the most successful. Having heard and read a number of scathing com-
ments about it, I experienced something like agreeable surprise when I read it.

516 III: FROM 1790 TO 1870

American economics, Carey , 4 that restrictive emphasis upon theory is very
much needed. For he lacked creativeness only in that respect. And his case
points an interesting moral about what technical deficiency may do to a man’s
reputation in the long run: 5 Carey’s name has no doubt suffered much more
from political animosity than from that deficiency; but nobody could have
treated him with contempt had he stated his case with tolerable competence.

Carey's idea of the fundamental unity of all science — a sort of generalized
Comtism — was not the idea of a man whose intellectual life is enclosed by
tariff walls. The man who propounded once more the fundamental sameness
of scientific law in all departments of knowledge was no doubt wrong; but
there was an element of greatness in his errors. And the man who could con-
ceive of the United States as a world unto itself, with all this implies eco-
nomically, morally, culturally, had no doubt the gift of grand vision in the
same sense as had List. In the light of this vision, his protectionism and his
‘harmony’ of agricultural, manufacturing, and commercial interests — his con-
ception of a ‘balanced’ economy — acquire a new significance and one that is
completely overlooked by all those who saw nothing in him but a mouthpiece
of the business class. We need not like that protectionism and we need not
like Carey’s whole vision. In particular, we may feel that the United States
would be a happier place and would have attained a higher cultural level by
now if a larger part of the country’s energies had gone into other than busi-
ness pursuits and if, in consequence, her industrial development had been
slower. This, however, is a matter of personal evaluation and does not excuse
us from recognizing that Carey’s was a great vision and that, in most respects,
this vision expressed adequately both the situation and the spirit of the coun-
try. Moreover, we cannot excuse ourselves from recognizing that this vision

4 For a list of his more important followers, see F. A. Fetter, op. cit. p. 56m They —
and presumably others — formed a school in our sense and also had personal contact
with the Master, which was how they referred to him. The school was called and also
called itself ‘nationalist,’ but it should be observed that this term entirely lacked the
connotation of aggressiveness it has today.

s Henry C. Carey’s (1793-1879) economic opinions were in part conditioned by those
of his father, Mathew, who already felt himself to be the leader of a ‘nationalist
school.’ Of the son’s works, those that are most important for us are: Essay on the
Rate of Wages . . . (1835; this first economic piece of his already displays his charac-
teristic weakness on the side of analysis); Principles of Political Economy (1837-40);
The Past , the Present, and the Future (1848); The Harmony of Interests , Agricultural,
Manufacturing, and Commercial (1851); Principles of Social Science (1858-9); and
Unity of Law (1872). This list neglects his writings on money and credit and several
other things. The next to the last item is the one read and suffices for those who do
not wish to make a thorough-going study of Carey. We need not go into the Carey lit-
erature beyond mentioning again his German admirer, Diihring. f. S. Mill described his
Principles of Social Science as the ‘worst book on political economy I ever toiled
through’ (G. O’Brien, ‘J. S. Mill and J. E. Cairnes,’ E conomica, November 1943, p.
274) and said that he never met with ‘such an apparatus of facts and reasonings in
which the facts were so untrustworthy and the interpretations of facts so perverse and
absurd’ (ibid. p. 280).

REVIEW OF THE TROOPS

517

was independent of its deplorable analytic implementation and capable of
being implemented more satisfactorily. This, however, is precisely what Carey's
critics refused to recognize. Most of them were more or less well-trained econ-
omists. They had no difficulty in showing that Carey’s theory was no good at
all. And, on the strength of this, they condemned his message without making
it clear — and presumably without being aware of the fact — that the essentials
of this message were beyond the range of theoretical analysis.

A comparison of Carey with the English free traders, on the one hand,
and with List, on the other, will bring this out still more clearly. The English
free traders and List also argued from a comprehensive social and political
vision that we may or may not accept; both, moreover, argued from their re-
spective national standpoints; both, finally, advocated policies that suited some
group interests better than others. In all these respects there is no difference
whatever between the cases of Carey and of either the English free traders,
or List except, of course, so far as our own preferences are concerned. But the
English free traders implemented their visions and their politics analytically
and with success — the theorem of comparative costs was a major contribution
to our analytic apparatus. This is the reason why they may claim a place in
the history of scientific analysis — not because of the advocacy of free trade
per se. List made no original contribution to the analytic apparatus of eco-
nomics. But he used pieces of the existing analytic apparatus judiciously and
correctly. And this, too, spells scientific merit. Carey’s case differs from both
in that he made negative contributions to analysis. And my point is that this
was entirely unnecessary either for the analytic implementation of the manner
in which he saw American reality and problems or for the formulation of his
policies, including protection, balanced economy, and all. If he lacked the
gifts of the creative analyst, he could have used existing analytic tools as did
List and, taking up his stand on United States data, could have argued that
English views on many economic problems did not apply to American con-
ditions and had to be modified by introducing other factual assumptions. Had
he done so with a modicum of competence, his detractors would still have
retained all the ammunition in the arsenal of politics, but he would have been
all right on the scientific front.

He was, however, unable to distinguish the theoretical from the factual
element in English free-trade teaching and distinguished neither from the
element of political volition. He saw only the practical recommendations and
naively thought that they followed from theoretical premisses which it was
therefore incumbent upon him to demolish, root and branch . 6 Instead of say-
ing simply that pressure of population’ was, for the calculable future, evidently
of no importance in the United States, he entered upon an infelicitous attempt
to refute the Malthusian theory. Instead of saying simply that the most im-
portant practical — social and political — implications of the 'Ricardian’ theory
of rent did not apply in a new country, he argued ineptly (in the Principles

6 It will be seen that he thus committed the same mistake that was committed by his
free-trade critics.

518 III: FROM 1790 TO 1870

of Social Science, 1858-9, not before) that this theory was totally invalid be-
cause cultivation did not typically proceed from richer to poorer soils, but
from poorer to richer. 7 Instead of simply emphasizing the fact that under
conditions of rapid development, rising cost curves are incessantly shifting
downward so that the Ricardian theorem that equates prices to the cost of
the 'least favored’ producer loses much of its practical importance, he dis-
cussed decreasing and increasing costs as if they embodied conflicting proposi-
tions about the same phenomenon. And in his highest flight, his theory of
value, he blundered so catastrophically as to crush its one good point. This
theory is a labor-quantity theory that contains the improvement that it is
not the labor quantity actually invested in a commodity but the labor quantity
necessary for reproducing it that determines its value. 8 He observed that this
quantity falls rapidly in the course of technological progress. And from this
he inferred that labor’s relative share must increase in the course of tech-
nological progress — which, besides being actually false, does not follow from
the logic of his argument. In this case, it is particularly clear that what he
strove to express was by no means wholly wrong: a competent theorist could
have worked it up into a valuable contribution; but he made it read wholly
wrong because he was unable to find for it the correct expression. There is no
need to go on. But one interesting question remains. Plenty of people admired
Carey’s diagnosis of American reality and shared his views on economic policy
and his enthusiasms. A prize, in terms of success and reputation, awaited the
man who could have weeded the errors from his volumes and put his system
into a defensible shape. Moreover, this prize was not hidden — and there were
followers for whom it would have been the most natural thing in the world
to pick it up. Why did nobody try? Well, opportunity is only a necessary
and not a sufficient condition for a great performance. It does not of itself
produce the man capable of using it. And the brains that could have done
the job were producing boots.

However, though nobody undertook the task in all its wide dimensions and
though nobody undertook it effectively even in any of its parts, a number of
writers did attempt it within a narrower compass and with inadequate force.
These writers were not all of them forerunners or followers of Carey. Nor
did they form any school in our sense of the term. But, reasoning as they did
on the same data and problems and, to some extent, in the same spirit, they
produced publications that have some affinity with Carey’s as well as a certain
family likeness between one another. Some of them described their economics
as American Political Economy, and this phrase may be fittingly applied to
all of them. They were all more or less protectionist. But the family likeness

7 The reader will realize, of course, that it is not his assertion about historical fact
that condemns Carey as a thinker — for it is possible to put up a case for his theory
that, historically, poorer soils are cultivated before richer ones: this may occur for more
reasons than one — but his belief that this assertion, true or false, is relevant to the
Ricardian theory.

8 This theory, which Carey elaborated in his Principles of Political Economy (1837-
40), differs essentially from Ferrara’s theory of cost of reproduction.

REVIEW OF THE TROOPS

extends beyond this feature to others that are more relevant to us, namely,
to the features of their modest analytic apparatus that was for the most part
derived, by either acceptance or criticism, from A. Smith. There was, however,
no first-rate man among them, and they made next to nothing of the great
opportunity before them. Nor did they attain any dominant position. Accord-
ingly, they do not dominate the following list, which offers, I believe, a fairly
representative sample of that period’s United States economists: Raymond,
Everett, Tucker, Bowen, and Amasa Walker . 9 If we like, we can include in
American performances also List’s early book, which was a typical product of
the American environment, and possibly also John Rae’s great work, which
was discussed in the first section of this chapter. Of course, this excludes
writings on money and banking and the still more important factual work
that was done by United States economists.

8. Factual Work

In the course of the review above, we have repeatedly had occasion to
commend the admirable factual work done by men who are usually classed
as ‘general economists’ or even as theorists only but who are not fully under-
stood unless the proportion of their time and energy that went into the hunt
for, and the presentation of, facts is taken into account. Let us glance once
more at a selection of relevant names, great and small: Blanqui, Chalmers,
Chevalier, Gamier, Gioja, Malthus, Messedaglia, McCulloch, Mangoldt, James
Mill (History of India), Roscher, Senior, Storch, and Thiinen. This list, which
could easily be lengthened, suffices to show that the economics of the period
under survey, taken as a whole, was anything but the speculative thing it is
sometimes made out to be and that the opinion — the source of much pointless
controversy — that the economics profession then neglected factual research is
utterly unfounded. The opposite opinion would in fact be nearer to the truth:

9 For a more favorable appraisal than is implied in my way of mentioning Daniel
Raymond (1786-1849), who wrote Thoughts on Political Economy (1820; 2nd ed.,
entitled Elements of Political Economy , 1823) see Teilhac, op. cit. The difference is
largely accounted for by Professor Teilhac’s emphasis upon the economic-thought aspect
of Raymond’s work, which is indeed more interesting than is his analysis. The presence
of analytic effort must, however, be recognized. He produced a theory of capital (in the
intermediate- goods sense) that, considering its date, is not without merit. On A. H.
Everett’s chief performance, see below, ch. 6. George Tucker (1775-1861) wrote,
among other things, Laws of Wages, Profits, and Rent Investigated (1837); for other
contributions of this not insignificant economist, see below, sec. 8b and ch. 7, sec. 3.
Francis Bowen’s American Political Economy (1870; first publ. as Principles of Political
Economy applied to the Condition, the Resources, and the Institutions of the American
People, 1856) stands here only because of its title. Amasa Walker’s (1799-1875; father
of Francis A. Walker) Science of Wealth (1866) must be mentioned as a representative
performance of the ‘non-American’ line of United States economics. Perusal of the
book will give the reader a good idea of what this economics then had to offer. For the
rest, the reader finds all he needs for further study in Seligman, op. cit.

520 III: FROM 1790 TO 1870

many of the shortcomings of the “classic’ analytic apparatus find their most
natural explanation on the hypothesis that the amount of work bestowed upon
it was inadequate, whereas it is not possible for us to level the analogous
criticism at the period’s factual work, especially if we include, as we must,
the work of economic historians and of the students of legal institutions that
we have sampled already in the preceding chapter. This section will present
additional examples of important types of factual work and thus help to round
off our picture and to establish our thesis that the “classic’ period fully main-
tained the tradition of factual research that, as we know, harks back to the
sixteenth century.

[(a) Tooke’s History of Prices.] Of particular interest to us is the type of
analysis that combines presentation and explanation of facts in such a way
that the two cease to be distinct tasks and mutually condition one another
at every step: the type of analysis that arrives at its results by means of dis-
cussing individual situations. We must be content to notice the peak achieve-
ment of this genus, the History of Prices and of the State of the Circulation
from 1792 to 1856 by Tooke and Newmarch. 1 A better title would have been:
Analysis of England’s Economic Processes from 1792 to 1856, with Special
Reference to the Condition of the Currency and of Credit. Jevons called it
“unique,’ and so it is. Never before or after has that method been used on an
equally large scale, or, so far as influence upon purely theoretical research is
concerned, with similar effect. Whether the authors handled it as well as they
might have done is another question. I am not alluding to the fact that, of
course, they argued for one policy and, still more obviously, against another:
this does not impair the value of either their facts or their reasoning, both
of which may be appreciated by any opponent of their views concerning de-
sirabilities. Nor am I alluding to the discursiveness and repetitiveness of their
work: in “realistic’ theory of this type neither is without its function — the

1 Thomas Tooke (1774-1858) was the author of all six volumes, if the term ‘author’
is taken in the sense of the Latin auctor. But only the first four volumes (1st and 2nd,
1838; 3rd, 1840; 4th, 1848) were substantially his work, the collaborators playing the
role of research assistants. The last two volumes (1857) were mainly the work of William
Newmarch (1820-82), who, though greatly influenced by Tooke, holds his place in his
own right. Newmarch, besides being one of the more important critics of Peel’s Act
and the doctrines of the “currency school,’ was a leading member of the Royal Statistical
Society, and the originator of the Economist index number and the same journal’s
“Annual Commercial History.’ As regards index numbers (which, by the way, were not
used in the History of Prices , a striking example of economists’ resistance to new
methods), he was not particularly original, but the ‘Commercial History’ is an inter-
esting model for an interesting type of work. Economists are even today not fully alive
to its scientific importance and to the methodological questions it raises, and have
hardly succeeded in bringing modern theory to bear upon it or in otherwise improving
upon Newmarch’s performance. The History of Prices has been republished (1928), ed.
by Sir T. E. Gregory with an introduction that fully discusses its nature and origin, and
should be carefully perused by the reader. This reference is to replace a survey of the
various writings of Tooke’s that paved the way toward the History.

REVIEW OF THE TROOPS 52 1

method is essentially one of 'thrashing out’ things, and this cannot be done
with Ricardian brevity. I am alluding to more fundamental defects of which
no trained reader of these volumes can fail to become aware very quickly.. Both
authors were no doubt deficient in command of economic theory. Tooke was
in addition a somewhat 'woolly’ thinker — who often impaired his case by miss-
ing the opponent’s point. And this told. Not only did his arguments sometimes
call forth derogatory comment, that was quite justified as far as it went; but
also, his authority, great as it was in his day and as it remained for the rest
of the century, was never what it might have been had there been more
theoretical edge to his thought. The work is nevertheless a classic and an ex-
ample to follow. But it seems to cry out for rewriting by a better-trained or
else a more adroit hand.

[(b) Collection and Interpretation of Statistical c Materials .] Though any-
thing but a novelty, work of the kind of which Tooke’s and Newmarch’s is
an outstanding instance was in that period powerfully propelled by the open-
ing up of new sources of statistical figures. Those were the times when gov-
ernments began to establish statistical bureaus and commissions; when the
first attempts were made at international co-operation (the first international
statistical congress met in 1853); when statistical societies emerged almost
everywhere — in England, for instance, several were founded in the 1830’s, of
which the Statistical Society of London (1834) was presently chartered as
the Royal Statistical Society. 2 To a great extent the compilation, from the raw
material provided by the official bureaus, of presentable statistical records re-
mained the task of individual investigators, as it had been in the preceding
period, especially but not exclusively of the men who by virtue of their official
position were able to command the requisite assistance. But these investigators
were no mere diggers. They did not confine themselves to marshalling data
and to developing estimates: many of them also offered interpretations. And
so we find, flowing from this source, another stream of work that differed
indeed from Tooke’s and Newmarch’s in that it started from the statistical
material instead of from the economic problem and, in consequence, em-
phasized the statistical information per se more than had Tooke and New-
march. But, though sometimes only as a by-product, they turned out analytic
work as well.

Attention has been called, in our survey of pre-Smithian times, to what may
be described as analyses of the economic state of a country. In the period
under discussion, this line of research produced a number of performances for
which Colquhoun’s, Porter’s, and Tucker’s will serve as examples. 3 They —

2 The American Statistical Association was organized in 1838.

3 Of Patrick Colquhoun’s (1745-1820) many writings, only two need be mentioned,
his Treatise on the Population, Wealth, Power, and Resources of the British Empire
. . . (1814), unintelligently sneered at by McCulloch, and the anonymously published
Considerations on the Means of affording Profitable Employment to the Redundant
Population of Great Britain and Ireland (1818). The first is particularly important, not
so much because of its estimates of national wealth, but because of the economic reason-
ing, however primitive, which is offered in explanation of the facts presented, and of the

5 22 III: FROM 1790 TO 1870

and others of the same type — no doubt suffer from the fact that their authors
did not know how to use economic theory as a tool of factual analysis; but
as far as this goes they are in the same boat with modern publications of this
kind. Other types of that period’s statistical economics will be represented by
the names of McCulloch, Baxter, Dieterici, Villerme, Le Play, and Wells.

McCulloch’s (see sec. 2 above) most significant statistical work, his Dictionary,
Practical, Theoretical, and Historical of Commerce and Commercial Navigation, 1832
— a heroic labor — is in spite of its dictionary form, a treatise in which facts and anal-
ysis intertwine very effectively. This was the kind of thing at which he was really good
— the man should in fact not be judged by his Principles alone.

Robert D. Baxter (1827-75) was an economist of major importance. His careful
and competent handling of his figures, and his much quoted estimates (of national
income and wealth), admirable though they are, constitute the least important of his
services to economic analysis. Of much greater interest for us are his bold ventures
into the statistical theory of the benefits that accrue to the public from railroads and
of the pressure and incidence of taxation (for which purpose he also collected family
budgets). These studies are not faultless, mainly because liewas weak on the pure-
theory side, but the mere fact that he made a serious attempt to answer numerically
such questions as how the burden of rates divides itself between landlord and tenant
should secure for him a place in the history of econometrics. I want to refer especially
to: The Budget and the Income Tax (i860); Results of Railway Extension (1866);
National Income: the United Kingdom (1868); The Taxation of the United Kingdom
(1869). In Memoriam by his widow is well worth reading.

Karl F. W. Dieterici (1790-1859) was a professor of Political Economy ( Staats -
wissenschaft ) and director of the Prussian Statistical Bureau in Berlin. Statistische
XJbersicht der wichtigsten Gegenstande des Verkehrs und V erbrauchs im preussischen
Staate und im deutschen Zollverbande . . . (1838-57). Also important: Der Volks-
wohlstand im preussischen Staate . . . (1846) and Uber preiissische Zustande, iiber

attempt to state and to solve problems — to paraphrase factually, as it were, the more
popular doctrines of the times.

On a larger scale, and with greater success, this was also done by George R. Porter,
a civil servant and for some time chief of the statistical department of the Board of
Trade. His Progress of the Nation in its Various Social and Economical Relations, from
the beginning of the Nineteenth Century to the Present Time (1836-43) has received
deserved credit as the standard record of English economic development during the
first half of the nineteenth century, i.e. as a source book of economic facts and figures.
As such it has been remodeled — very freely indeed — and continued by Mr. F. W. Hirst
and his associates (1912). But this is not what matters for us. The relevant point is
that the work, as originally planned and executed, is really a treatise of general eco-
nomics, dealing successively with population, production, interchange, public finance,
consumption, accumulation, moral progress, and colonies in a manner not entirely dis-
similar to Mill’s Principles, of which, in a sense, it ought to be considered as the com-
panion volume: in particular neither Mill’s free trade nor Porter’s free trade is complete
without the other.

George Tucker has been mentioned already and will have to be mentioned again.
The work of his that is relevant here is: Progress of the United States in Population and
Wealth in Fifty Years (1843; 2nd ed., 1855). It is mainly a study in U.S. demography.
For us, however, more important is the fact that it is also a study in economic analysis.

REVIEW OF THE TROOPS

5 2 3

Arbeit und Kapital (1848). His delightful serenity in matters of ‘method’ deserves to
be recorded. His lecture De via et ratione oeconomiam politicam docendi (1835),
though stressing quite reasonably the fundamental importance of the historical aspects
of the economic process, arrives at the result' which might be said to sum up, by
anticipation, all that ever came of the methodological squabble of a century: et mere
philosophando et mere experiendo erratur. And he showed his good sense by extolling
Ricardo's attention to facts. Though he never embarked upon a venture as compre-
hensive as Porter’s, his neat and trustworthy publications of the results of the statis-
tical bureau he directed are glorified by his grasp of the needs of scientific economics
that enabled him to pick out fertile projects. Thus, his statistics of consumption con-
tinue to this day to render assistance to analysis. 4

The work that justifies the inclusion in our sketch of the name of Louis R. Villerme
(1782-1863), who was not exclusively, or even primarily an economist, is his investiga-
tion, undertaken as a research project (quite as such things are done today) under the
Academie des Sciences Morales et Politiques, into the conditions of labor in several
French manufacturing industries: Tableau de Vetat physique et moral des ouvriers
employes dans les manufactures de coton, de laine, et de soie (1840). His recommenda :
tions (protection to children) do not interest us here. The work is important as an
outstanding instance of a large class, in which method of procedure has hardly made
any progress at all since that time.

P. G. Frederic Le Play (1806-82), mathematician and mining engineer by training
and professor of metallurgy by vocation, figures here and not in the next period al-
though some of the publications and activities that made his international fame be-
long to the latter. The Soci6t6 Internationale des Etudes Pratiques d'Economie So-
ciale, which was founded by Le Play in 1856, started the publication of a fortnightly
review, Reforme sociale, in 1881. The work that is relevant to our purpose was done
during the period under discussion: Les Ouvriers europeens (1st ed., 1855; 2nd ed.,
1877-9). He was not a technical economist and heartily despised the misunderstood
bits of economics he knew. Nevertheless, he deserves a place in the histo^ of economic
analysis because of his method of studying family budgets that may some day help to
bring into existence a theory of consumption worthy of the name. It consists in an
immensely painstaking investigation of a limited number of individual cases, each con-
sidered as intensively as possible, in the whole setting of its social, moral, and cultural
conditions. We cannot go into the program of social betterment that is associated with
the name of that great man. But he formed a school that is associated with that pro-
gram and continues work along that line.

As has been mentioned already, statistical economics flourished in the
United States, and from the famous Hamilton Report on Manufactures
(1791) to the end of the period we observe an ever-broadening stream
of such publications. However, we shall be content to add another illus-
trative instance, namely, the earlier work of D. A. Wells — his later and
much better-known work belongs to the next period. 5 He turned to eco-

4 Among other things, they established the fundamental fact that the consumption
of the masses may fall in cyclical upswings (that it may fall in prolonged spells of
inflation is of course common knowledge).

5 David A. Wells (1828-98) was a geologist and chemist who had published a suc-
cessful textbook in each of these subjects before he took to economics and the civil
service during the Civil War. The two publications that should be mentioned here

5 2 4

III: FROM 1790 TO 1870

nomics in his early middle age, attracted by his interest in the practical
questions of his day and country, and our analytic apparatus owes noth-
ing to him. Yet he was a significant economist whose works repay study
even today. He was a master of the art of making the most of imperfect
material . 6 Moreover, his sound and conscientious mind enabled him to
represent the elements of a situation in their right perspective without
precisely knowing why: his was that sound practical judgment in which
many of the best theorists are woefully deficient and which was to show
up to still greater effect in some of his later publications.

Of course, all that I have been able to present in this section is a
scatter of instances that in addition may not have been the best to choose.
Thus, barring what is implied in mentioning Tooke and Newmarch and
also Senior, I have entirely neglected all the scientific economics to be
found in English official reports. It is hoped, however, that even these
bits of information will help the reader to form a correct idea of the
scientific situation of that period. But the question must, I suppose,
arise in his mind how, under the circumstances described, it was possible
for even the most unfair of critics to speak of undue preponderance of
‘theoretical speculation/ The only answer I have to offer is this. Criticism
of scientific economics comes to a great extent from ignorant outsiders,
and these ignorant outsiders include many individuals who call them-
selves economists. This fact alone makes it understandable that criticism
mistook the significance of a feature of that period’s economic work that
we have noticed before. Economics then gained the status of an estab-
lished field. This meant, among other things, greater specialization not
only of individuals but also of publications and the emergence of purely
theoretical treatises. It is hardly possible to overlook the factual com-
plement in the Wealth of Nation $ — though some critics seem to have
accomplished even this feat — and it is still less possible to overlook the
factual work in Vauban’s Dixme royale. But if an economist, such as
Senior, chooses to deal with the analytic apparatus of economics sep-
arately, then it is much easier to overlook his factual work — especially
if it be hidden in commission reports — and thus, comparing the Outline
with the Wealth (which is of course absurd), to arrive at the discovery
that there is a methodological gulf between the two and that Senior was
indulging in pure speculation whereas A. Smith was keeping his eyes
upon historical fact.

[(c) Development of Statistical Methods .] The groups of workers in any
department of scientific knowledge should not perhaps be compared to the
corps of an army. For the latter, at least in principle, move according to some
plan, whereas the scientific groups are essentially unco-ordinated: one group

are: the famous Our Burden and our Strength (1864) and his Reports of the Special
Commissioner of the Revenue (1.866-9).

6 Professor Kuznets has told me that Wells’s estimates of national income are deserv-
ing of confidence which, considering the data at his disposal, represents an even greater
feat than Baxter’s, who had at least income-tax data to go on.

REVIEW OF THE TROOPS

525

rushes on, the others lag behind, and each fails to give support to the others
or to avail itself of the possible support it could derive from diem. The progress
in statistical method illustrates this. We have already noticed that there was
considerable advance on the probability front. We should add to this the
Gaussian law of error and the method of least squares, achievements that
meant an important addition to the economist’s box of tools. However, noth-
ing to speak of came of this opportunity during this period in which, on the
contrary, the statistician’s pure theory and the economist’s pure theory were
almost completely divorced — to remain divorced until our own day. I wonder
if I can create in my reader’s mind the proper feeling of surprise at this. Let
us for this purpose transfer ourselves into a better world and, from this better
world, look at the situation of economics. We then behold a field in a large
part of which reasoning is essentially and inevitably quantitative — surely all
economists would have acquired a saving knowledge of mathematics. But even
if they failed to see the necessity of doing this in order to improve their pure
theory, would they not surely do so in order to improve their handling of
statistical figures, to the importance of which, as we have just seen, they were
fully alive? They would be on the lookout for new tools of statistical research
and, of course, rush to use them if they were proffered, as they were being
proffered, from outside. And we should expect the author of the period’s
leading treatise, J. S. Mill, laboring in the sweat of his brow, to acquire and
to teach command of those tools. Observe that, with a profession intellectually
alive and moderately conscious of the scientist’s duties, there would have been
nothing impossible in all this. But as a matter of fact, if we let our glance
shift back to the real world, we see nothing of all this until about a century
later, and even then all we see is a painful struggle to realize it. What we
do see, for the period under discussion, is ignorance born of intellectual in-
ertness or else, which comes to much the same thing, preoccupation with the
practical problems of the day that life itself solved without needing any assist-
ance. It was not quite so in demography or what is usually understood by so-
cial statistics. This is our only opportunity to mention the name of Quetelet.

Adolph Quetelet's (179 6- 1874) 'importance for our subject is small — I know of no
economist of that period whose economics shows any traces of his influence. He was
a mathematician and astronomer, and entered the field of social statistics by the door
of probability. Here, so far as I can see, his merit is confined to meritorious propa-
ganda: there is nothing original in his Lettres d S. A. R. le due regnant de Saxe-
Coburg-Gotha sur la theorie des probability, appliquee aux sciences morales et poli-
tiques (r846). But he joined the brilliant band of statistical administrators who during
that period led and inspired the new statistical bureaus and, with indefatigable energy,
did much to improve methods and projects and especially to promote international co-
operation.

He was much more than that implies, however. His vigorous and original investi-
gations into the distribution of human characteristics mark a step in advance that had
never to be retraced and, as an example to follow, had eventually also some importance
for economics. But he took another step that, after a brief success, had to be retraced:
he plunged into a philosophy of a sort of statistical determinism by conceiving the
theory that those investigations were revealing a stable type of average man whose

526 III: FROM 1790 TO 1870

properties linked up with simple general ‘causes,' deviations being of the nature of
errors of observation in the Gaussian sense. He thus hoped to reduce, on a statistical
basis, the methodology of the social to that of the physical sciences. The develop-
ment of thought in this matter went wholly against this theory, and many serious
workers came to consider it, perhaps more than is justified, as a mere freak. His
merits concerning anthropometry are of course riot affected thereby. See especially his
Stir Vhomme . . . (1835; English trans., 1842), later expanded into his Physique
sociale . . . (1869) and, for criticisms, G. F. Knapp, ‘Quetelet als Theoretiker,’ and
several other notes, Jahrbiicher fur Nationalokonomie und Statistik (1871-2) and Maurice
Halbwachs, La theorie de Vhomme moyen (1912).

Economists even failed to avail themselves of the most primitive devices for
presenting figures. All the more necessary is it to notice the fact that at least
simple charting — line, bar, circle, and pie graphs — had been introduced into
economics right at the beginning of the period by Playfair. 7 Moreover, there
is no excuse for the hesitation with which fact-presenting economists took to
the use of price index numbers or theoretical economists to the task of pro-
viding a theory for them. We have seen that the idea had emerged before
A. Smith. A great step toward full realization of the importance of the method
was made in 1798, when Sir George Shuckburgh Evelyn presented a paper to
the Royal Society in which, with apologies for treating & subject so much
below the dignity of that august body, he used an index number — of a primi-
tive kind no doubt but which was superior to Carli’s — for measuring the
‘depreciation of money/ 8 Lowe 9 added nothing to the idea of a ‘tabular
standard' beyond Evelyn’s, but he improved the technique and recommended
the use of index numbers for the purpose of ‘lessening the injury from fluctua-
.tions and giving a uniform value [over time] to money income,’ that is, of
creating a stable unit of deferred payments — the idea that was to become so
popular in the next period and still more so in the 1920’s and 1930’s. G.
Poulett Scrope seems to have been the first to introduce the subject into a
general treatise (1833).

7 William Playfair, brother of the physicist, John Playfair, to whom he gave credit
for having suggested his graphical methods, was a man of varied experience in business
and economic journalism. He first introduced those methods in his Commercial and
Political Atlas (1786), which contained 44 charts and was translated into French. His
most telling graph, however, was used to illustrate his argument in A Letter on our
Agricultural Distresses; it displays the course of the price of wheat and of wages over
250 years. See Funkhouser and Walker, ‘Playfair and his Charts,’ Economic History,
February 1935, with illustrations. I owe my acquaintance with Playfair’s work to this
article, and know only the two publications mentioned. For others, see the biblio-
graphical note appended to the article.

8 Philosophical Transactions, 1798, Part 1. Arthur Young ( Enquiry into the Progressive
Value of Money in England, 1812) was the next to follow him and the first to attack
him.

9 Joseph Lowe, The Present State of England in regard to Agriculture, Trade and
Finance (1822), a book that seems to have met with some success and contains many
interesting discussions, e.g. on population. The author is, however, very unfair to
Evelyn’s pioneering attempt.

CHAPTER 5

General Economics: A Cross Section

1. J. S. Mill and his Principles. Fawcett and Cairnes 527

2. Scope and Method: What Economists Thought They Were Doing 534

(a) Definitions of the Science 534

(b) Methodology 536

3. What Mill's Readers Actually Got 541

4. The Institutional Frame of the Economic Process 544

(a) The Institutions of Capitalist Society 544

(b) The State in ‘ Classic ’ Economics 548

5. The ‘Classic’ Schema of the Economic Process - 554

(a) The Actors 554

(b) The Agents 557

6. The ‘Classic’ Conception of Economic Development 570

1. J. S. Mill and his Principles . Fawcett and Cairnes

Mill’s Principles was not only the most successful treatise of the period under
survey but also qualifies well for the role of the period’s classic work in our
sense. Having decided to choose it as headquarters from which to survey the
general economics of that period, we had better begin by a preliminary glance
at the man and the book.

John Stuart Mill (1806-73) was — John Stuart Mill. That is to say, he was
one of the chief intellectual figures of the nineteenth century and is so fa-
miliar to every educated person that it might seem superfluous to add any-
thing to what can be read in dozens of books. Moreover, most of what econo-
mists need to know about him has been admirably said by Sir W. J. Ashley in
the introduction to his edition (1909) of the Principles , which I hope is in the
hands of every student. 1 A few points must be touched upon all the same.
Most of us have heard or read of the severe intellectual training to which
James Mill, the father, subjected his son from early childhood and which,

1 Attention is called particularly to the appendix of this edition, which puts, with
substantive success, many items of Millian doctrine into their relation to contemporane-
ous, earlier, and even later thought, and should be carefully studied. For the rest, com-
petent analyses of Mill’s economic work are rarer than are competent appraisals of his
work in philosophy and logic. But there is one that has been written by a master:
Edgeworth’s article — ‘Mill, John Stuart,’ in Palgrave’s Dictionary — on no account to
be omitted. Moreover, E. Cannan’s Theories of Production and Distribution (3rd ed.,
1917), the most important individual reference for this and the next chapter, discusses
Mill’s economics very fully.

527

528 III: FROM 1790 TO 1870

much more cruel and injurious than daily whippings would have been, ac-
counts for that impression of stunted growth and lack of vital strength that
comes to us from many passages in the imposing work of his life. Most of us,
I suppose, also know that it was first a salary and then — after 1858 — a pension
from the East India Company which financed his needs (fairly comfortably),
and that his duties, though not tm the average very arduous, meant further
injury to his thought: as has been pointed out already, not only interruption
but also mere anticipation of possible interruption paralyzes creative research.
Then, too, his unflagging interest in current issues caused additional interrup-
tion and loss of energy. This interest and the office combined account for the
incessant hurry that all his writings display, even the one that is the most fin-
ished of all in a literary sense, the essay On Liberty. Finally, being all intellect
and having been taught to despise any but intellectual interests — and of these
all that do not come within the pale of utilitarianism, though he outgrew this
part of his father’s teaching as he did others — he never knew what life really is.
He did create an intimate foyer for himself by his friendship and, later, mar-
riage with Mrs. Taylor. But he intellectualized that too, and anyone who has
an ear for the note of hysteria in the Preface to the essay On Liberty will need
no other indications — to be gleaned, for example, from his Autobiography — in
order to feel that he lacked many of the requisites, not indeed of the theorist
but of the philosopher of social life.

We behold the picture of the purebred laicist radical. But, unlike other
laicist radicals, this one never allowed indoctrination to stifle criticism. With
an honesty and internal freedom that cannot be too much admired, he took
the critical axe to the foundations of his laicist and utilitarian religion — for this
is what it was — and, still more important, he opened the doors of his mind to
any message he was able to comprehend. He tried to get on terms with the
ideas of Carlyle and Coleridge; 2 he studied Saint-Simonism and Comtism pro-
foundly; by his critique he proved how seriously he took the question raised by
the Hamiltonian philosophy; and, honestly wrestling with all this and much
besides, he actually allowed himself to be drawn away from his early moor-
ings. He was the opposite of a zealot. Not only the range of his interests but
also, in a sense, the range of his comprehension was quite abnormally wide.

2 In two articles contributed to the London and Westminster Review (1838 and
1840, reprinted in Dissertations and Discussions, vol. 1) J. S. Mill formulated his mature
opinion on the contribution of Coleridge and his group to sociology and, by impli-
cation, on their influence upon himself. Perusal of these articles must, I think, enhance
our respect for their, author. Mill goes a long way toward accepting their criticism of
eighteenth-century rationalism — and the ‘interest philosophy of the Bentham School’ —
and shows himself, quite open to their romanticist conception of history: in fact, I do
not think that the man who wrote these articles — and the passages on James Mill’s
theory of government in the Logic (see above, ch. 3, sec. 5c) — can properly be called
a utilitarian at all. But he understood technical economics too well to throw it over-
board on that account. To critics who did not understand it equally well, this looked
like hesitation and like endless shifting of standpoints. Actually, however, his views were,
in this respect, perfectly consistent and, in addition, far ahead of his time.

GENERAL ECONOMICS: A CROSS SECTION 529

But now I have to add a point that is extremely difficult to make and very
liable to be misunderstood. You can travel far and wide and yet wear blinkers
wherever you go. Mill's comprehension never went below certain layers — we
have noticed this already when discussing his Logic — and his intellect never
got over certain barriers. What wgs below these layers and beyond those bar-
riers he put down as nonsense by means of the well-known trick of our sub-
conscious apparatus of self-defense.

Of his three great works, the Logic (1843), the Examination of Sir William
Hamilton's Philosophy (1865), 3 and the Principles of Political Economy with
Some of their Applications to Social Philosophy (1848), only one is in our
field. The list of his other writings 4 strengthens an impression that interests
other than economics were dominant with him, since the list contains only
one item that deals with questions of technical economics: Essays on Some
Unsettled Questions of Political Economy, containing his freshest and most
original contributions to economics. And in fact, if we claim him for our own,
nevertheless, we must always remember in justice to the man that, after his
late twenties, he never was a full-time (or even 'full leisure-time’) economist
except in 1845-7, when he wrote the Principles. As regards the influences that
helped to shape his economics, those of his father and of Ricardo himself come
first, of course. But I have said already, and have emphasized by my refusal
to include J. S. Mill in Ricardo’s school, that the economics of the Principles
are no longer Ricardian. This is obscured by filial respect 5 and also, independ-
ently of this, by J. S. Mill’s own belief that he was only qualifying Ricardian
doctrine. But this belief was erroneous. His qualifications affect essentials of
theory and, still more, of course, of social outlook. Ricardianism meant no
doubt more to him than it did to Marshall. But Mill's and Marshall’s cases
are similar in that for reasons of their own, commendable or not, they stressed
Ricardian influences unduly at the expense of others. From Marshall’s Prin-
ciples, Ricardianism can be removed without being missed at all. From Mill’s
Principles, it could be dropped without being missed very greatly. The in-
fluence that J. S. Mill failed to stress adequately was Say’s. He did stress it in
one point only, the Law of Markets. But it is present in Mill’s theory of value

3 The Logic and Hamilton’s Philosophy have been discussed above in ch. 3.

4 Any work of reference will give this list. For us, the most important items, in addi-
tion to the three above, are: the Autobiography (1 873; two new editions by J. J. Coss,
1924, and H. Laski, 1924); Some Unsettled Questions (publ. 1844; written about 1829
and 1830); On Liberty (1859); Considerations on Representative Government (1861);
Utilitarianism (1863); and Auguste Comte and Positivism (1865).

5 This no doubt commendable attitude of the son also obscures the nature of the
influence of the father in other respects, e.g. in respect to associationist psychology.
This influence may indeed be called dominant if we mean by influence the total effect
of a man’s teaching upon another man. But it is not dominant at all if we count as
influence only effects that show in conformity of views. In many if not in most depart-
ments of thought, the son, though still reacting to his father’s opinions, arrived at dif-
ferent, often opposite, standpoints. On one point noticed above, it is an enemy of James
Mill’s teaching that speaks to us from the pages of the son.

530 III: FROM 1790 TO 1870

and cost — which is essentially a compromise between Ricardo's and Say's, with
all the emphasis put upon the Ricardian elements — that is to say, in the very
heart of his theoretical structure. The other influence to which Mill submitted,
semiconsciously and rather reluctantly, was that of Senior, who also receives
explicit recognition in one point only — abstinence. There are many others,
Malthus' and Rae’s, for example, which Mill accepted consciously and hence
recognized frankly — for he was scrupulously fair to others, always ready to
give credit to them, and quite indifferent to any claims of his own. This fair-
ness and this indifference are among the strongest and most lovable traits of
his character and the remarks above on the influence of Say and Senior must
not be interpreted to imply any aspersion or any doubt on this score.

Mill's declared purpose in writing the Principles and the perform-
ance actually embodied in it fit like hand and glove. The original preface
is worth reading. He might with little change have reprinted the preface
to the Logic. Once more, the program was to untie knots and build
bridges. There is no claim to novelty or originality — though several
would have been justified. Mill simply explained that there had been no
equally comprehensive treatise, especially none that paid so much at-
tention to practical applications, since the publication of the Wealth of
Nations. This, however, was obsolete, both as regards facts and as re-
gards theory. So he would aim at the 'sufficiently useful achievement’ of
writing 'a work similar in its object and general conception to that of
Adam Smith, but adapted to the more extended knowledge and improved
ideas of the present age’ which is 'the kind of contribution which Politi-
cal Economy at present requires’ — and exactly the kind of book he
wrote. For a man of Mill’s powers and standing, modesty could not
have gone further. Two comments should be added.

First, there is a side to this admirable modesty that may perhaps be
held responsible for a less admirable consequence. Had Mill conceived a
less modest idea of his task, he might have produced an even better
book. As it was, he took his task altogether too lightly: not Hercules
himself could write a Wealth of Nations in eighteen months, which
seems to have been the actual time invested. But, as we have had occasion
to remark with respect to the Logic , Mill, however modest on his own
behalf, was not at all modest on behalf of his time. 'This enlightened
age’ had solved all problems. And if you knew what its 'best thinkers’
thought, you were in a position to answer all questions. I do not mean
to repeat what I have previously said on Mill’s attitude of speaking from
the vantage ground of definitively established truth. But I mean to add
that this attitude, besides being ridiculous, made for sterility and — yes —
superficiality. There is too little attention to groundwork. There is too
little thinking-things-through and much too much confidence that most
of the necessary thinking had been done already. The Smith-Mill-Mar-
shall line is clear enough. But the middle term is not on a par with the
other two, owing to relative insufficiency of labor applied. What looks

GENERAL ECONOMICS: A CROSS SECTION 531

like so many tergiversations or what gives the impression, energetically
voiced by Marx, that Mill never says a thing without also saying its op-
posite is in part due to this cause. But to a greater part it is due to Mill's
judicial habit of mind that forced him to consider all aspects of each
question. Also, it is due to something that is still more creditable. He was
a man of strong preferences. But he also was incorruptibly honest. He
would not twist either facts or arguments if he could help it. When the
preferences — his social sympathies — did assert themselves all the same,
he was not slow to apply the pruning knife. Hence many an inconclusive
result, or even many a contradiction.

Second, Mill emphasized repeatedly, though not in his preface, that
his Principles differed from other treatises in something he ascribed to
his wife’s influence, namely, in moral tone or atmosphere. There is, in
fact, plenty of warm-hearted humanitarianism about the book and plenty
of solicitude for the welfare of the laboring class. More important, how-
ever,\is a cognate aspect: he restricted the domain of inexorable law to
the physical necessities to which production is subject and emphasized
for all the rest, all institutions in particular, that they are man-made,
changeable, malleable, and ‘progressive.’ There was for him no invariable
natural order of things social, and economic necessity meant to him
largely necessity in regard to a given state of the changing institutional
frame. However much he glorified his age in other respects, the actual
state of society he beheld he did not consider as either ideal or perma-
nent. Book iv, Chapter 7 of the Principles and many other passages,
even some of those that criticize the utopian socialism of his time, are
conclusive on this point and also as regards the direction that he ex-
pected social development to take. Though repeatedly changing his po-
sition in details, he was, from about his middle twenties on, an evolu-
tionary socialist of associationist complexion. For a history of analysis,
this fact is important only in as much as it refutes the absurd indict-
ment that ‘classic’ economists believed in the capitalist order as the
last and highest wisdom that was bound to persist in secula seculorum .

If it be replied that Mill was a solitary exception, the answer is that this
is not true, but that, even if it were true, this exception was responsible
for the most successful and most influential treatise of that age. For the
sociologist of capitalism, this fact is still more interesting: nothing can
be more revealing of the character of bourgeois civilization — more indica-
tive, that is, of its genuine freedom and also of its political weakness —
than that the book to which the bourgeoisie accorded such a reception
carried a socialist message and was written by a man palpably out of
sympathy with the scheme of values of the industrial bourgeoisie.

J. S. Mill was exactly what is meant by an evolutionary socialist. His
attitude toward socialism went through a steady development, the traces
of which are but imperfectly discernible in the successive editions of the
Principles. Moreover, the three articles on socialism which Miss Helen
Taylor published in the Fortnightly Review (1879) after Mill's death are

2 III: FROM 1790 TO 1870

perhaps more misleading than helpful: they were written in or about
1869 as exploratory sketches for a book on socialism which Mill then
intended to write, and contain little more than critical appraisals of the
French and English socialist literature prior to 1869 and of current so-
cialist slogans; the book presumably would have contained a positive
complement that might have reversed the impression the reader of these
sketches is likely to get. However, neglecting all minor points, we may
with some confidence describe Mill's attitude to socialism as follows.
Emotionally, socialism always appealed to him. He had little taste for the
society he lived in and plenty of sympathy with the laboring masses. As
soon as he had gained intellectual independence, he readily opened his
mind to the socialist — mainly French — ideas of his time. But, being a
trained economist and thoroughly practical-minded, he could hardly fail
to perceive the weaknesses of what a little later was labeled Utopian
Socialism by Marx. Reluctantly and with a partial exception in favor of
Saint-Simonism, he therefore arrived at the conclusion that those plans
were but beautiful dreams. This was the first stage. On the face of it, a
completely negative attitude to socialism — coupled with thoroughgoing
radicalism in some respects, for example, with respect to property in land
— might be considered compatible with what he wrote in the first edi-
tion of his Principles. But there is no reason to doubt his statement in
the preface to the third edition (1852) which was to the effect that he
never intended to 'condemn' socialism 'regarded as an ultimate result of
human progress/ and that his objections merely rested on 'the unpre-
pared state of mankind/ The alterations and emendations in the text
went, however, further than this suggests (see in particular the new sec-
ond paragraph of ch. 7 of Book iv) and really amount to explicit recog-
nition of socialism as the Ultimate Goal. This marks a second stage. And
there was a third: on the one hand, he came to believe that 'progress’
was accelerating wonderfully and that this 'ultimate end’ was coming
rapidly within view; on the other hand, he came to believe that capital-
ism was near to having done its work so that purely economic objections
were losing part of their force. At the same time he always stoutly denied
the presence of any tendency in the capitalist system to deteriorate the
condition of the working class or to reduce its relative or absolute share
in the social product; and not less stoutly he refused to entertain the
idea of transition by revolution, basing his argument against it mainly
on what seemed to him the insuperable difficulties of management that
would arise in this case. But such views define Evolutionary Socialism.
They do not substantially differ from those which the leader of German
Revisionism, E. Bernstein (see below. Part iv, ch. 5, sec. 8b), was to de-
fend thirty years later. Naturally, they were gall and wormwood not
only to Marxists but to all socialists who base their argument on the
thesis of inevitably increasing misery and' for whom the revolution is an
essential article of faith. And Mill’s teaching on the subject, precisely be-
cause it was so perfectly honest and because it expounded unpalatable

GENERAL ECONOMICS: A CROSS SECTION

533

truth in. evident sympathy with the Ultimate End, grew much more dis-
tasteful to them than would have been straight hostility. All this is very
important for understanding Mill’s 'Weltanschauung — particularly for
those of us who hold that a man’s class interest or philosophy will de-
termine his economic theory and his views on economic policy, and who
have been taught to look upon the Principles as a verbalization of bour-
geois ideology.

The success of J. S. Mill’s Principles was sweeping and much more general,
also much more evenly distributed over all countries in which economics re-
ceived attention, than was that of Ricardo’s. This was primarily due to a
happy combination of scientific level and accessibility: Mill did present anal-
ysis that satisfied competent judges, yet, barring very few points that proved
stumbling blocks, every economist could understand him. The book’s many
editions measure only its direct influence. To this must be added, so far as
teaching is concerned, the litter of other textbooks it produced. Both students
and general readers seem to have experienced a need for a still simpler pres-
entation, even in England. And this demand was provided for by Fawcett . 6
On a higher level, even people who accepted Mill’s claim of finality in sub-
stance could not fail to discover that many individual stones in his structure
were loose. The most eminent of the English economists of this period who
undertook to mend the structure — with debatable success — was Cairnes . 7 He

6 Henry Fawcett’s (1833-84) Manual of Political Economy (1863) ran through six
editions in his lifetime. The heroic energy of this eminent man, who lost his eyesight
at twenty-five and nevertheless taught, wrote, practiced sports, was an active and inde-
pendent Member of Parliament, and even a successful cabinet minister (Postmaster-
General), cannot be sufficiently admired: he rightfully commanded the highest respect
of his fellow economists. He was Marshall’s predecessor in the Cambridge chair. In a
history of economic analysis, however, he must rank below many far lesser men and no
attempt can be made to do justice to him.

7 John E. Caimes’s (1823-75) career — if career is indeed the word to be used — as a
research worker, writer, academic teacher, and, though behind the scenes, politician
was marred by ill health, the obvious reason why he failed to fill to the full the measure
of his great ability. Even so he attained front rank: everyone would have mentioned
him when asked, after Mill’s death in 1873 (Jevons not being as yet appreciated accord-
ing to merit), who was England’s first scientific economist. The work of his that is for
us the most important. Some Leading Principles of Political Economy Newly Expounded,
appeared in 1874. Nevertheless, we allocate its author (unlike Jevons, whose Theory
was published earlier, i.e. 1871) to the period under survey, because he expounded the
old analytic economics and explicitly distanced himself from the new, which had just
emerged into the light of day — showing, in doing so, that he entirely failed to appreciate
its significance and possibilities. We range him, therefore, with the 'classics’ (in quotes)
but not with the Ricardian school. He belongs in Mill’s group and there is the same
reason as in the case of Mill for not calling him Ricardian. Of course, we might have
deferred notice of him until the next period and made him, with Sidgwick, Nicholson,
and others, a member of the group of 'survivals/ The other work of his that matters
to us is his Character and Logical Method of Political Economy (1857), a landmark in
the history of methodology.

534 m : from 1790 to 1870

may be called Mill’s pupil, for he always reasoned with reference to the lat-
ter’s teaching — even where he did not mention the fact explicitly — and he en-
tertained toward Mill, as his correspondence shows, feelings that can be ren-
dered only by the term "reverence.’ 8 Nevertheless, he sometimes criticized
Mill sharply and, by virtue of this criticism, constructed something that,
though entirely within the Millian groundwork, was in some measure his own.
He was a born, but not a very original, theorist. Though most of his contribu-
tions have been sterile, his work, both analytical and methodological, marks an
important stage. In calling him a born theorist, we must not forget however — as
has been forgotten by some critics, particularly of the German historical school
— that the bulk of his working hours went into practical problems and that
it was his ‘factual’ contribution {in particular his Slave Power, 1862), which
accounts for his reputation with the English public of his time.

2. Scope and Method: What Economists Thought They Were Doing

The preceding chapter has given us some idea of what the economists of
that period actually did. We shall see presently how far their work reflected
itself in J. S. Mill’s Principles. But it is one of the characteristic features of
the period that economists began to interpret themselves, that is to say, to
theorize on (or to "rationalize’) their own aims and procedures. In research as
elsewhere we first act and then think. It is only when a field has grown into
an established science that its votaries will develop an interest, not untinged
with anxiety, in problems of scope and method and -in logical fundaments
generally. This is perfectly natural, although excessive activity of this type may
be a pathological symptom — there is such a thing as methodological hypo-
chondria. The emergence of that interest — almost, though not quite, absent
before — is indicative of the relative maturity that economics then gained. The
results that this interest produced are, in themselves, of no great importance
for us. We are all of us bad interpreters of ourselves and untrustworthy wit-
nesses to the meaning of our practice. But precisely because of this, we can-
not afford to neglect the period’s methodology entirely. For critics have taken
it literally, and hence it has become a source of misunderstandings concerning
the scope and meaning of "classic’ economics.

(a) Definitions of the Science. We know that economists had experienced
a need for defining their field even before A. Smith. During the period under
discussion, their sense of responsibility for a distinct field having grown much
stronger, practically all the writers of treatises tried their hands at defining it.
Here are a few samples. }. B. Say defined Political Economy, by way of sub-
title, as exposition de la maniere dont se forment, se distrihuent et se con -
somment les richesses. McCulloch defined Political Economy as the "science

8 A few of Mill’s letters to Cairnes have been published by Mr. Hugh S. R. Elliot
(ed. Letters of John Stuart Mill, 2 vols., 1910). The correspondence I mean, however,
has been published by G. O’Brien in "J. S. Mill and J. E. Cairnes,’ Economica, Novem-
ber 1943. It whets one’s appetite for more.

GENERAL ECONOMICS: A CROSS SECTION

of the laws which regulate the production, accumulation, distribution, and
consumption of those articles or products that are necessary, useful, or agree-
able to man and which at the same time possess exchangeable value' or the
‘Science of Values’ (sic!). According to Storch, Political Economy is the sci-
ence ‘of the natural laws which determine the prosperity of nations.’ Senior’s
Political Economy is ‘the Science which treats of the Nature, the Production,
and the Distribution of Wealth.’ J. S. Mill contented himself in the Principles
with ‘the nature of Wealth, and the laws of its production and distribution,
including: directly or remotely, the operation of all the causes by which the
condition of mankind ... is made prosperous or the reverse.’ Roscher said:
‘Our aim is simply to describe man’s economic nature and economic wants,
to investigate the laws and the character of the institutions which refer to the
satisfaction of these wants, and the greater or smaller measure of success they
have had.’ These examples will suffice to give an idea. If we realize that it is
hopeless and, moreover, pointless to try to frame a definition that will fit all
the activities of the economics profession, we shall not feel inclined to judge
harshly any of the obvious inadequacies of these and other definitions. Certain
features are worth noting, however.

All the definitions of the period emphasize the autonomy of economics as
against the other social or moral sciences — which is, of course, perfectly com-
patible with the recognition of close relations. Most of them emphasize its
analytic (scientific) character . 1 Both these facts, though they may not be to the
taste of every critic, should be registered as landmarks on the road of analytic
economics. A third fact must also be noted, however, because it gave rise to
one of the most important, as well as irritating, of those misunderstandings to
which I alluded above. The reader will observe that the definitions quoted are
none too specific as regards the facts and problems that are to come within
the scope of economics: J. S. Mill’s, for example, reads like a comprehensive
catchall, and even Senior’s, taken by itself, leaves the reader in doubt as to
what it is that Production and Distribution of Wealth imply, since the whole
of a society’s institutional pattern is obviously relevant to production and
distribution. Now, the ‘science’ to be defined was, of course, called Political
Economy . 2 Most continental writers used this term in a very wide sense. But

1 This seems to indicate a break with the past, if we go, e.g., by Sir James Steuart’s
definition or by the one A. Smith offered at the beginning of the Fourth Book of the
Wealth. But the break is more apparent than real. On the one hand, some authors,
Sismondi for instance, kept to the old practice of defining economics by a practical aim.
On the other hand, most of A. Smith’s work is genuinely analytic in nature in spite of
that definition; and the economists of the period continued to proffer value judgments
and to recommend policies in spite of their definitions. This will be discussed below in
subsec. c.

2 With the exception of Staatswirtschaft, which was used by some German writers,
the terms used on the Continent, even Nationalokonomie, were equivalents of Political
Economy. The term Economics came into use in the subsequent period and then only
in England and the United States. The German equivalent of this, Sozialokonomie or
Sozialokonomik, never caught on.

536 III: FROM 1790 TO 1870

most of the leading Englishmen, and especially James Mill and Senior, con-
fined it to what is perhaps more properly called economic theory, and it is to
this that their methodological pronouncements referred . 3 To critics, this looked
like a tremendous difference in attitude and outlook. They felt that the Eng-
lish ‘classics’ had no eye for anything but ‘wealth,’ that their political economy
was nothing but speculative ‘chrematistics’ (Sismondi) and so on. But we have
already seen that this was not so. Their practice proves that they did not mean
to restrict either their activities or their interests. What they did restrict was
the use of a word. Thus, Senior would indeed have excluded from his political
economy any factual analysis and any treatment of welfare problems. But what
did that matter if at the same time he welcomed both to what he called the
Great Science of Legislation? 4

(b) Methodology. From the standpoint thus gained we have no difficulty in
absolving, once more, the ‘classics’ of any major errors of procedure. Their pro-
cedures were crude and often clumsy. Many of their controversies arose from
nothing but an inability to see the opponent’s point and some were purely
verbal (as are many of ours ). 5 The ridiculous ‘method’ of trying to analyze a
phenomenon by hunting for the meaning of a word was rampant. But such
as they were, the procedures actually used were not open to any serious ob-
jection of principle. They were thoroughly sensible and exactly what the na-
ture of each type of problem would suggest to minds that were armed with
little more than simple common sense. The ‘classics’ theorized in order to
straighten out points that involved some logical complications; they assembled
facts whenever they thought it useful to do so. The same cannot, however, be
said about their methodological pronouncements, even apart from the fact
that these — at least the English ones 6 — referred to economic theory . alone.

3 Realizing the danger that lurked in this terminology, Archbishop Whately made
the unsuccessful suggestion: to replace the term Political Economy in this sense by the
term Catallactics— from %axaXkaxziy, to exchange. In this he showed his usual good
sense. But having failed to make his meaning clear, he himself was misunderstood and
thus really made matters worse. The reader will not have to tax his imagination very
heavily in order to visualize how this must have struck critics: What! — Political Econ-
omy, the science of the economic fate of humanity, entirely reduced to a miserable
theory of bargaining!

4 J. S. Mill adopted instead the term Social Philosophy.

5 One of the points at issue between Ricardo and Malthus was, e.g., whether the rent
of land owed its existence to the ‘bounty’ or to the ‘niggardliness’ of nature. Nothing
shows so clearly the primitivity of the analytic apparatus of the time as does the fact
that two able men could actually discuss whether the return to a factor is due to its
productivity or its scarcity!

6 The most important methodological treatises of the period are: Senior’s Four Intro-
ductory Lectures on Political Economy (1852); Cairnes’s Logical Method ; and J. S.
Mill’s fifth essay in Some Unsettled Questions (this essay was first published in the
Westminster Review, 1836) and the relevant passages in his Logic. Several critics have
held that Mill’s position in the latter differed from that he had taken in the essay.
This is a misunderstanding. The essay deals with the methodological aspects of ‘political

GENERAL ECONOMICS: A CROSS SECTION

537

But in most cases it is possible to put matters right by means of small correc-
tions. Thus, most economists, J. B. Say and J. S. Mill in particular, thought
altogether too much of the analogy with the physical sciences, which the latter
declared to be the 'proper models’ for economic theory ( Autobiography , p.
165) — a point for critics to fasten on but actually irrelevant, since no practical
use was made of it. 7 J. B. Say, while correctly emphasizing that economics is
an observational science, nevertheless called it ‘experimental.’ But this can be
easily corrected into ‘empirical.’ Furthermore, practically all economists used
the term Law or even Natural Law, the avoidance of which would have saved
them much obloquy from philosophy-minded critics. But this habit was quite
harmless, since what they really meant was nothing but Montesquieu’s ‘neces-
sary relations’ between economic phenomena or Marshall’s ‘statements of tend-
encies.’ In view of J. S. Mill’s insistence on ‘the very limited and temporary
value of the old political economy,’ there is no excuse for later critics who
harped on those words. In fact, all the really valid points in the latter’s meth-
odological credo could have been copied out from Mill. Again, Mill used the
term a priori in a misleading sense 8 and also placed unnecessary emphasis upon
‘deduction.’ This was perhaps responsible for the absurd argument of later
times about ‘induction vs. deduction,’ but, always remembering that he
thought of the theoretical apparatus of economics when speaking of methods
of political economy, we readily see that it never caused any errors in practice.?
Finally, as regards the method of ‘isolating’ economic phenomena or motives,
or of abstracting from noneconomic ones, not only the practice of the ‘classics’
but even their methodological rationalization of it was free from serious error.
It is difficult to believe that any critic who raises objections on this score can

economy’ in the sense of economic theory. The passages in the Logic deal With the
methodology of a much wider sector of the social sciences, mainly with what is called
economic sociology in this book. The epistemological situations of the two fields differ
substantially, and there is no contradiction between prescribing ‘deductive’ methods. for
the one and ‘inductive’ (or ‘inverse deductive’) methods for the other. The chief reason
for this is that economic theory, owing to its quantitative character, admits of systematic
elaboration to a much greater extent than does the analytic apparatus of any ether social
science.

7 We have already observed that the introduction of the terms Statics and Dynamics
does not involve any such use, i.e. any borrowing of a method from any physical science.
Nor do economists borrow from mechanics when they employ the term equilibrium any
more than does a bookkeeper who ‘balances’ an account.

8 This is all the more surprising, because in his Logic he even made geometry an
empirical science and because, though not an empiricist to 100 per cent, he certainly
was more of an empiricist than was Kant.

9 This, to repeat, is the real test. The literal meaning of a methodological profession
of faith is of little interest except for the philosopher. Alternatively, our test may be
formulated by saying that any objectionable piece of methodology is immaterial when-
ever it can be dropped without forcing us to drop any result of the analysis that is
associated with it.

538 III: FROM 1790 TO 1870

have studied J. S. Mill. 10 Of course, this statement must be understood to refer
to the principles of isolation and abstraction per se as the ‘classics’ applied
them for the purpose of carving out the domain of purely economic research.
Only, so far as this goes, I maintain that, in principle as well as in practice,
their procedure did not differ either from that of A. Smith 11 or from that of
later economists as formulated by the later methodologists, Carl Menger and
John Neville Keynes (see below. Part iv, ch. 4), and as accepted, around 1900,
by a large majority of non-German economists. But I do not maintain that in-
dividual ‘classic’ writers, when reasoning within that domain, always ‘isolated’
relevant factors and ‘abstracted’ from others faultlessly. This would be ab-
surd on the face of it, because it would imply that practically all their propo-
sitions were faultless: any criticism that does not charge either logical error or
misstatement of facts can be formulated as an objection to the manner in
which the criticized author ‘isolates’ or ‘abstracts.’

The distinction that I have just tried to convey will help us greatly in un-
derstanding the methodological situation of the period, that is to say, the na-
ture and extent of differences about ‘method’ that then existed among econo-
mists. At first sight, we have the impression that the scientific controversies of
the times turned largely upon method. Thus, the two most famous and most
prolonged controversies, the one on value and the one on general gluts, speed-
ily led to the familiar situation in which, no progress being made with more
concrete arguments, the parties fall back upon objections to one another’s
methods. In itself, this means little beyond admission of inability to convince

10 As a matter of fact, men like Roscher, who had mastered J. S. Mill, did not raise
any such objection. But then, as will be shown presently, he was really no critic of the
‘classics’ in the sense in which this implies a methodological creed, incompatible with
theirs. The majority of later German critics, however — those of the genuine historical
school — cannot have had much first-hand knowledge of Mill or of the ‘classics’ in
general, for it is hard to believe that if they had they could have misunderstood Millian
methodology as completely as they did: they argued rather against a wrong picture of
it that had become fixed by the time they wrote. And, considering their absorption in
a research program of their own, this is after all not so difficult to understand. But what
about Ingram (see below, Part iv, ch: 4)? How was it possible for him to preach the
gospel of a ‘new economics’ that took its methodology from Comte? The only answer
I am able to offer — and which must suggest itself to any professional who makes a
study of Ingram’s History of Political Economy — is that both his knowledge of eco-
nomics and his interest in it did not go beyond general ‘philosophies’ that were inspired
by generous enthusiasm for the great slogans of his day but never came to grips with
real problems. His other objections to ‘classic’ economics point to this conclusion still
more clearly than does his Comtist objection to an autonomous economics.

11 This is so important as to justify repetition: A. Smith’s work looks less ‘abstract’
because it includes so much factual information that the specialized later works on
economic theory did not include — but left for other specialized works to provide. But
where he does move within the orbit of economic theory, his reasoning is not less
abstract than is, say, Ricardo’s. With the latter, ‘abstractness’ shows more because he
confines himself to topics of an ‘abstract’ nature, and does not provide illustrative
foliage, but this is all.

GENERAL ECONOMICS: A CROSS SECTION

539

the other man, coupled with a declaration of being unconvinced by him — or,
in a word, deadlock. For instance, when in the controversy on gluts, Malthus
(and Sismondi) objected to Ricardo’s procedure as too abstract and Ricardo
himself emphasized the abstract nature of the argument, 12 they simply verbal-
ized a sigh of despair. It would be quite wrong to infer that Malthus and
Sismondi really objected to Ricardo’s ‘method’ in the sense in which this
word came to be used in the later Battle of Methods (see Part iv, ch. 4). That
this was not the case can be established by analysis of their own modes of
reasoning: these were ‘theoretical’ in the same sense as was Ricardo’s — just as
Lord Keynes’s theory is theory in the same (logical) sense as is Marshall’s. In
other words, Malthus and Sismondi theorized in a different way and partly
with an eye to different sets of facts, but their practice proves that they had no
objection to theorizing per se, such as had, for a time, the later Schmoller
school or the American institutionalists.

But was not this objection (against theory per se) raised by other people?
It was, but only in isolated instances that had no significant influence Upon
the work of a large majority of economists. 13 One such root-and-branch ob-
jector was Comte. But as we have seen, he exerted no perceptible influence
within the period and on economists: J. S. Mill, so far as technical economics
is concerned, yielded not an inch. Another was Le Play. He initiated an im-
portant program of research but, for the rest, he was hardly known among the
economists of the period. I doubt whether R. Jones and B. Hildebrand can
be called root-and-branch objectors. But even if they can, they were no more
than forerunners. Cliffe Leslie did not declare for a distinctive historical
method in economics until 1876. Ingram did not raise the flag of his New
Economics until 1878. Knies, 14 it cannot be too often repeated, was primarily
an economic theorist and, for the rest, an able general economist without any

12 For, though 'abstractness’ is usually urged against an argument, it may also serve
in its defense. Marxists, in particular, frequently — and in some cases with justice— save
a perilous situation by yielding the doctrine (in controversy) on one level of abstraction
with the reservation that the same doctrine is quite right on a higher level of abstrac-
tion.

13 1 am not speaking now of extra-scientific objectors such as Carlyle. Nor am I
speaking of those objections that arise from the general public’s dislike of anything
that looks like a complicated argument, nor, finally, of those objections that simply
express everyone’s natural preference for his own chosen type of work.

14 As already stated, Knies’s chief work and also the better part of his activity as a
teacher belong to the next period. But the only one of his writings that connects him
with the historical school appeared during the period under survey: Die politische Oko-
nomie vom Standpunkte der geschichtlichen Methode (1853; greatly enlarged, 1883).
This book presents an interesting problem. It expresses not only a sense of the general
flux of social institutions and of the impossibility of framing universally valid 'policies’ —
and other things that the author could have just as well taken from J. S. Mill — but
actually outlines essential parts of the Schmoller program. But the modes of procedure
actually employed in all his subsequent publications are so many disavowals of these
principles. As a teacher, too, Knies was very far from inculcating economic historicism.

54 ° m: FROM 1790 TO 1870

distinctive bent as to method. As for Roscher, who described Ricardo and
Malthus as 'political economists and discoverers of the first rank’ and who
went out of his way to express agreement with J. S. Mill’s methodology, 15 a
comparison of his Grundlagen with J. S. Mill’s Principles fails to reveal any
fundamental difference in procedure — he even speaks of natural laws. It is true,
nevertheless, that he laid claim to having used a historical or 'physiological’
method. But, as is evident from Chapter 3 of the Introduction to that work,
all he meant by this was to dissociate himself from what he called the 'ideal-
istic' method that prescribes norms for an ideal state of society, whereas he
wished to describe things as they are 'after the manner of the investigator of
nature’ 16 (op. cit. vol. 1, p. 111). We therefore emerge with the result that,
barring isolated rumbles, the Battle of Methods had not been engaged as yet
and that — taking the word method in the sense that is relevant here — meth-
odological peace substantially prevailed. This was also Cairnes’s opinion.

(c) The Science and the Art. Most of the writers of standing who paid seri-
ous attention to the fundamental questions of methodology clearly saw, and
strongly emphasized, the distinction between arguments about what is and
arguments about what ought to be: the distinction between the 'science’ of
economics and the ‘art’ of policy. 17 But it would be a great mistake to read
into their statements the meaning which this distinction acquired later, when
the question of ‘value judgments’ was raised. Senior, who was more explicit
on the point than was anyone else, said indeed that the economist’s conclu-
sions ‘do not authorize him in adding a single syllable of advice.’ But by this
he did not mean that the economist as a scientific worker is debarred from
presenting practical advice because such advice presupposes ultimate valua-
tions that are extra-scientific by nature — preferences that are beyond the range
of scientific proof. This is the point of view that was taken by Cairnes (who
did not, however, adhere to it in practice) and later on, more explicitly, by
Sidgwick and by M. Weber. Senior and Mill and their contemporaries did
not mean this at all. They merely meant that questions of economic policy
always involve so many noneconomic elements that they should not be dealt
with on the basis of purely economic considerations — which, by the way, in it-
self suffices to show how little there is in the common indictment that the

16 W. Roscher, Grundlagen (English trans., Principles of Political Economy, 1878,
vol. 1, p. io6n.).

16 This does not apply, without qualification, to L. Wolowski’s ‘Preliminary Essay’
that Roscher’s translator, J. J. Lalor, prefixed to the English translation (1878). In 1878
things looked different and, by a not unnatural confusion, Lalor spoke of Roscher as
the ‘founder’ of what was then the Historical School. This gives a completely wrong
picture.

17 Confusions between the two and even denials of the validity of the distinction were
of course frequent; but not more so than they have been at any later time, including
the present. In the large majority of cases the distinction was firmly kept in view. For
France, Charles Coquelin’s article on political economy in the Dictionnaire de l’ eco-
nomic politique is typical in this as it is in other respects. Roscher’s emphasis upon the
distinction between what is and what ought to be deserves particular notice.

GENERAL ECONOMICS: A CROSS SECTION 54 1

English 'classics' never saw anything but the economic aspects or, still worse,
the wealth or even the profit aspects of things. But none of them really ques-
tioned the validity of value judgments that were based on ‘philosophical’
grounds and took proper account of the noneconomic as well as the economic
elements of a given case — the value judgments of ‘the writer or statesman
who has considered all the causes which may promote or impede the general
welfare' as distinguished from ‘the theorist who has considered only one,
though among the most important of those causes’ (Senior, Outline of Political
Economy, p. 3). Tliis, as we have seen, was also J. S. Mill’s opinion and in
fact practically everyone’s. There is, of course, sound sense in it: one could
only wish that the economists of that (or any) period had never forgotten
this piece .of wisdom — had never been guilty of the Ricardian Vice. 18 How-
ever, it still remains true that the real problem of value judgments never oc-
curred to them. To the end of the period, economists considered their recom-
mendations concerning policy as scientific results which followed from scien-
tific, though not purely economic, analysis. In this sense they were after all,
as later critics sneeringly remarked, purveyors of recipes. Fortunately they also
were more than that.

3 . What Mill’s Readers Actually Got

Mill's readers got, in the first place, factual information to the extent of
about one-sixth of the book. On the face of it, this is a smaller proportion of
space than either A. Smith or Roscher allotted to the presentation of facts,
and what there is of this factual presentation is extremely ill-balanced, facts
about ‘peasant proprietors,’ for example, taking a share more commensurate
with Mill’s own interest in the subject than with its probable interest for his
readers. But this may be a wrong view to take. As Mill’s preface emphasized,
his treatise abounds in practical ‘applications.’ And these have reference to
factual material that Mill often failed to present, perhaps because he assumed
that his readers could easily supply the deficiency from universally accessible
sources — such as the work of Babbage. 1 If we count as ‘factual’ all discussions

18 See above, ch. 4, sec. 2.

1 Charles Babbage, On the Economy of Machinery and Manufactures (1832). This
work, which was widely used (also by Marx), is a remarkable performance of a remark-
able man. Babbage (1792-1871), who was one of Newton’s successors in the Lucasian
chair of mathematics (Cambridge), one of the founders of the British Association for
the Advancement of Science (1831) and of the Statistical Society, and a versatile writer
on many subjects, was also an economist of note. His chief merit was that he com-
bined a command of simple but sound economic theory with a thorough first-hand
knowledge of industrial technology and of the business processes relevant thereto. This
almost unique combination of acquirements enabled him to provide not only a large
quantity of well-known facts but also, unlike other writers who did the same thing,
interpretations. He excelled, among other things, in conceptualization: his definitions
of a machine and his conception of invention are deservedly famous. It is interesting
to note that in some points he recognized the priority of Gioja, whose name should in

542 III: FROM 1790 TO 1*870

in the book that in this sense presuppose factual information, although the in-
formation is not actually presented, then, if I have estimated with anything
like accuracy, the ‘factual’ portion of the book increases to a little more than
two-thirds of the whole, a little less than one-third being left for exposition
of the analytic apparatus. In the second place, his readers got a farly thor-
ough — but none too thorough — grounding in ‘theory.’ However, as has been
pointed out already, no contact whatever is made with' any statistical method.

From another standpoint, we can illustrate Mill’s range of topics by means
of the following list of headings that, as the reader can easily satisfy himself,
could be lengthened both by including further minor items and by dividing
up some of the major ones: prices, price fixing, competition, custom, mo-
nopoly; wages and employment, wage policy, trade unions, poor, laws, and
other items of the Sozialpolitik of that age; socialism, with special attention
to Saint-Simonism and Fourierism; producers’ and consumers’ co-operatives;
future of the working class; education; population; enterprise and forms of
enterprise, capital, profit, interest; saving and investment; technological ad-
vance; money and banking, central banking, foreign exchanges, government
paper money; crises; foreign trade; colonies; private property, inheritance;
partnerships, companies, bankruptcy legislation; rent, ownership of land, primo-
geniture, peasant proprietorship, metayage, cotter tenancy, slavery; ‘progress,’
‘maturity’ (stationary state); government policy and government control;
grounds for and limits of laissez-faire; public finance, especially taxation and
public debts. I do not think that this list is conspicuous for either narrowness
of range or remoteness from the practical issues of the day. It should be ob-
served particularly that all that interested later generations could have been
hung on hooks presented by Mill without upsetting his system. For instance,
later institutionalists could have inserted into Mill’s niches all the additional
material of a specifically institutional nature that they might have wished to
insert, -without thereby destroying the general character of the treatise: there
was room for everything within its spacious folds; and everything could have
come to it as a development of existing points, nothing need have come to
it as a revolution.

J. S. Mill arranged his material in five books: ‘Production,’ ‘Distribution,’
‘Exchange,’ ‘Influence of the Progress of Society on Production and Distribu-
tion,’ and ‘On the Influence of Government.’ The last also contains things
other than public finance but nevertheless mainly corresponds to A. Smith’s
Fifth Book. In Book iv, the shortest. Mill concentrated what he- had to say
on the subject of economic evolution — a happy innovation in exposition. The
titles of the first three books suggest the influence of Say’s arrangement or,
rather, a not very felicitous attempt to improve upon it. The central theory of
value, which should come first on logical grounds (and does come first with
Ricardo and Marx), is presented in Book m as if it had to do only with the

fact be coupled with his. By way of contrast to his sound well-balanced treatment,
I mention A. Ure’s ( Philosophy of Manufacture, 1835), who also presented interesting
facts, but was not Babbage’s equal as an analyst.

GENERAL ECONOMICS: A CROSS SECTION 543

‘circulation’ of goods and as if production and distribution could be under-
stood without it. This is worth mentioning because it points to a fundamental
weakness of thd ‘classic’ construction. I do not accuse the ‘classics’ of having
failed to sense the pivotal importance of the analysis of value (choice) which
is, if I may say so, the specifically economic element about the economic
process. But there is some truth in Professor Knight’s indictment that the
‘classics’ had ‘no clear or definite conception of the meaning of economy as
a process of maximizing a value return’ and that ‘the problem of distribution
. . . was not approached as a problem of valuation at all.’ 2 To this extent,
we must qualify our recognition of Ricardo’s chief merit. He and all the
‘classics,’ including Mill, did indeed make progress toward the acquisition of
an analytic apparatus that would unify all purely economic problems; but,
partly owing to the shortcomings of their groundwork, they never realized its
possibilities to the full. They still divorced production from distribution — J. S.
Mill even took credit for doing so — as if they were governed by different
‘laws.’ The first to point this out was Ferrara . 3 But Say’s and Mill’s combined
authorities kept this plan of exposition alive for many decades to come. It is
not worth our while to discuss its variants. Roscher, for example, has: Produc-
tion, Circulation, Distribution, Consumption, Population — including Credit
with Production.

The five books are preceded by ‘Preliminary Remarks,’ which, among less
interesting things, contain a short sketch of what we should call the evolution
of economic society — a universal economic history in a nutshell. This, of course,
is not in itself surprising in a work that aimed at doing again what A. Smith
had done. But much beyond what tradition leads' us to expect from Mill is
his handling of the factors to which he attributes causal roles in the shaping of
the fortunes of a society or country. Environment, race ( racially differentiated
quality of human material), class structure, habits or propensities, combine to
make a colorful and, what is more, a very realistic picture. There are no intel-
lectualist and in particular no utilitarian errors about it: ‘knowledge’ is con-
sidered as a consequence as well as a cause ‘of the state of the production and
distribution of wealth,’ and objective conditions receive more emphasis than
ideas or principles. Such prefatory sketches of economic history — though of
course not always of this quality — became more and more popular as the cen-
tury wore on: Marshall’s is the peak performance of this type.

2 F. H. Knight, ‘Ricardian Theory . . .’ op. tit. p. 6. The second part of that state-
ment goes perhaps too far. But Professor Knight supports it by a highly significant
passage from a letter of Ricardo to McCulloch, where the former avers in so many
words that the relative distributive shares ‘are not essentially connected with the doc-
trine of value.’ Though this cannot be taken literally — for it could be refuted from
Ricardo’s own argument — it does show that the full implications of the fact that
capitalist distribution is a value phenomenon were not clearly seen even by Ricardo.
They were seen by Marx.

3 In his Prefazione to Say.

544

III: FROM 1790 TO 1870

4. The Institutional Frame of the Economic Process

(a) The Institutions of Capitalist Society. Economic sociology covers, first,
the facts of economic behavior from which economists forge certain assump-
tions and, second, the institutions that characterize the economic organization
of the societies to be studied. ‘Classic’ practice as regards the former will be
more conveniently discussed in the next chapter. As regards the latter we must
distinguish three questions. Many writers, primarily the English theorists — such
as Ricardo, James Mill, and Senior — did not bother to specify the details of
the institutional frame they visualized, but took them for granted. Is it true,
as has been averred so often, that they believed in the permanence of the
capitalist order of things or even that laissez-faire capitalism is the only pos-
sible form of civilized society? What were the institutions they took for
granted? When they did discuss them, what methods did they use?

The first question must, I think, be answered in the negative. It is true that
Ricardo, for example, by virtue of the very fact that he failed to specify his
institutional assumptions, creates an impression to the effect that the prob-
lems of social change were beyond his range of vision. But this does not follow.
All that follows from his practice is that they were beyond his chosen field of
inquiry. There is no reason to believe that, had he offered a description of
the institutional frame, this description would have differed significantly (though
his value judgments might have) from that of J. S. Mill, who, aiming as he did
at systematic completeness, was more explicit. But as we know already (see sec.
1, above) there cannot be any doubt whatever about the latter’s awareness of the
historical relativity of social institutions and also of some at least of his ‘eco-
nomic laws.’ To this extent, the current belief that this awareness was confined
to isolated forerunners of later historicism, such as R. Jones and Sismondi, is.
certainly erroneous. It would be nearer to the truth to say that explicit belief
in the permanence or in the unsurpassable excellencies, for all times, of capi-
talism occurred only in isolated instances.

The reader should observe, however, that this does not amount to crediting
the ‘classic’ theorists with the idea that the capitalist order is only a historical
phase and bound to develop, by virtue of its own inherent logic, into some-
thing else. This idea belongs to Marx alone. Even J. S. Mill held only that
men could, should, and would change capitalist institutions through a rational
perception of what he considered to be their defects. He did not hold that in-
stitutions would change of themselves or even that they would have to be
changed because they would become objectively untenable. He saw that ‘opin-
ions . . . are not a matter of chance ’ 1 but the product of social conditions,
and we might feel tempted to develop this in the Marxist direction. But this,
would hardly be justified: we must, I think, leave him in the citadel of eight-
eenth-century faith in intellectual progress, from which he occasionally sallied
forth, no doubt, but to which he always returned. Practically, this matters but
little. Scientifically, it makes a great deal of difference.

1 Last but one paragraph of Book ix, ch. 1, J 1.

GENERAL ECONOMICS: A CROSS SECTION

545

The second question is an easy one. Economists, wishing to serve their time
and countries, took for granted — and reasoned in terms of — the institutions of
their time and countries. Since conditions differed as between different coun-
tries, this accounts for certain differences in outlook that, at the time and
later, were erroneously construed as differences of analytic principle. The traits
of the picture that were selected by the English ‘classics’ stand out very clearly.
They envisaged the legal institutions (if we disregard the historical survivals
that suggest another type of society) of a private-property economy that left
so much room for free contracting as almost to justify the practice of econo-
mists to leave limitations out of consideration. This only means, of course,
that no account was taken of limitations explicitly and consciously. As a matter
of fact, English economists always reasoned with reference to the actual extent
of the sphere that English law and administrative practice left for private deci-
sion and to the actual use that was being made of this freedom within that
sphere — subject to the prevailing moral habits. Failure to be specific about
all this exposed the English ‘classics’ to much mistaken criticism concerning
their apparent neglect of ethical aspects.

The unit of that private-property economy was the firm of medium size.
Its typical legal form was the private partnership. Barring the ‘sleeping’ part-
ner, it was typically managed by the owner or owners, a fact that it is impor-
tant to keep in mind in any effort to understand ‘classic’ economics. The facts
and problems of large-scale production and, in connection with them, those of
joint stock companies were recognized by economists after everybody else, had
recognized them. They received textbook status at the hands of J. S. Mill,
who duly blamed A. Smith for his narrow views on corporate business — for-
getting only the detail that there was little merit in realizing its importance
in 1848 and that actually he was doing no more than what A. Smith had
done, namely, describing with sober and somewhat platitudinous common
sense that which stood before his eyes. Two further points deserve notice.

In the normal case, these firms were supposed to work under what the
‘classics’ called Free Competition. With them, this competition was an insti-
tutional assumption rather than the result of certain market conditions. And
so firmly were they convinced that the competitive case was the obvious thing,
familiar to all, that they did not bother to analyze its logical content. In fact,
the concept was usually not even defined. 2 It just meant the absence of mo-

2 It is interesting to note that J. S. Mill in Book n, ch. 4, of his Principles, which
deals with 'Competition and Custom,’ while expressing a conviction to the effect ‘that
only through the principle of competition has political economy any pretension to the
character of a science’ — which presumably means that there is more of determinateness
about prices and quantities of commodities in the case of competition than there is in
other cases — he does not think it necessary to state what competition is. The only
author to handle perfect or pure competition correctly was Cournot, who also indi-
cated, though he did not formulate in so many words, a correct definition (see below.
Part iv, ch. 7, sec. 4).

546 III: FROM 1790 TO 1870

nopoly— which was considered as abnormal and was vigorously condemned, 3
but was not properly defined either — and of public price fixing. J. S. Mill took
credit, not without justification, for two important steps. First, he emphasized
the importance of customary prices, mainly for earlier civilizations and for the
Continent, but in certain cases, such as rent and professional fees, also for
England. And, second, he emphasized the fact, though custom was the only
reason he gave for its existence, that competition often 'falls short of the
maximum' and that in this case a general correction must be applied, ‘whether
expressly mentioned or not/ to all conclusions arrived at on the hypothesis
of perfect competition (Book n, ch. 4, { 3). Into such a picture co-operative
price setting could enter only, if at all, as another deviation from normal prac-
tice like straight monopoly and as a conspiracy against public welfare exactly
as it does now. There was, however, an exception to this: in J. S. Mill’s scheme
of things, trade unions were a normal element of the institutional pattern and
laws against them 'exhibit the infernal spirit of the slave master’ (Book v,
ch. 10, § 5).

The other point to remember is this. Many English economists were se-
verely critical of the English land system. 4 But when not engaged in criticizing
it or in discussing alternatives, they also took it for granted in the sense that
they reasoned with reference to it and to the English type of landlords who
owned but did not operate large estates. In this particular case, however, rea-
soning in terms of existing institutions carried an advantage that may be made
to stand out by contrast with the reasoning in terms of the owner-managed
firm: landlords and farmers being different persons, it was easy for the theorist
to keep their economic 'functions’ distinct; owners of firms — ‘capitalists’ — be-
ing then mostly the same people who also operated these firms, it proved less
easy for the theorist to recognize this distinction of ‘functions.’ This teaches us
an interesting lesson: it may happen, though we have no right to see in this
occurrence more than a stroke of luck, that a particular historical pattern,
which taken as a whole has nothing permanent about it, reveals facts and rela-
tions that are of general analytic importance. Usually, of course, it is the other
way round, and we must always look out, on the one hand, for limitations
that their particular institutional assumptions may impose upon the results of
the ‘classics’ and, on the other hand, for possible justifications of these same
results that may be found occasionally in the peculiarities of the social pattern
they envisaged.

3 For Roscher’s unconditional eulogy of competition and his uncritical condemnation
of monopoly, see op. cit., Book n, ch. 1 , J 97-

4 So much so as to he unable to see at all its strong points. I am not referring now
to the political society and the cultural values it produced: a bourgeois radical cannot
in fairness be expected to see these. But many economists also had no eye for the
advantages of a system that separated the administTation of land from the operation
of it and thus e g. eliminated the most serious of the problems of agricultural credit.
Rational socialism could do worse than copy the system, replacing, of course, the land-’
lords by a public agency.

GENERAL ECONOMICS: A CROSS SECTION 547

Our third question — concerning the method used by the ‘classics’ in discuss-
ing social institutions — will be addressed, for brevity’s sake, to J. S. Mill alone.®
As an example, consider his views on inheritance . 6 The discussion culminates
in the recommendations (a) that freedom of bequest be the general rule, ex-
cept for a modest compulsory provision for descendants and for a provision to
the effect that no person should ‘be permitted to acquire by inheritance more
than the amount of a moderate independence’; and (b) that ‘in the case of
intestacy, the whole property escheat to the State,’ also with a proviso in favor
of ‘just and reasonable’ provision for descendants. In themselves these recom-
mendations and also the particular ideas of ‘justice’ that enter into them are
only interesting from standpoints other than ours: to the historian of civiliza-
tion they reveal part of the schema of cultural values that was harbored by a
leading intellectual who belonged to the middle class and lived in the mid-
Victorian era . 7 But there is, besides much pure ideology, also something be-
hind those recommendations that is analytic in nature and admits of the appli-
cation of a scientific method. Only, this scientific method is not the one We
might expect. Mill’s problem is not to explain, historically and sociologically,
the origin and the various forms of the institution of inheritance. This, as he
said in so many words in the case of the institution of property (J 2 of Book ii,
eh. 1), is no concern of ‘social philosophy.’ What does concern the latter is
the problem of social expediency, though not the expediency of any institution
as it actually is, but as a community that is unhampered by any tradition or
‘prejudice’ might introduce it — under advice, I suppose, of the social philoso-
pher. This is perhaps not the most scientific way of putting the matter but it

5 This carries the disadvantage that our answer will be lopsided. Let me therefore
state explicitly that more history-minded economists and, a fortiori, contemporaneous
students who specialized in the history of institutions are not as a rule oblivious to the
indictment I am going to level at Mill. His case is, however, important for general
economics because he set a textbook fashion that prevailed far beyond the period under
survey. The discussion of property and inheritance, e.g., that we find in the deservedly
successful textbook of von Philippovich is exactly on Millian lines as far as its method-
ology is concerned.

6 Principles, Book 11, ch. 2 and Book v, ch. 9. This treatment of the same subject in
two different parts of the treatise, which is highly inconvenient for the reader and a
bar to any well-rounded exposition, is one of the many symptoms of the haste with
which the work was produced.

7 From Mill’s essay on Utilitarianism it is clear that he was not blind to the doubtful
standing of the concept of ‘justice.' Yet he was no more able to do without it than
were (or are) other economists. Even Ricardo occasionally finds some things ‘just' and
others ‘unjust.’ In Mill's case we cannot help discovering — perhaps with a wry smile — a
marked association between what he thought right and proper and the modest privi-
leges that he enjoyed himself. Socrates — an intellectual — should really have a moder-
ately larger allowance than should a fool, he argued (as had his father), and if anything
is certain, it is that J. S. Mill did not identify himself with the latter. The emphasis
above upon ‘moderate independence’ points in the same direction. For only to the
middle-class bourgeois is the desirability of anyone’s ‘moderate independence' as evident
as it was to him.

548 III: FROM 1790 TO 1870

indicates Mill’s method of analyzing social institutions clearly enough: ex-
pediency of an institution turns upon its effect on, or role in, the economic
organism — in practice upon the effects to be expected from given changes of a
given pattern — and these effects Mill then proceeded to analyze. In doing so
this fighter against prejudice proves himself indeed the most defenseless victim
of prejudice against anything that is very far removed from his own mode
of life or thought — displaying in this a deplorable narrowness of outlook 8 —
but in themselves both the task and the method are scientific (analytic) in
nature.

(b) The State in ‘ Classic ' Economics. In Chapter 2 of this Part we learned
a number of facts about the 'politics’ of the period’s economists and about the
meaning and limitations of what has been called the System of Natural Lib-
erty. In Chapter 3, we made the acquaintance of several types of political so-
ciology, among them the Marxist Theory of the State. In Chapter 4, we had
the opportunity to notice, here and there, the positions taken by individual
economists with respect to the role of the state in economic affairs. In this
section, we shall disregard all this, and all philosophies, ideologies, and politi-
cal preferences — which were in part simply the philosophies, ideologies, and
preferences of the business class that, standing on its own feet economically,
did not want anything from the state except legal protection and low taxes —
including the political recommendations associated with them. Instead we
shall concentrate on one question only: how did all this affect economic anal-
ysis? Or, since all this enters or influences economic analysis by way of the
assumptions economists make about the nature of the state (governments,
parliaments, bureaucracies) and its normal functions and efficiency: how far
were the assumptions made by economists realistic, considering the historical
conditions to which their analytic propositions were to apply? v

My answer is that these assumptions reproduced tolerably well the actuali-
ties of the time in those economists’ countries. Practically all economists
believed — no matter what they desired — that, as J. S. Mill put it, laissez-faire
was the general rule for the administration of a nation’s economic affairs and
that what was significantly called state 'interference’ was the exception. And,
though for different reasons in different countries, this was so in actual prac-
tice not only as a matter of fact but also as a matter of practical necessity:
no responsible administrator could have held then, and no responsible his-
torian should hold now, that, social and economic conditions and the organs
of public administration being what they were, any ambitious ventures in regu-
lation and control could have issued in anything but failure. For the rest, wide
differences existed between the economists of different countries with regard
to what public administration could and ‘should’ do. But, as has been pointed
out in Chapter 2, they are largely accounted for by differences, not in eco-
nomic principles, but in the actual conditions of different countries. 9 And

8 If the reader refer to Mill’s text, he will presumably not agree with me. But this is
only because he shares Mill’s prejudices. However, our own prejudices are still prejudices.

9 Of course this was not all of it, and one of the reasons why it was not is that differ-
ent historical developments had, in different countries, induced different political doc-

GENERAL ECONOMICS: A CROSS SECTION

practically all of them — so far as professional economists are concerned —
come within the range covered by the phrase, ‘differences of opinion as to the
extent of the exceptions — necessary or only desirable, approved or disapproved
— to the laissez-faire rule/

The special case of England will illustrate this . 10 There, no revolution had
occurred to sweep away the top-heavy structure of eighteenth-century bureauc-
racy, which was inefficient, wasteful, littered with sinecures, associated with
unpopular mercantilist policy and even with political corruption. Before a new
and more efficient structure could be erected, the old one had in any case — I
mean, irrespective of what, if anything, one wished to put in its place — to be
pulled down bit by bit in order to clear the ground. And until this had been
done, the existing machinery of public administration was simply hot up to
any of those complicated tasks that modern regulation or Sozialpolitik in-
volves. It is to the credit of J. S. Mill’s judgment that he was aware of this.
He was not on principle averse to a large amount of government activity. He
had no illusions about any philosophically determined ‘necessary minimum’ of
state functions. But he realized the superiority, which was in the circumstances
simply not open to doubt, of the businessman’s administration of the pro-
ductive resources over what could possibly have been expected from the public
official of his day. He realized more than that. No careful reader of his treatise
can fail to notice the number of times he, after arriving at the result that some-
thing or other (for example, restriction of the income tax to consumers’ ex-
penditure) is ‘desirable,’ refuses to turn this value judgment into a recommen-
dation because of insuperable administrative difficulties: they actually were in-
superable then. It is true that the other English ‘classics’ — not to mention the
anti -etatiste monomaniacs, whom that social situation produced, especially in
France — not only failed to see that those conditions were essentially transi-
tional but also advocated, as a matter of course, that the red tape that was
being eliminated should never be replaced by anything: that government and
bureaucracy should ‘naturally’ be confined to a certain minimum of functions.
But even this, representing as it did a real tendency, does not so far as it was
an assumption about part of the institutional frame of the economic process
impair the value of their economic analysis.

But we can go a step further. From our argument it might seem to follow
that, if ‘classic’ analysis, in the respect under discussion, was valid because its
assumptions about the role of the state were realistic though time-bound, it
must be invalid for any other period because those assumptions were time-
bound though realistic. This is in fact true for a large number of propositions

trines about state and bureaucracy that led economists to ‘absolutize’ tlieir nationally
conditioned opinions, i.e. to exalt them into eternal truths. The situation was compli-
cated by migration of ideas, such as the migration of ‘Smithianism’ to Germany, where
it conquered not only many economists but also most leading bureaucrats. We cannot
stay to analyze the consequences.

10 It will be seen that what I am going to say applies to no other country. But it is
not possible, in the available space, to do more than indicate the point of view from
which such problems should be seen.

550 III: FROM 1790 TO 1870

in applied economics— still more so for recommendations. But it is not so for
the 'classic’ analysis itself. We always need to understand whatever it is we
wish to regulate or control. This means that, however comprehensive the eco-
nomic tasks of government may be at any time, we always need theory of the
'classic’ type as long as it is a question of regulation and control only — in so-
cialism we need of course a different type of theory. We do not go to 'classic’
economics for information about, say, the factors that account for unemploy-
ment because of its analytic defects. But the fact that its assumptions about
the role of legislation and public administration do not fit the conditions of
our time does not in itself constitute a valid reason for our refusing to do so.
Of course, the reader will understand how difficult it must have been to ac-
cept this for later historians of economic thought, who were interested in little
else but ideas, social doctrines or philosophies, and political recommendations,
and who were in no position to decide which 'classic’ propositions must, and
which need not, be dropped when we drop any given element of their insti-
tutional frame.

(c) The Nation and the Classes. In concluding this section, I wish to ad-
vert to two of the many lacunae in our survey of the institutional aspects of
'classic’ economics: we have not dealt with the manner in which the econo-
mists of that period handled the social phenomenon that we call Nation or
Country; and we have not dealt with their conception of the class structure
of society. The former is relevant for economic analysis in three ways. First of
all, it is a factor — some would say the dominant factor — in the general sociol-
ogy or social philosophy of many economists: of this all that needs to be said
for the purposes of this book, has been said in Chapter 3 (especially under the
heading Romanticism). From this we distinguish, second, the national view-
point in economic policy, about which we have learned something in Chap-
ter 4 (Carey, List), but which will be touched upon again in the section
below that deals with foreign trade (ch. 6, sec. 3). Third, it is a question of
considerable interest to ask how far the economists of that period took ac-
count of national differences of economic behavior and of consciousness of
nationality as a motive of economic behavior: this question will be treated
below (ch. 6, sec. 1). The subject of Social Classes offers a convenient transi-
tion from this to the next section.

In economics, as in all the social sciences, the term Class denotes two dif-
ferent things that, in strict logic, have nothing to do with one another. When
we speak of Social Classes or of the Class Structure of Society, we mean to de-
note a real phenomenon that exists independently of the activity of research
workers: actually or metaphorically, we may hold that a social class is an entity
that thinks and feels and acts. But we also speak of classes when we mean
nothing hut categories that owe their existence to the classifying activity of
research workers. Thus, when we speak of working-class movements, we are
indeed referring to masses of individuals but of individuals that rally around
a group standard and form, as it were, a psychological corporation, a social
class. When we consider the group of all the people who derive their incomes
from selling services (personal efforts), we find that we are combining social

GENERAL ECONOMICS: A CROSS SECTION 551

types that have very little in common and hardly ever feel and act in unison —
such as street sweepers and movie stars, manual workers and executives, char-
women and generals; in short, we are considering a category that we have
formed ourselves. If this were all, we should have merely to advert to the
existence of another source of confusion in economic discussion and to make
sure in each individual case what it is we mean or a given writer means when
using the term Class — social classes that are red-blooded realities, or categories
of participants in the economic process that are pale abstractions . 11 But asso-
ciated with this simple distinction is an important issue that may as well be
noticed at once.

Marx’s two ‘classes of participants in the economic process/ 12 capitalists and
proletarians, are not mere categories but social classes. This feature is essential
to the Marxist system. It unifies his sociology and his economics by making
the same class concept fundamental for both. On the one hand, the social
classes of sociology are ipso facto the categories of economic theory; bn the
other hand, the categories of economic theory are ipso facto the social classes.
The importance of this feature becomes particularly clear when we observe its
bearing upon class antagonism, which in this system is at the same time an
exclusively economic phenomenon and the all important fact about all pre-
socialist human history. We shall understand that from this standpoint any
attempt to form economic categories other than social classes is bound to ap-
pear as an attempt to leave out or obscure the very essence of the capitalist
process or, to use a phrase current among Marxists, to ‘rob economic theory
of its social content/ Such an attempt is not only tainted with ‘apologetics':
it is futile and cannot produce solutions of the real problems of economics.

But non-Marxist economics was not less bound to take, with increasing em-
phasis, the opposite view, and to look upon the very feature Marxists took
(and take) pride in, as a blemish due to the survival of prescientific patterns
of thought. This was the inevitable consequence of analytic advance that made
more and more for a clear distinction of the purely economic relations from
others with which they are associated in reality. In analyzing economic phe-
nomena, categories other than those suggested by the class structure of society
have proved more useful, as well as more satisfactory, logically. This does not
involve overlooking any relevant class-struggle aspects, or simply class aspects,
of the relations investigated . 13 All it does involve is greater freedom for all the
various aspects of reality to assert their rights.

11 Some modem economists call these abstractions Functional Classes. We ourselves
shall, for greater clearness, use the term Categories, however objectionable it may be
in some respects.

12 Unfortunately, there is no good English equivalent for the German 'Wirtschafts -
subjekt.

13 The proof of this pudding is, of course, in the eating. No general professions of
faith or general arguments about the impossibility of analyzing, e.g., distribution of
income in terms other than the terms of social classes can settle the matter. Of course,
the question is complicated by another, viz., the question of the validity of the Marxist
theory of classes. But, in this connection, this is a side issue. Even if it were valid, the

55 2 111 : FROM 1790 TO 1870

As we shall presently see, the economists of the period under survey did
take a great stride toward an economic analysis in terms of categories of eco-
nomic types and away from economic analysis in terms of social classes. But
they did not proceed in the logical way; that is, they did not work out a
theory of social classes, insert it into their economic sociology, and then con-
struct economic categories for use in economic analysis: this procedure would
have required an awareness of the problems involved from which they were
far removed. Instead, they took a short cut: they simply turned, with little
modification, the social groupings that are known to the popular mind into
categories of economic analysis. With the exception of Marx, whose analysis
of social classes, however defective, is still analysis, they made no analytic ef-
fort. And the need for such an effort never occurred to them because, as a
matter of fact, the social groupings of the man in the street were sufficiently
drenched with economic meanings to make them adequate for the rough pur-
poses of 'classic’ economic analysis. The man in the street always had been
greatly impressed by the landed aristocracy that towered over the rest of so-
ciety. Hardly less distinctive and impossible to overlook was the position, on
the other end of the scale, of the agricultural and industrial 'poor.’ For the
rest, the man in the street saw farmers, artisans, manufacturers, moneyed men,
bankers, merchants and so on, rather than a single business class, and he would
certainly have reserved other special positions for the professions. In the lat-
ter respect, 'classic’ economists agreed with him more or less . 14 But for the
rest of those groups, they (the 'classic’ economists) did perform the modest
service to analysis that consists in throwing them together, for some though
not all purposes, into a single economic category, for which the label 'capi-
talists’ soon came to be generally used in economic literature . 15

Thus Marx, alone of all leading analysts, retained the class connota-
tion of the categories of economic types, consciously and as a matter of

principle. The prevailing tendency to get away from it, which he did

methodological necessity of a conceptualization adapted to the special tasks of economic
analysis would still remain. Most modem socialists, by using modern theory, testify to
their agreement with the view taken in this book. Much more important is it that
Marx himself, in his analytic practice, agrees with us. For he uses his classes only for
the purpose of interpreting the results that the capitalist economy produces; as will be
seen presently, he does not introduce his classes as actors in his basic analytic work.
He emphasizes indeed the social-class aspect whenever he can. But, except in the
political sphere, his classes do not struggle with each other as classes.

14 The analytic difficulty which the ‘classic’ wage analysis opposed to the inclusion
of the professions in the labor category was in part avoided by those authors who
described the professions as unproductive and thus excluded them from the economic
society to which their propositions primarily applied. Those who counted skills as
capital could also include them with capitalists.

16 The public did not adopt it to any great extent until after 1900. But while the
term Capitalist gained citizenship in the economist’s lingo, the term Capitalism was,
throughout the nineteenth century, hardly used except by Marxists and writers directly
influenced by Marxism. There is no article under this heading in Palgrave’s Dictionary.

GENERAL ECONOMICS: A CROSS SECTION 51

not fail to notice> he simply put down as one of the symptoms of the
degeneration of bourgeois economics that, so he held, had no longer the
courage and honesty to face the real issues. By the same token, he no-
ticed with approval those vestiges of the popular confusion of the two
aspects that may be found in the earlier ‘classics/ especially in Ricardo.
The existence of such vestiges is what we should expect in a process of
analytic development that was not only slow but also subconscious. But
how important were they? It is true that Ricardo spoke of distribution
of the ‘produce of the earth’ as a process of distribution between ‘three
classes of the community’ (Preface). This does seem to imply class
connotation. If, however, we wish to take this phrase literally, we must
take the whole sentence literally — and this would make a physiocrat of
Ricardo. Further, it is true that his theory of wages, so far as it fits any
part of reality at all, fits only the wages of manual labor — of the prole-
tarian class. And finally Ricardo, according to traditional interpretation,
emphasized antagonism of class interests — the interests of the landlords,
in particular, being held to be ‘always opposed’ to those of the rest of
society. This, of course, is what Marx liked best and what other econo-
mists who also took it for an essential feature of Ricardo’s economics,
such as Carey and Bastiat, liked least. But as regards the old wage theory
that Ricardo adopted, it is very obvious that he did not impart to it
any class-struggle twist. And it seems much more realistic to see in its
very partial validity the inevitable result of a defective analytic apparatus
than of any intention to emphasize class aspects. As regards his general
handling of class interests, two things must be carefully distinguished.
Like most ‘classics’ Ricardo was much alive to political implications. Be-
ing one of the champions of free trade in corn, he thought of it as a po-
litical measure that was to be carried against the economic interest of a
social class— which in this case would understandably merge in his mind.
And this happened, of course, every time there was a political issue on
the anvil. But this is all right — the political viewpoint brings in party
strife and party brings the social-class element: nothing is further from
my thought than any wish to argue for a treatment of political ques-
tions that neglects this class element and reasons in terms of an imag-
inary common good. But quite another question is the significance of the
opposition of class interests in Ricardo’s economic analysis per se. This
reduces to propositions about the long-run tendencies of relative dis-
tributive shares (see below, ch. 6, sec. 6). He held, for example, that
the landlord’s share tends to increase at the expense, primarily, of the
capitalist’s share. This, however, does not constitute class antagonism
either in the Marxist or in the usual sense. Marx, recognizing two classes
only, saw class ‘struggle,’ economic and political, only between these
two and thereby testified to his belief that opposition of interests in the
Ricardian sense does not constitute class antagonism. In the usual sense,
class antagonism means antagonism between social classes — a reality that
manifests itself, for example, in the political arena. For this phenomenon

554 III: FROM 1790 TO 1870

to arise, the Ricardian antagonistic tendency in distributive shares is
neither a necessary nor a sufficient condition. This seems to establish our
thesis, namely, that the class connotations of Ricardo’s categories are in
fact no more than survivals and nonessential to his system; and that, in
particular, Carey and Bastiat and all the writers who took similar lines
were in error when, believing that the Ricardian tendencies in distributive
shares spelled social warfare, they set about disproving them.

5. The 'Classic’ Schema of the Economic Process

Into the sociological frame just sketched, the ‘classics’ fitted a schema of the
economic process, the general features of which it is our next task to describe.
In itself this task is simple enough. But it is rendered more difficult by the
facts that the form the schema took in the classic (in our sense) wOrk of the
period, J. S. Mill’s Principles , is of course not more than ‘representative’ of a
large number of schemata that more or less differed from it; that even so it
was the outcome of long discussions that were in part pointless, sometimes
merely verbal, but which loom large to the backward glance; and that the
state of analytic work looked very different at different stages. The very propo-
sition that there was anything like progress toward clarification of the issues
and improvement of the results of analysis will be voted a misrepresentation
by readers who either forget, or on principle disapprove of, the aim and view-
point of a history of analysis.

(a) The Actors. Any schema of the economic process must first of all settle
the. question of the dramatis personae to be admitted to the scene and thereby
prejudge many of its features. These actors were, of course, firms and house-
holds and not social classes, or else there could not have been competition:
this also applies to Marx’s theory. As we know, these actors were classified by
means of turning the social groups known to common experience into the three
categories of economic types (or ‘functional’ classes): landowners, laborers, and
capitalists . 1 Of course, this merely continued an old practice that had been
sanctioned by A. Smith. Since the three were mere categories, each defined
by an economic trait, it was recognized without difficulty that an individual
was capable of belonging to two (for example, if he was an artisan) or to all
three of them (for example, if he was a peasant, tilling his own soil). Marx, as
we also know, substituted his two -class schema for this tripartite division of
types . 2

In one respect, however, there was significant, if halting, advance. A fourth
category or type eventually received explicit recognition, the entrepreneur. Not
that economists had ever accomplished the impossible feat of overlooking the
most colorful figure in the capitalist process. The scholastic doctors, at least

1 Subgroups were, of course, introduced when desirable. But in dealing with the
general pattern of economic theory, we may neglect this fact.

2 Sismondi was the only other economist of major importance to do the same thing.
But he did so only for purposes of simplification, not as a matter of principle.

GENERAL ECONOMICS: A CROSS SECTION 555

since the times of St. Antonine of Florence, had distinguished the business-
man's industria from the workman's labor. Seventeenth-century economists
had displayed an unmistakable, if inarticulate, understanding of the type. Can-
tillon was, so far as I know, the first to use the term entrepreneur. But these
suggestions petered out without coming to fruition. A. Smith glanced at the
type occasionally — he speaks occasionally of tire undertaker, the master, the
merchant — and, if pressed, would not have denied that no business runs by
itself. Nevertheless this is exactly the over-all impression his readers get. The
merchant or master accumulates ‘capital' — this is really his essential function —
and with this ‘capital' he hires ‘industrious people,' that is, workmen, who
do the rest. In doing so he exposes these means of production to risk of loss;
but beyond this, all he does is to supervise his concern in order to make sure
that the profits find their way to his pocket. J. B. Say, moving along in the
French (Cantillon) tradition, was the first to assign to the entrepreneur — per
se and as distinct from the capitalist — a definite position in the schema of the
economic process. His contribution is summed up in the pithy statement that
the entrepreneur’s function is to combine the factors of production into a
producing organism. Such a statement 8 may indeed mean much or little. He
certainly failed to make full use of it and presumaby did not see all its ana-
lytic possibilities. He did realize, to some extent, that a greatly improved
theory of the economic process might be derived by making the entrepreneur
in the analytic schema what he is in capitalist reality, the pivot on which
everything turns. But he failed to realize that the phrase ‘combining factors,'
when applied to a going concern, denotes little more than routine manage-
ment; and that the task of combining factors becomes a distinctive one only
when applied not to the current administration of a going concern but to the
organization of a new one. In any case, however, he turned a popular notion
into a scientific tool.

In Germany, the concept of the entrepreneur was a familiar element of the
‘cameralist' tradition. And so was the corresponding term, Unternehmer, which

3 Lest the reader feel inclined to read this either into Cantillon or into A. Smith,
let me further explain my reasons for believing that Say's formulation should be con-
sidered a distinct step in analysis. Cantillon said indeed that the entrepreneur acquires
means of production at certain prices with a view to selling at uncertain (expected)
prices. This describes one of the aspects of the businessman’s activity very well; but it
does not describe (or, at any rate, emphasize) its essence. A. Smith considers indeed the
case of the capitalist who lends his capital to other people and thus seems to recognize
the distinct function of those people who take the trouble and risk of employing it.
But the businessman who borrows from the capitalist still remains a vicarious capitalist,
i.e. an intermediary between the owner of capital and the labor force;, and to provide
the latter with tools, means of subsistence, and raw materials is still all he does. It
might be said that the distinctive function that Say made explicit is implied both by
Cantillon and Smith. But analytic progress — not only in economics — hinges in great
part on making things explicit that have been implied or implicitly recognized for ages.
A. Smith also knew that we pay for goods because we want them, but this does not
make him a marginal utility theorist.

556 III: FROM 1790 TO 1870

the economists of the period continued to use — it occurs, for example, in
Rau’s textbook. The analysis of the entrepreneurial function developed stead-
ily if slowly, culminating in the work of Mangoldt. 4 How much of it, if any-
thing, is due to influence from Say, I feel unable to tell. But in England
this influence shows more clearly. Ricardo, the Ricardians, and also Senior
took indeed no notice of Say’s suggestion and in fact almost accom-
plished what I have described as an impossible feat, namely, the exclusion of
the figure of the entrepreneur completely. For them — as well as for Marx 5 —
the business process runs substantially by itself, the one thing needful to make
it run being an adequate supply of capital. But some of the non-Ricardian and
anti-Ricardian writers of the late 1820’s and the 1830’s did take it up, Read
and Ramsay — the latter used the term 'master’ rather than entrepreneur,
though he spoke of enterprise — deserving special mention. The decisive step
was taken by J. S. Mill, who brought the term entrepreneur into general use
among English economists and, in analyzing the entrepreneurial function,
went from 'superintendence’ to ‘control’ and even to ‘direction,’ which, he
admitted, required ‘often no ordinary skill/ But this defines the function of
management and not anything distinct from mere administration. If this were
all, he might as well have been content with the good English term, manager —
which was in fact adopted later on by A. Marshall — and have spared himself
all regrets about there being no good English word for entrepreneur. A reason
why he did not do so was possibly that managers are frequently salaried em-
ployees and they do not necessarily share in business risks, whereas J. S. Mill,
like all the authors of that period and most authors of the next one, wished
to make risk-bearing an entrepreneurial function alongside of ‘direction/ But
this only served to push the car still further on the wrong track. 6 And there

4 See above, ch. 4, sec. 5 and below, ch. 6, sec. 6a. The work marks in this respect
the most important advance since Say.

5 In his case this stands out particularly because he went into so much detail about
the process of accumulation. Accumulated capital, with him, invests itself in a wholly
automatic manner. All the phenomena and mechanisms in the emergence of mechanized
large-scale enterprise that hinge upon the personal element are completely shut out
from his range of vision. A famous passage in the Communist Manifesto (concerning the
‘wonders’ that the ‘bourgeoisie’ has accomplished) seems to contradict this, since mere
investment of accumulated capital could hardly be said to be productive of ‘wonders/
But this conception of entrepreneurial achievement — for what else could be responsible
for the bourgeois miracles? — entirely failed to influence his basic analysis.

6 Since many modern economists also include risk-bearing among entrepreneurial func-
tions, it may be well to point out at once the objection to the idea. It should be
obvious, so soon as we have realized that the entrepreneur’s function is distinct from
the capitalist’s function, that an entrepreneur, when he employs his own capital in an
unsuccessful enterprise, loses as a capitalist and not as an entrepreneur. It has been
said that if he borrows at a fixed rate of interest, the capitalist being entitled to repay-
ment plus interest irrespective of results, it is the entrepreneur who bears the risk. But
this is a typical instance of a very common confusion of economic and legal aspects.
If the borrowing entrepreneur has no means of his own, it is obviously the lending
capitalist who stands to lose, his legal rights notwithstanding. If the borrowing entre-

GENERAL ECONOMICS: A CROSS SECTION 557

it stuck. There were various attempts at improvement and development dur-
ing that period and the subsequent one. Substantially, however, J. S. Mill’s
conception of the entrepreneurial function prevailed throughout the century,
which means that, after all. Say’s suggestion came to very little. We shall pres-
ently return to the subject.

(b) The Agents. The reader is requested to observe how very short, simple,
and natural the step is from the recognition of the three categories of par-
ticipants in the economic process — landowners, workmen, and 'capitalists’ —
to a general schema of this process. The categories are characterized by a
purely economic trait: they are respectively the suppliers of services of land,
of labor, and of a stock of goods that is labeled 'capital.’ This seems to settle
their role in production and, quite unbidden, the famous triad presents itself,
the triad of agents, or factors, or requisites — or instruments (Senior) — of pro-
duction. And, not less easily, a triad of incomes emerges to correspond to the
triad of factors — rents, wages, and 'profits.’ Surely nothing could seem more
useful and more simple or more obviously in accord with fact to any person
not influenced by previous acquaintance with economic controversy. This is
the first point about the triad of factors that I want the reader to realize.

The second point to be borne in mind is that the triad is, nevertheless, not
popular with modern economists. It established itself, more or less, around the
middle of the nineteenth century and took a new lease of life through A. Mar-
shall’s sponsorship of it. T And it still survives, owing to its handiness in ele-
mentary teaching. Beyond this, however, modern economists do not like it
particularly: some look upon it as a relic of bygone stages of analysis, a clumsy
tool, an encumbrance rather than a help. But for the moment, we are not
concerned with this, but with a third point. For reasons quite different from
those that motivate the attitude of modern theorists, economists of the period
under survey were reluctant to accept the triad, which accordingly conquered
but slowly and incompletely — a fact that, considering the obviousness of the
schema, calls for explanation. Moreover, examination of these reasons will
teach us an interesting lesson about the ‘ways of the human mind’ in our field.

In Chapter 6 of the First Book of the Wealth of Nations , A. Smith de-
composed the price of products into three components: wages, rent, and
profit. In Chapter 7, these prices are built up again from these same com-
ponents. 8 In itself, this points strongly enough toward the triad of factors.

preneur has means by which to effect discharge of his debt, he too is a capitalist and,
in case of failure, the loss again falls upon him as a capitalist and not as an entre-
preneur.

7 Marshall had indeed a fourth factor or agent of production. Organization. But this
is only a label for a compound of topics — such as division of labor and machinery — of
which business management is only one. It is not an agent in the same sense as are
land, labor, and capital.

8 These are equilibrium prices. As we know, the arrangement referred to embodies
A. Smith’s manner of recognizing the fact of general interdependence between the
elements of the economic system and constitutes one of his greatest merits in the field
of pure analysis. But we also know that it was much misunderstood — some critics even
saw circular reasoning in it.

558 III: FROM 1790 TO 1870

But the pointer is completely lost in the argument of Chapter 6. There, la-
borers, landlords, and capitalists are indeed introduced as participants in the
process of distribution, but their shares are not construed as returns from the
productive employment of their factors: if not wholly denied, and even if oc-
casionally "recognized/ 9 this factor-value aspect of distributive shares is brushed
aside in favor of quite another aspect. A. Smith, it will be remembered, tries
to show how the landlord’s and the capitalist’s shares are "deducted’ from the
total product that "naturally’ is, in its entirety, the product of labor. And this
seems to point toward a different conceptual arrangement, which reserves the
role of factor of production for labor alone and bars the outlook on the triad
of factors in spite of the fact that A. Smith’s language on the first page of
Chapter 7 is clearly suggestive of it.

A. Smith’s exposition has been restated, in the first place, because it antici-
pates instructively the situation that prevailed in this corner of economic
theory throughout the period. Whether under A. Smith’s influence or inde-
pendently, some economists took the line indicated by the one of A. Smith’s
pointers, and some took the line indicated by the other. But the majority hesi-
tated and compromised, though the tendency was all along in favor of the
triad of factors. In the second place, we have started from A. Smith because
his exposition illustrates very well the nature of thq main obstacle that stood in
the way of smooth acceptance of the three-factor schema. In order to see it,
we must recall once more that the proposition that labor alone produces the
whole product has no empirical content that could be relevant in an analysis
of the facts of the economic process: clearly, nobody can maintain that labor
is all that is needed in order to produce something, except in a class of cases
without importance. But the proposition may have "meta-economic’ meaning
of an ethical color and it agrees well with the emotional propensities and the
political doctrines of sponsors of the interests of labor who, like A. Smith,
loved to declaim about the laborer who produces everything for everybody and
himself "goes in rags.’ They thought that they were gaining a point for labor
by clinging to that doctrine, and they were confirmed in this childish belief
by the no less childish belief of many sponsors of the triad that setting up
land or capital as factors of production was gaining a point for landlords or
capitalists. 10 They failed to see that their ethical philosophies and political
doctrines were logically irrelevant for the explanation of economic reality as it
is. In other words, they failed to see that all that matters for this purpose is

9 Thus, A. Smith described the gross revenue of society as "the whole produce of
their land and labour’ (beginning of ch. 2, Book n).

10 I do not deny, of course, that slogans for popular consumption may be derived
from either analytic set-up. To that extent — that is, if meant for the sole purpose of
taking in slow-witted people — neither was childish. Only the honest belief was childish
that any analytic arrangement about factors of production could in good logic
strengthen the political use either for or against the claims of their owners. That this
is not so has been pointed out repeatedly in this book: even if there were any sense in
maintaining that, e.g., land produces everything, this would not constitute any reason
why the returns from it should go to its owners.

GENERAL ECONOMICS: A CROSS SECTION

559

the simple fact that, in order to produce, a firm needs not only labor but all
the things that are included in land and capital as well, and that this is all
that is implied in setting up the three factors. In still other words, they had
not yet a clear conception of the distinctive purposes of analysis — have we? —
and of what is and what is not relevant to the analytic purpose , It will be
realized therefore that to see this distinctive purpose and to perceive that the
three'factor schema served it in a simple way was, under the circumstances,
not quite so easy as one might infer from its obviousness and that hence its
adoption spelled considerable analytic merit after all.

There is, however, another aspect to the matter. If one accepts a labor-
quantity theory of value, either in Ricardo’s or in Marx’s manner (see below,
ch. 6, sec. 2 a), the three-factor schema, which we have been commending for
its simplicity, meets with analytic difficulties that are quite independent of
any philosophies. For the distributive shares must be paid from prices of prod-
ucts that, owing to the presence of claimants other than labor, cannot in gen-
eral be proportional to the quantities of labor embodied in those products. A
new problem therefore arises concerning the manner in which those other
claims are satisfied. And in attempting to solve this problem, we find the triad
of factors that puts these factors all in fundamentally the same logical position
very inconvenient to handle: 11 from this standpoint the mere fact that all
agents are equally "requisite’ cannot any longer be regarded as decisive. Note
this interesting fact: from the standpoint of any theory of value other than
the labor-quantity theory, this problem appears as a choice example of a spu-
rious problem, that is, a problem that owes its very existence to defective analy-
sis and disappears, without any trouble, if the defective element, in this case
the labor-quantity theory of value, be removed; but from the standpoint of
the labor-quantity theory of value, the problem in question becomes the most
important of all, the problem the solution of which must reveal the innermost
secret of capitalist society. Marx had therefore plenty of reason to rise in
wrath against the triad of factors and to condemn it as a piece of vile apolo-
getics that, reducing colorful struggles of social classes to colorless allocations
of returns to co-operating factors, emasculated capitalist reality. 12 Sometimes,

11 James Mill and McCulloch tried to do this with very indifferent success.

12 Conceiving of economic analysis as an element in social evolution — and theories
other than his as the fog that rises from it — Marx, as stated above, was of the opinion
that, after Ricardo, ‘bourgeois economics' had entered a stage of decay along with the
society that produced it. It is not without interest to ask what the facts were he took
for manifestations of this decay. The first we know already: it was the refusal of
‘bourgeois' economics to couch its analysis in terms of social classes. The second,
related to the first, was precisely the increasing tendency to adopt the three-factor schema.
The third was the tendency to assert that the economic process, however much given
to stalling under the impact of "disturbances,’ was yet free, in its pure logic, from
inherent hitches. Marx took this for another piece of ‘whitewashing’ though, from
another standpoint, it was the natural consequence of improved analysis. The fourth
was the tendency to replace what Marx considered to be profoundest truth by a
description of the surface phenomena of business practice as they appear to the business-

560 in: FROM 1790 TO 1870

the task of analysis is rendered difficult by the nature of its problems — wave
mechanics is a good example. Sometimes the difficulties are not in the things
but in our own minds.

As soon as this is understood, we can deal very briefly with the facts of the
case. The aversion to the triad schema that was due to philosophical or political
or emotional causes gave way eventually and in the end asserted itself merely
in verbal concessions. The obstacle of the labor-quantity theory was, of course,
next to insuperable for Ricardo himself and for the Ricardian socialists, in-
cluding Marx. But it was overcome by the non-Ricardian and anti-Ricardian
theory of the i830 7 s — which shows again that the Ricardian teaching was
really in the nature of a detour. On the Continent, Say — possibly following
Turgot's lead — established the triad schema 13 and the practice of dealing,
both in the theory of production and in the theory of distribution, with the
‘services’ of the three factors on the same footing. In England, Lauderdale
was the first major writer to set up capital as a distinct factor. Malthus placed
no emphasis upon the triad but his theoretical set-up implies it. Torrens, Read,
and Senior, especially the last, are the most important of the economists who
helped it toward anchorage in English economics. 14 J. S. Mill, finally, adopted
it in substance but hesitatingly and without going through with it — in a way
that mirrors the actual doctrinal situation very well. He started like Petty
with two ‘requisites’ of production, a felicitous term that disarms unintelli-
gent criticism by avoiding any suggestion to the effect that ‘agents’ might be
morally entitled to ‘rewards.’ 15 Then he noticed the fact that the economic
process of every period also depends on the stock of goods that is available at
the beginning of the period which is all that is implied in setting up ‘capital’
as a distinct factor. And so he recognized capital as a factor but distinguished
it from the other two, the two ‘original’ ones. 16 Senior had spoken of capital
as a ‘secondary’ agent in contrast to the two ‘primary’ ones. There is in fact
point in maintaining that capital is a ‘factor with a difference.’ For, if capital
is goods, it raises problems of depreciation and renewal that the other two
factors do not raise. And if capital is so defined as to include wage goods, it
is not quite on a par with land and labor but stands to them, so far as the
wage goods are concerned, in a relation that is peculiar to it. But J. S. Mill
did not go much further than this. Though he did recognize occasionally that
in this schema the rent of land enters or does not enter into price and cost
exactly as do wages, he yet refused to put land quite on a par with labor. He

man. It is for the reader — and an excellent exercise it would be — to make up his
mind on these points now.

13 He also generalized ‘land’ into ‘natural agents.’

14 And in spite of Say’s priority and in spite of the fact that we moderns do not
think very highly of it, there was considerable merit in this around 1830.

15 The term Requisite is, so far as I know, due to James Mill, who has labor and
capital, however, instead of labor and land. J. S. Mill uses also the term Agents.

16 If we wished to be nasty, we could quote him to the effect that he started with
two factors and, after prolonged discussion, ‘reduced’ these two factors to three
(Book 1, ch. 1, J 1 and ch. 7, J 1).

GENERAL ECONOMICS: A CROSS SECTION

561

therefore clung, officially as it were, to the Ricardian theory of rent, although
it was quite superfluous for him . 17 And capital remained stored-up labor for
him, as it had been for James Mill, although from the standpoint of his
schema and if he wished to ‘resolve’ capital into something else, he should
have ‘resolved’ it into stored-up services of labor and land . 18

To sum up: the question what is and what is not to be ‘recognized,’ by the
analyst, as an agent of production is a mere question of analytic convenience
and efficiency. As such, however, it is very important, for the way in which a
writer answers it will, to a considerable extent, determine his schema of the
economic process and the formulation of the problems to be solved. At an
early stage of analysis, the triad of agents suggests itself primarily because it
links up nicely with the three categories of participants in the economic proc-
ess that are derived from the layman’s picture of society. But it so happens
that the triad also makes economic sense because it presents a complete list of
the requisites of physical production, the items of which are both nonover-
lapping and distinguished by economically relevant characteristics. Therefore,
it makes a useful basis to start from. J. B. Say seems to have been the first to
realize this fully. But most of the economists of the period did not look at the
matter in this light. They believed that when they were deciding what to
‘recognize’ as an agent, they were dealing with momentous real problems of
analysis and, still more important, of social justice. Hence we find widespread
reluctance to adopt the triad, which was reinforced, in some cases, by a theory
of value that did not work well with it and by the fact that the role of capi-
tal in the productive process does display certain traits that are not shared
by the two ‘original’ or ‘primary’ agents. And so one-factor schemata and
two-factor schemata survived throughout. Moreover, even writers who in fact
adopted the three-factor scheme displayed a tendency to make verbal conces-
sions to the other two 1? — which further obscures the situation.

(c) The Model. In every scientific venture, the thing that comes first is
Vision. That is to say, before embarking upon analytic work of any kind we

17 The specifically Ricardian element in the theory of rent was logically superfluous
for him because mere ‘requisiteness’ of land plus its scarcity is all that is needed to
explain the price of its services. Yet he commits himself to the Ricardian view of
rent, e.g., in the last sentence of J 2, ch. 2, of Book 111.

18 Let us notice at once that this ‘resolution’ of capital goods, e.g., a machine,
involves two problems: first, the ‘resolution’ of the machine into the factors that enter
into it and include services of other capital goods; second, the ‘resolution’ into land and
labor only (or, with Marx, into labor only). In the next period it was especially Bohm-
Bawerk and, following him, Wicksell who used and propagated the ‘resolution’ into
land and labor.

19 Such a verbal concession that veils a man’s acceptance of the triad is instanced by
the turn of phrase that capital increases the productivity of labor (or that its function
consists in making labor more effective). This seems to point toward a one-factor
theory by confining the honorific quality of productivity to labor alone but actually
does, so far as explanation of facts is concerned, exactly what ‘recognition’ of capital as
an agent of production is meant to do.

562 in: FROM 1790 TO 1870

must first single out the set of phenomena we wish to investigate, and acquire
‘intuitively’ a preliminary notion of how they hang together or, in other words,
of what appear from our standpoint to be their fundamental properties. This
should be obvious. If it is not, this is only owing to the fact that in practice
we mostly do not start from a vision of our own but from the work of our
predecessors or from ideas that float in the public mind. We then proceed to
conceptualize our vision and to develop or correct it by closer examination of
facts, two tasks that of necessity go together — the concepts we possess at any
time and the logical relation between them suggesting further factual investi-
gation and further factual investigation suggesting new concepts and relations.
The total or ‘system’ of our concepts and of the relations that we establish
between them is what we call a theory or a model. We have had ample op-
portunity to observe how difficult a task conceptualization is in the early stages
of analytic effort, chiefly because the scientific fraternity takes time to learn,
by a process of trial and error, what is and what is not important in an ‘ex-
planation’ of the phenomena envisaged. In economics, particularly, there are
many inhibitions to overcome before the nature of the analyst’s task can be
clearly understood. But model building, that is, conscious attempts at systemati-
zation of concepts and relations, is more difficult still and characterizes a later
stage of scientific endeavor. In economics, efforts of this kind date, substan-
tially, from Cantillon and Quesnay. In the period under discussion, a model
evolved from the Cantillon-Quesnay pattern that, since we already know the
actors and the agents that figure in it, may be briefly described as follows.
Consideration of details will be deferred to the next chapter. 20 Moreover, com-
ments on the ‘classic’ schema of economic evolution will be deferred to the
next section. In this section I shall present the ‘classic’ schema of a stationary
process only — a schema which, in this respect, was much like that of Quesnay.

From A. Smith on, most of the English ‘classics' used the term Stationary
State. But this stationary state was an actual condition of the economic proc-
ess which they expected to materialize sometime in the future. Taken in this
sense, the subject of the stationary state belongs in the next section. Here we
are concerned with a different kind of stationary state, namely, with a sta-
tionary state that is not a future reality but only a conceptual construct or
tool of analysis that serves to isolate, for the purposes of a preliminary study,
the group of economic phenomena that would be observable in an unchanging
economic process. The first to recognize- explicitly the methodological impor-
tance of doing this was J. S. Mill. But Marx, whose schema of Simple Repro-
duction ( Capital , vol. 1, ch. 23) is the schema of an economic process that
merely reproduces itself in time, went much more deeply than Mill. All other
writers, however, including A. Smith and Ricardo, actually used that tool but,
not being aware of the fact that they were using any particular device of this
kind, they used it in a haphazard and unsatisfactory manner. This point be-

20 This procedure entails the disadvantage that certain concepts will have to be used
before they have been fully explained. No serious inconvenience will, however, arise
from this.

GENERAL ECONOMICS: A CROSS SECTION 563

ing both important and somewhat difficult to understand calls for additional
comment.

We have repeatedly had the opportunity to advert to the slow devel-
opment, not completed within the period under discussion or even within
the next one, of the notions of economic (or social) statics: and dynamics.

J. S. Mill, who as we have seen probably took them from Comte and used
them in his logic, defined statics as the theory of 'the economical phe-
nomena of society considered as existing simultaneously’ ( Principles ,
Book iv, ch. 1, § 1). This definition, by itself, might pass muster as an
anticipation of the modem definition (Frisch). Statics as thus defined
pivots on the concept of (stable or unstable) equilibrium that appears
in Mill and in the 'classic’ literature generally, for example, in the garb
of such constructs as the 'natural’ or 'necessary’ prices. But a little later,
we learn that in the passage quoted he did not really think of the statics
that is defined by his wording or, rather, that he confused it with 'the
economical laws of a stationary and unchanging society.’ As we shall see
more clearly later on, these are different things: we can study a changing
process by means of a static method (comparative statics, see below. Part
iv, ch. 7, sec. 3a) and an unchanging process by means of a sequence
analysis of the kind which Sismondi occasionally used, and which relates
economic quantities that belong to different points of time — i.e., by
means of a dynamic theory in the sense of Frisch. Mill, following Comte,
understood by dynamics something altogether different, namely, the anal-
ysis of those forces that produce fundamental change in the long run —
the kind of thing we shall discuss in the next section. All this is confusing
enough. But we must add a final element to the confusion. In addition
to speaking of a static theory and of a stationary state, which is an ana-
lytic tool, Mill also, like Ricardo, expected the economic process to settle
down, at some future time, into a stationary state of a special kind that
will not be an analytic device for facilitating the study of a nonstationary
reality but will be itself a reality. I repeat that, in all this, Mill did no
more than to make explicit what everybody fumbled for.

Some of the fundamental features of the ‘classic’ model or models of the
stationary process may be thus described in Ricardo’s words ( Principles , ch.
31). Suppose that a capitalist 'employs a capital of the value of £20,000’ and
‘that profits are 10 per cent.’ Of this capital, £7000 are ‘invested in fixed
capital, viz. in buildings, implements, etc. etc.’ and ‘the remaining £13,000 is
employed’ as wage capital 21 ‘in the support of labour.’ ‘Each year the capitalist
begins his operations by having food and necessaries in his possession to the
value of £13,000 [plus another quantity of the value of £2000 destined for
his own consumption, J. A. S.], all of which he sells in the course of the year
to his own workmen for that sum of money, and, during the same period, he
pays them the like amount of money for wages: at the end of the year, they

21 Ricardo wrote 'circulating capital,’ but see below, ch. 6, sec. 5b.

564 hi: from 1790 to 1870

replace in his possession food and necessaries of the value of £15,000, £2000
of which’ he then consumes himself in the following year 22 — a piece of se-
quence analysis that is certainly the last word in simplicity — which is why I
refrain from elucidating it either by a system of equation or by a tableau of
the Quesnay type. 23

Now, first, one feature of this model was generally accepted throughout the
period, by Marx not less than by Say. This was the physiocrat notion, which
it embodied, that the fundamental flows of goods (and money) that consti-
tute the economic process consist of a flux and an (augmented) reflux of 'ad-
vances.’ Yet, unlike the physiocrats, the ‘classics’ made the capitalists the sole
source of these aflvances, and the value of the goods advanced swelled in the
industrial process instead of in agriculture only. Nevertheless, it was substan-
tially the old idea of Quesnay as it had already been transformed by Turgot.
I cannot emphasize too strongly that this was a particular way of interpreting
the economic process and not at all directly suggested by the practice of life:
in practice, the employer ‘hires’ the workman — or he may be said to ‘buy’ the
latter’s services — but he does not advance anything to him. Moreover, this
interpretation means more than recognition of the trivial facts that whatever
is being consumed must have been produced before; or that society at any
moment always lives on the past and works for the future; or, finally, that
initial stocks are always among the data we must start from. J. B. Clark’s
theory of the synchronized process or, for that matter, Walras’ system (both
discussed below. Part iv, eh. 7) proves sufficiently that these facts do not
force us to make them the pivots of our analysis. But if we do make them the
pivots, then a number of consequences suggest themselves that are not avoided
simply by refusing to recognize them. If ‘capitalists’ actually advance labor’s
real income and if this is to mean more than a monetary arrangement, dis-
counts and ‘abstinence’ will have to be admitted among the essentials of the
economic process whether we like them or not; 24 that is, no analysis of pro-

22 Ricardo neglects, of course, the wear and tear of the machines, etc. This could
he easily avoided, but we shall do the same thing. The £2000 must be consumed each
year or else the process would not be stationary.

23 But, in spite of its gauntness, the model we took from Ricardo will still serve two
purposes that may be of some help to the reader. First it will illustrate what dynamic
analysis in the modern sense is and in what it differs from the kind of investigation
that J. S. Mill denoted by Dynamics. Second, it will explain what sounds like a paradox
even to some economists of today, viz., how it is possible to treat a stationary process
dynamically. This consists simply in describing such a process in terms of quantities
that belong to a sequence in time or in terms of relations that link quantities that
belong to different points of time. The particular form of dynamic analysis which this
model displays is, for obvious reasons, often called Period Analysis.

24 Talk about exploitation may cover up this state of things but cannot alter it. If I
were asked what I consider the easiest method for upsetting Marx’s theoretical structure,
I should certainly answer: start from Marx’s admission that capitalists advance wages
and develop the logical consequences of this admission. I should add, of course, that
this is the answer to the question what is the easiest, not to the question what is the
most profound, set of moves for the anti-Marxist to make.

GENERAL ECONOMICS: A CROSS SECTION 565

duction and consumption will be complete that does not take account of them
in one way or another. This is important enough to justify a distinctive label
for all analytic patterns that do work with the notion under discussion. We
may call them advance economics and distinguish them from synchronization
economics, that is, all analytic patterns that do not in a stationary process
assign any fundamental role to the fact that what society lives on at any given
moment is the result of past production, on the ground that, once a stationary
process has been established, the flow of consumers’ goods and the flow of
productive service are synchronized so that the process works as if society did
live on current production.

Second, we may as well introduce another classification of analytic patterns
('theories'), though its practical usefulness is in the analysis of growth rather
than in the analysis of stationary states. No economist has ever denied, of
course, that, like every other engine, the economic engine is given to stalling,
besides being sensitive to disturbance by factors external to itself. But economic
models differ according to whether they are or are not built on the assumption
that the economic engine has or has not an inherent tendency to develop
hitches (merely by working normally and according to design), which then
make it stall or stop working normally and according to design. The various
forms of underconsumption theories of crises that we shall discuss later on may
serve as examples: they all of them hold that, because of oversaving or other
reasons, the economic system, as it goes on functioning, develops strains and
stresses by virtue of its own design or logic, for example, the strain or stress
that — really or supposedly — shows in the impossibility of selling the products
it is capable of producing at prices that will cover costs. With apologies, I in-
troduce the term hitchbound for models that do recognize the existence in
the economic system of such inherent tendencies to stall, and the term hitchless
for models that do not. For the moment, all we get from an application of this
distinction is the statement: all the models of stationary processes that were
ever constructed are hitchless. Marx, for example, makes this very clear —
hitches do not occur in his schema of Simple Reproduction; they enter his
picture only with Accumulation.

A few comments may be useful. To begin with, though all economists
do recognize the propensity of the economic engine to stall on any num-
ber of provocations and its sensitiveness to the impact of external dis-
turbance, there is still room for disagreement as regards the importance of
this propensity to stall and sensitiveness to disturbance, in particular as
to the importance of both, relatively to the importance they would have
in a planned economy. These questions may well make all the difference
in an appraisal of the relative efficiency of different forms of economic
organization. Next, let us notice that, precisely because of this, there is
no question of apologetics or 'whitewashing’ involved in constructing a
hitchless model. For the economist who constructs such a model may
still have so high an .opinion about the sensitivity of the economic sys-
tem he wishes to describe that he may, because of this sensitivity, rate its

566 hi: from 1790 to 1870

efficiency lower than does another economist who prefers a hitchbound
model but has no such high opinion about the importance of the hitch.
Malthus’ model of economic growth was hitchbound. But this did not
make him a 'planner/ Finally, observe that the analyst’s choice between
constructing a hitchbound and constructing a hitchless model is to some
extent a question of mere analytic convenience. Two economists may en-
tertain exactly the same opinion about something that both of them
recognize as a stress. Nevertheless, the one may think it more useful, to
build a hitchless model first and then superimpose the stress, and the
other may think it more useful to introduce the stress, as it were, on the
groundfloor, and include it in his model from the first so that he gets a
hitchbound model. The same man may do the one for some purposes
and the other for other purposes. It is only our inability to divorce re-
search from politics, or our suspicion, all too often justified, that the
other fellow cannot analyze with single-minded devotion to truth,
which makes problems and party issues out of decisions that do not ex-
cite anyone in more fortunate fields of research.

Third, the model from which we started may be complicated in various
ways without losing its fundamental simplicity. Thus, we can easily introduce
current production of producers’ goods and investigate the simple conditions
for equilibrium that exist between the various departments of production . 25
Also, we can easily introduce servants, physicians, teachers, and so on. More
important, the reader may wonder what has become, in that model, of the
third class of actors, the landowners. Why they do not figure in Ricardo’s text
will become clear presently. Marx treated them as a sort of appendage to the
'capitalists/ The 'capitalists’ employ- labor and extort from it Surplus Value.
But this surplus value is not all Ricardian profits. The ‘capitalist’ must share
his loot, the surplus value, with the landlords. Thus, in a second act of the
drama of distribution, the surplus value is split into profits and rent, both
of which are therefore simply parts of a unitary exploitation gain. Everybody
not completely blinded by indoctrination will, however, realize immediately
that, so far as description of fact and not agitatorial phraseology is concerned,
this comes to the same thing as saying that the capitalist hires services of land
exactly in the same sense in which he hires services of labor. In fact, all we

25 Marx, more directly inspired by Quesnay than was any other economist of his time
and perceiving more clearly the importance of such research, tried to construct tableaus
or reproduction schemata of his own, starting from Quesnay’s tableau. Technical handi-
caps prevented him from getting very far either in this or in the attempt to replace it
by arithmetical or algebraic equations. However, in magnis voluisse sat est and he saw
more intuitively than he was able to express. His efforts naturally centered on the case
of ‘extended’ rather than of 'simple’ reproduction. But he developed the condition of
stationarity all right, and also the condition of equilibrium between the two depart-
ments of consumers’ goods and producers’ goods production. The interested reader
finds all he needs in P. M. Sweezy’s Theory of Capitalist Development and in its
Appendix by Shigeto Tsuru.

GENERAL ECONOMICS: A CROSS SECTION

567

need to do in order to arrive at this result is to ask the question why land-
lords are in a position to prey upon the ‘capitalist’s 7 loot. The only answer is
that the services of land, also, are requisites of production. As soon as we real-
ize this not very recondite truth, we arrive at what, to any unbiased mind,
must seem to be the most natural view to take: the landowners should enter
the model of the stationary process, along with labor, as another class of
owners of productive services, which, at the beginning of (or during) each
period, they stand ready to exchange for the income goods that the ‘capitalists’
were supposed to possess . 26 This should be extended, of course, to the ‘capi-
talists’ (or whoever the people are) who own the nonwage capital.

Fourth, as our discussion of Agents must have led readers to expect, the
frame provided by the model under study was filled in, not by one but by
two theories (or types of theories) of production and distribution, which were
but very imperfectly welded in J. S. Mill’s mongrel performance. This was be-
cause the triad of agents and returns was gaining ground so slowly — we know
|§ the reasons why — that types of analysis that were distinctly more primitive

not only survived but also prospered.

On the one hand, then, we have the analysis that is associated, primarily,
with the names of Turgot and Say; partially, hesitatingly, and mixed with in-
compatible elements, it was also outlined by A. Smith. It accepted the triad
of agents and returns in its fullest and deepest meaning. Let me restate this
meaning. Production in the economic sense of the term 27 is nothing but a
combination, by purchase, of requisite and scarce services. In this process, each
of the requisite and scarce services secures a price, and the determination of
these prices is all that distribution or income formation fundamentally consists
in. Thus the process effects, in one and the same series of steps, production in
the economic sense and, through the evaluation of productive services inci-
dent to production, also distribution or the formation of incomes. Thus, in
this schema, capitalist production and distribution cease to be what they would
be in a socialist community, namely, two distinct processes: we behold but one

26 This curious idea, according to which capitalist employers are supposed to hold
cabbages and shoes, which they sell to their workmen, must be viewed as a measure of
simplification designed to bring out essentials and meanings that underlie the treacherous
mass of surface phenomena in a monetary economy. ‘Capitalists’ who are not them-
selves producers of food and necessaries are supposed to acquire these from the ‘capital-
ists’ who are. Even if it should be granted that this schema brings out the essentials
correctly, we have still to observe that it neglects so many intermediate steps and draws
together the essentials so closely — another example of this is the ‘classic’ theory of
saving and investment — that the possibility of deriving practical conclusions from such
a theory becomes questionable.

27 It is highly characteristic of the difficulties most authors experienced in the task
of conceptualization that the large majority kept on defining production technologically.
They philosophized about man's inability to ‘create matter’ and his ability to displace
it and to change its forms in useful ways and other completely irrelevant things. Say’s
phrase to the effect that production produces utilities pointed in the right direction,
but much more important was his emphasis upon the combination of services in con-
nection with his definition of entrepreneurial activity.

568 III: FROM 1790 TO 1870

process of choices and evaluations of which production and distribution are
merely two different aspects. And all types of incomes are by this, schema ex-
plained on one and the same principle, the principle of pricing the services of
co-operating factors. The analytic task of showing how this principle, so ob-
vious in the case of consumers’ goods or their services, may be made to apply
also to the case of producers’ goods or their services, was not clearly dis-
cerned, let alone accomplished before the rise of the theory of imputation in
the next period (see Part iv, ch. 5, sec. 4a), except perhaps by a few forerun-
ners, such as Longfield and Thiinen. But the fundamental thesis, that the
production-distribution process of capitalist society is in the last analysis a web
of exchanges, for one another, of productive (or directly consumable) services —
the employing entrepreneur acting as an intermediary — stands out with un-
mistakable clearness in Say’s Traite. Among leading English authors, Lauder-
dale, Malthus, and Senior came more or less near to grasping this idea. But
only Say made something like a success of it. It is nothing short of pathetic
that, owing to a complete lack of understanding on the part of opponents and
owing to complete ignorance of even the most elementary mathematical tools
on the part of exponents, this promising start not only was left to hibernate
for decades but also acquired a reputation for superficiality and sterility.

On the other hand, we have the type of analysis of which the Ricardian
detour is the outstanding example. It would of course be an exaggeration to
say that Ricardo was entirely blind to the aspect of the economic process de-
scribed above. He had glimpses of it now and then, and Professor Knight
went perhaps too far if he accused Ricardo of not having seen the problem of
distribution as a problem of valuation at all . 28 But it is true that Ricardo failed
to see the explanatory principle offered by the valuation aspect. This failure
is intimately related to a peculiarity of the Ricardian work that is essential for
understanding him and proves better than does anything else that this work
constitutes in fact a detour and falls out of the historical line of economists’
endeavors.

For A. Smith, A. Marshall, and ourselves, the factors that explain the size
and rate of change of the Social Product or National Dividend or Total Net
Output are of primary significance. This was not Ricardo’s view. On the con-
trary, in his preface to the first edition of the Principles, he tells us:- ‘To de-
termine the laws which regulate this distribution [of total product between
landowners, capitalists, and laborers, J. A. S.] is the principal problem in Po-
litical Economy.’ That is to say, he all but identifies economics with the

28 See F. H. Knight, ‘The Ricardian Theory of Production and Distribution/
Canadian Journal of Economics and Political Science, vol. 1, February 1935. But
Knight supported his indictment effectively by a quotation from a letter of Ricardo’s
to McCulloch to the effect that ‘the proportions in which the whole produce is
divided between landlords, capitalists and labourers . . . are not essentially connected
with the doctrine of value’ (ibid. p. 6n.). This is not true even from Ricardo’s own
standpoint. [Substantially this same footnote appears above, sec. 3. J. A. S. had taken
out this section (5) for revision (his notes indicated dissatisfaction with the looseness
of the argument) just before his death.]

GENERAL ECONOMICS: A CROSS SECTION 569

theory of distribution, implying that he had little or nothing to say about —
to use his language — ‘the laws which regulate total output.’ This is a strange
view to take, though it must be added at once that he did not always adhere
to it, as his chapters on foreign trade and on machinery show. It enables us,
however, to state the fundamental problem Ricardo wanted to solve in terms
of an equation between four variables: net output equals rent plus profits plus
wages (everything measured in Ricardian values, see below, eh. 6, sec. 2a).
And it does still more for us. It rids us of one of these four variables. For,
since we have nothing to say about total net output, we can accept its amount,
whatever it is, as a datum. So we really start with an equation that contains
only three variables. But one equation in three variables is still a hopeless
business. Therefore, Ricardo (eh. 2) places himself on a margin of agricultural
production where rent is zero. Observe carefully what this means for Ricardo’s
analytic set-up. By numberless writers the West-Ricardo theory of rent has
been discussed in isolation, and with nothing but the question in mind
whether it was ‘right’ or ‘wrong.’ This question is completely pointless. The
West-Ricardo theory of rent cannot be discussed in isolation, that is, without
reference to the whole of the West-Ricardo system. It is within this system
only that it acquires analytic meaning and, in fact, owing to Ricardo’s in-
ability to deal with systems of simultaneous equations, imposes itself. Out-
side of the West-Ricardo system considered as a whole, it has very little mean-
ing and is hardly worth bothering about.

Let us go on. That theory of rent having fulfilled its only purpose, which is
to get rid of another variable in our equation, we are left, on the margin of
production, with one equation and two variables — still a hopeless business.
But, so it occurred to Ricardo, wages are not really a variable either, at least
not within that equation. He thought he knew, from external considerations,
what they will be in the long run: here the old Quesnay theory comes in,
reinforced by Malthus’ law of population — the wages will be roughly equal to
what is necessary to enable ‘the labourers, one with another, to subsist and to
perpetuate their race without either increase or diminution.’ And so we reach
the blessed goal at last: profit, the only variable left, is determined too. Call
this patchwork ingenious, if you so please, but do not deny that it is patch-
work — and rather primitive patchwork at that.

Marx’s schema is open to a similar objection. 29 He also eliminated rent from
the fundamental problem, though in a different way. His equation of distribu-
tion, in terms of Marxist values, then reads: net output equals wages plus
surplus. Again we can take the net output as a datum. And again the surplus
is a residual, the determination of which depends upon the external consider-
ations that determine wages.

J. S. Mill’s system, on the contrary, absorbed enough of the Say conception
— and in addition was sufficiently helped by Senior’s notion of abstinence —
to be free from any such objection, and it offered all the elements of the

29 On Marx’s elimination of rent from the final problem, see above, ch. 1, sec. 4; on
his equation of distribution in terms of Marxist values, see below, ch. 6, sec. 6g.

570 III: FROM 1790 TO 1870

complete model that Marshall was to build. But he retained so many' Ri-
cardian relics that there is some excuse for Jevons’ and the Austrians' not see-
ing that they were developing his analysis and for believing instead that they
had to destroy it.

6 . The ‘Classic' Conception of Economic Development

I have tried to explain above (Part 1, ch. 4, sec. id) the meaning and role of
what I have called Vision — that first perception or impression of the phenom-
ena to be investigated which factual and ‘theoretical’ analysis, in an endless re-
lation of give and take, then work up into scientific propositions. But when we
are concerned with nothing more ambitious than to formulate the way in which
— on the plane of pure logic — economic quantities ‘hang together,’ that is, when
we are concerned with the logic of static equilibrium or even with the essential
features of a stationary process, the role of Vision is but a modest one — for we
are really working up a few pretty obvious facts, perception of which comes
easily to us. Things are very different when we turn to the task of analyzing
economic life in its secular process of change. It is then much more difficult
to visualize the really important factors and features of this process than it is
to formulate their modi operandi once we have (or think, we have) got hold
of them. Vision (and all the errors that go with it) therefore plays a greater
role in this type of venture than it does in the other. This may be illustrated
by the Stagnationist Thesis of our own time, that is, the notion that the
capitalist system has spent its powers; that the opportunities of private enter-
prise are giving out; that our economy is, amid convulsions, settling down to
a state of Secular Stagnation or, as some prefer to call it. Maturity. No doubt
facts and arguments have been collected in order to establish this notion,
which has also been embodied in theoretical models. But it should be obvious
that these facts and arguments rationalized a pre-existing vision or impression
which they would have been powerless to create, if for no other reason, be-
cause the. relevant observations extend over a period that is much too short
and was much too much under the influence of clearly abnormal events to
warrant any conclusions or predictions of that kind. Economists’ visions were
in no better case a century or so ago. We shall consider three types of vision
of the economic future of humanity that the writers of the period under sur-
vey tried to formulate and to establish. In other words, we shall consider three
types of theories of economic development.

The first type, associated primarily with the names of Malthus, West, Ri-
cardo, and James Mill, fully justifies their being labeled ‘pessimists.’ Its well-
known features were: pressure of population, present already but still more to
be expected; nature's decreasing response to human effort to increase the sup-
ply of food; hence falling net returns to industry, more or less constant real
wages, and ever-increasing (absolutely and relatively) rents of land. We are
now not concerned with the manner in which these ‘classics’ gave analytic
effect to this vision of theirs, that is, with the manner in which they formu-
lated their ‘laws’ of population, decreasing returns in agriculture, and so on.

'^aM

GENERAL ECONOMICS: A CROSS SECTION

57 1

and with the analytic use they made of them. To this we shall attend in
the next chapter. Here we are concerned only with what they thought they
saw, that is, with the vision that was at the back of their analysis — or, if you
prefer, with their preconceptions.

The most interesting thing to observe is the complete lack of imagination
which that vision reveals. Those writers lived at the threshold of the most
spectacular economic developments ever witnessed. Vast possibilities matured
into realities under their very eyes. Nevertheless, they saw nothing but cramped
economies, struggling with ever-decreasing success for their daily bread. They
were convinced that technological improvement and increase in capital would
in the end fail to counteract the fateful law of decreasing returns. James Mill,
in his Elements , even offered a ‘proof' for this. In other words, they were
all stagnationists. Or, to use their own term, they all expected, for the future,
the advent of a stationary state, which here no longer means an analytic tool
but a future reality.

Apparently, J. S. Mill was in better case. He dropped all ‘pessimism/ and
he was even intelligent enough to realize that there was no reason to look
upon the future of the masses ‘as otherwise than hopeful/ However, this was
only because he believed — as other Malthusians such as Chalmers had be-
lieved before him — that mankind was learning the Malthusian lesson and was
about to restrict propagation voluntarily so that the race between capital and
population would be won by the former. In this he proved himself a better
prophet than did others. But he had no idea what the capitalist engine of
production was going to achieve. On the contrary, toward the end of his life
(around 1870) he really became a stagnationist in the modern sense, believing
that the private-enterprise economy had pretty much done what it was able
to do and that a stationary state of the economic process was near at hand.
But there is this difference between him and our own stagnationists. He did
not, as A. Smith and Ricardo had done, view the stationary state with mis-
givings ( Principles , Book rv, ch. 6), because he had eliminated the bogey of
overpopulation. But neither did he share the modem stagnationist’s misgiv-
ings, because he did not fear the bogey of underconsumption. To him the
stationary state looked rather comfortable — like a world without ‘bustle’ (his
term) in which a philosopher like himself would not mind living and in
which there would be moderate prosperity (or better) all round. 1 The ques-
tion, whether the social structure of capitalism could persist in circumstances
in which the main function of the capitalist entrepreneur was being lost, we
may answer for him by saying that he visualized the advent of the stationary
state as a very gradual process so that institutions and minds would have no
difficulty in making the currently necessary adjustments.

In agreement with all the English ‘classics’ — perhaps we might say, with
the spirit of his age — he greatly underrated the importance in economic de-

1 This stationary state was a state of a peculiar kind and did not conform to the
definition given above. It did not quite exclude technological progress or increase in
capital. It was really stationary with respect to population only, it being assumed that
this would cause everything to go on more quietly.

572 III: FROM 1790 TO 1870

velopment of the element of personal initiative and, correspondingly, he greatly
overemphasized the importance of mere increase in physical producers’ goods.
And in this again, he overemphasized the importance of saving . 2 Accepting
the Turgot-Smith theory of the investment process, he took it for granted
that the important thing was to have something to invest: the invesment it-
self did not present additional problems either as to promptness- — it was
normally sure to be immediate — or as to direction — it was sure to be guided
by investment opportunities that were equally obvious to all and existed inde-
pendently of the investing man . 3 Saving, then, was the powerful lever of eco-
nomic development. And it never created obstructions; the saving act itself
did not, since the sum saved was immediately spent on productive labor; the
resulting expansion of productive capacity did not, since products of correctly
planned production were always capable of being sold at cost-covering prices . 4
To use our own term, J. S. Mill’s schema of economic development, like
Say’s, was essentially hitchless. Malthus’ and Sismondi’s schemata are exam-
ples of hitchbound ones, the hitches arising in both cases not so much from
saving per se, but from the resulting increase in productive capacity. Ricardo’s
also was hitchbound, but for another reason, namely, the reason enshrined in
his interpretation of the law of diminishing returns.

The second type of vision of the economic future — the 'optimistic’ type —
can be best illustrated by such names as Carey and List. Whatever we may
think of the virtues of their technical analysis, at least they did not lack
imagination. They felt intuitively that the dominant fact about capitalism was
its power to create productive capacity, and they saw vast potentialities looming
in the near future. With less imagination but with plenty of sound judgment,
the majority of economists on the Continent refused to share the 'pessimism’
of the Ricardians and of Malthus. At least, most of them watered it down.
But beyond this, it was natural for those who more or less followed Say’s
lead so far as technical theory was concerned to realize that neither facts nor
analysis were bearing out the Ricardian vision. These were called 'optimists’
and, partly but not wholly under Marxist influence, there grew up a tradition
to despise them as shallow. This view is in fact historically associated with

2 Of course we may define saving in such a way as to make that statement meaning-
less. But I mean by saving (or thrift) the distinctive phenomenon we all know (unless
we are too familiar with the economic theory of the 1930’s) and therefore consider it
as a factor in the process of the accumulation of physical capital goods. My statement
then means that J. S. Mill, like all the authors that followed the Turgot-Smith line,
was at fault in believing that thrift was the all-important (causal) factor in that process.

3 This mechanistic view, too, was an important element in the economic W eltbild.
of the 'classics/ They were entirely unaware of how great a part of capitalist reality
they thereby suppressed in silence.

4 The latter proposition is more delicate to handle than J. S. Mill and the economists
of his time and line realized. But its opponents were below and not above the limited
truth it asserts. Also, though in a particularly narrow way — through saving alone — Mill
thus did recognize the most obvious of all truths about capitalist development, viz.,
that, by virtue of its logic, it tends to raise the standard of life of the masses.

GENERAL ECONOMICS: A CROSS SECTION

573

many writers — the Bastiat type — who fully deserve to be so called. But in
itself this ‘optimism' was the result of both a vision and a theory that were
more correct than those of the ‘pessimists': the degree of truth of a doctrine
is by no means always positively correlated with the ability of its exponents. 5

The third type of vision of the economic future and of corresponding theo-
ries of economic development will be represented by Marx alone. Based upon
a diagnosis of the social situation of the 1840's and 1850’s that was ideolog-
ically vitiated in its roots, 6 hopelessly wrong in its prophecy of ever-increasing
mass misery, inadequately substantiated both factually and analytically, Marx’s
performance is yet the most powerful of all. In his general schema of thought,
development was not what it was with all other economists of that period, an
appendix to economic statics, but the central theme. And he concentrated his
analytic powers on the task of showing how the economic process, changing
itself by virtue of its own inherent logic, incessantly changes the social frame-
work— the whole of society in fact. We have already dwelt on the grandeur
of this conception; we shall briefly discuss its analytic aspects below.

Only two points can be mentioned here. First, nobody — not even the most
ardent of optimists with whom Marx had this point in common — had then a
fuller conception of the size and power of the capitalist engine of the future.
With a quaint touch of teleology, Marx said repeatedly that it is the ‘his-
torical task' or ‘privilege’ of capitalist society to create a productive apparatus
that will be adequate for the requirements of a higher form of human civiliza-
tion. However much our modern positivism may resent this way of putting
it, the essential truth of what he meant to convey, in this respect, stands out
clearly enough.

Second, the motor of Marx’s economic development was indeed not quite
the colorless Saving of J. S. Mill: he linked it — or investment — -to technolog-
ical change in a manner that is not to be found in the latter’s Principles. But
all the same the motor is Saving, which with him is as promptly turned into
investment as it is with Mill. This fact is hidden but not abolished by Marx’s
use of the term Accumulation and by his violent diatribes against the ‘nursery
tale’ ( Kinderfibel ) that physical capital is created by saving. There are good
reasons as well as bad ones for Marx’s dislike of the latter term. In particular,
capitalist fortunes do not typically arise from saving income dollars and piling

5 In this and other respects, the case is similar to that of the doctrine of the essential
harmony of class interests. On investigation, this doctrine turns out to be only partly
tenable — but rather more so than does the doctrine of the essential antagonism of
classes. But the latter has been preached with unsurpassable force and, moreover, renders
the radical intellectual’s ideology. The former has never been put forcefully or even
convincingly. And it does not suit the book of the radical intellectual. So he who holds
it is likely to be sneered at as a sort of Caspar Milquetoast, and this is quite as effective
as, or more so than, serious argument would be. In the present case, there is something
else however. No matter what the reason is, it is a fact that pessimistic views about a
thing always seem to the public mind to be more ‘profound’ than optimistic ones.

6 It was pointed out above that Marx took his picture of social reality from the
radical ideology of his formative period.

574 m : from 1790 to 1870

them up neatly, hut by the creation of sources of returns, the capitalized
value of which then constitutes a ‘fortune/ However, the implications of this
he would not have liked any better than he did the picture of good and
frugal boys who save till they find themselves rich. So it had to be Exploita-
tion forever, so exclusively in fact as to endanger the explanatory value of his
schema: for the social process as a whole, the essential point is in any case
the capacity-creating use made of capitalists' gains — no matter whether or not
they arise from exploitation and are invested again for the purpose of further
exploitation — and this essential point, so a history of analysis has to notice,
is fundamentally the same with Marx and Mill, however different the phrase-
ologies were in which they conveyed it.

CHAPTER 6

[General Economics: Pure Theory ] 1

[x. Axiomatics. Senior’s Four Postulates] 575

[(a) The First Postulate] 576

[(b) The Second Postulate: the Principle of Population] 578

[(c) The Fourth Postulate: Diminishing Returns] 584

2. Value 588

(a) Ricardo and Marx 590

(b) The Opponents of the Labor-Quantity Theory of Value 598

3. The Theory of International Values 605

4. Say’s Law of Markets 615

5. Capital . 625

(a) Terminological Squabbles about Wealth and Income 625

(b) The Structure of Physical Capital 631

(d) J. S. Mill’s Fundamental Propositions Respecting Capital 640

6. The Distributive Shares 645

(a) Profits 645

(b) Marx’s Exploitation Theory of Interest 647

(d) The Productivity Theories of Interest 655

(e) The Abstinence Theory of Interest 659

(f) The Wage-Fund Doctrine, Precursor of Modern Aggregative Analysis 662

(g) Rent 671

(h) Distributive Shares and Technological Advance 679

[x. Axiomatics. Senior’s Four Postulates]

To Senior belongs the signal honor of having been the first to make the at-
tempt to state, consciously and explicitly, the postulates that are necessary and
sufficient in order to build up — it is misleading to say to 'deduce’ — that little
analytic apparatus commonly known as economic theory, or, to put it differ-
ently, to provide for it an axiomatic basis. The merit of the attempt is but little
decreased by the fact that his list of postulates was incomplete and otherwise
defective and by the further fact that he invited attack by defining that ap-

1 [Section 1 of this chapter was written much earlier than the remainder of the
chapter. The typescript was dated December 1943. It was obvious that J. A. S. intended
to revise these pages on Senior and to make them the introductory section to this
chapter. There were many notes clipped to the early typescript. There was no title for
; f :, this section and no title for the chapter, but the remaining sections were relatively
complete with titles for sections and subsections. This section is presented as written,
although it lacks the proper introductory remarks and the revisions J. A. S. would
have made.]

575

576 III: FROM 1790 TO 1870

paratus so narrowly or else by equating this theory to 'political economy/ It is
increased by the fact that the attempt occurs in the course of a general theo-
retical house cleaning and is part of a wider attempt at rigorous conceptuali-
zation. First he polished Wealth and (exchange) Value; then he stated his
four Elementary Propositions — the postulates; finally he presented, under the
inadequate heading of Distribution (Exchange or Value and Distribution
would be more adequate), a set of additional concepts and of relations that
together with the immediate development of the postulates, which settle
most matters usually dealt with under the heading Production, are supposed to
make up the theoretical organon. As a venture in pure theory, his perform-
ance is clearly superior to that of Ricardo. We shall now consider the postu-
lates, using in doing so every opportunity that may arise of looking further
afield.

[(a) The First Postulate .] The first reads as follows: 'That every man de-
sires to obtain additional Wealth with as little sacrifice as possible/ 2 Implic-
itly at least, some such proposition underlies all theoretical reasoning and it
would just as well fit into Ricardo’s or Mai thus’ texts. Adam Smith and J. S.
Mill took it for granted, Lauderdale came near to stating it explicitly. In the
language of the next period — in Marshall’s for instance — it can be expressed
by saying that every man desires to maximize the difference between the
sum total of his satisfactions and the sum total of his sacrifices, both dis-
counted to the present moment. But what is its nature and standing?

Senior calls it 'a matter of consciousness’ and distinguishes it from the three
other propositions, which are ‘matters of observation/ But it would not af-
fect his meaning if we called it a matter of introspective observation. More-
over, there are, in his ‘development’ of this proposition (e.g. pp. 27-8) 3 vari-
ous comments on the behavior of Dutchmen and Englishmen and Indians of
Mexico that are obviously based upon an external observation of sorts. We
may therefore provisionally speak of observation even in this case and proceed
forthwith to state the following generalization about all four of them or any
other proposition an economist may see fit to postulate. In so doing we ex-
emplify — and in part justify — Say’s opinion on economics being an observa-
tional science (though he said experimental), which will thus be seen, appear-
ances notwithstanding, to involve no disagreement with Senior.

Nobody ever denied — or, by his practice, belied — the truth that economic
theory, like any other theory, is founded upon observation. Senior, by taking
little trouble with observations and concentrating upon inference from them,
may have created a wrong impression and he may himself have held errone-
ous views about the relative importance of observing and inferring, but he did
not in fact — though he did in phrase — treat economics as toto caelo ‘de-
ductive.’ Now, the facts observed enter theory as hypotheses or assumptions
or ‘restrictions,’ that is to say, as generalized statements induced or suggested

2 [The postulates are discussed in Nassau William Senior, An Outline of the Science
of Political Economy (1st ed. 1836; 6th ed. 1872; publ. in the Library of Economics,
1938).]

3 [Page references are to the edition published by the Library of Economics.]

GENERAL ECONOMICS: PURE THEORY

577

by observation . 4 When we wish to stress our confidence in their validity, we
often call them Laws — compare for instance Keynes’s "psychological law’ of
the propensity to save. When we simply wish to stress our resolve not to
challenge them in the course of a particular argument, we call them Princi-
ples. But all these words really mean one and the same thing, and there is no
point in philosophizing about them. This applies to frontier facts as well as to
facts that belong to our field proper. The difference, as pointed out above, is
only that in the first case we do not, in the second we do, feel fully respon-
sible for the validity of our statements about them.

Quite another question is whether or not we are to be satisfied with an ob-
servation of the Seniorian or, for that matter, the Ricardian or Millian kind.
Three aspects of this question must be carefully distinguished if we are to
understand "classic’ or any other theoretical procedure. There are first the
two problems of observation by introspection and by common or everyday
experience. Many economists of later times, especially the founders of the
so-called Austrian School, have stoutly stood for both. Wieser in particular
seems quite in accord with J. S. Mill in accepting common experience as a
valid basis for theory to start from. Critics have sometimes gone so far as to
rule both out entirely on the ground that introspection and common experi-
ence are nothing but cloaks for purely speculative assertions. This extreme
form of the criticism is indeed open to the reply that some postulates — such
as that businessmen on the whole prefer making money to losing it — are evi-
dently not miles from the truth and that it is vexatious to insist upon elaborate
research for the purpose of establishing them. But a less extreme form of the
same criticism is not invalidated by such cases. There are others — savings habits
for instance — in which introspection and common experience cannot be con-
vincingly invoked; and even where they can, the relative importance and the
modus operandi of the facts that enter a postulate may still have to be ascer-
tained by more substantial methods.

This opens up the second aspect of our question. Senior’s postulate embod-
ies observation, but possibly inadequate observation. Does this justify us in re-
jecting everything that is between the covers of his book? Evidently not. The
postulate divested of unnecessary utilitarian associations is plausible. . All that
could be objected to it on grounds such as that he overemphasized selfishness,
overestimated the rational element in our behavior, and neglected historical
differences in the intensity of the desire for ‘wealth’ at different times and in
different places, is amply taken into account in his comments upon his propo-
sition. If we feel misgivings nevertheless, all we have to do is to start appropri-
ate research. Anything else is pure filibustering. So long as the strong prima
jade plausibility of the postulate is not destroyed by the results of such re-
search, and so long as particular problems are not specified for which plau-
sibility is not enough and which were nevertheless attacked by those critic-
economists, we may indeed feel that Senior’s analysis was primitive — we know

4 It should be noticed that this is only one of several meanings of the word
Hypothesis. We have met others. The same remark applies to Laws and Principles.

578 III: FROM 1790 TO 1870

that the whole of Senior’s, Ricardo’s, and Mill’s work is primitive, in inference
no less than in observation — but we cannot deny its scientific character or call
it wrong on principle.

The third aspect of our question comes into view when we ask ourselves
whether Senior’s first postulate could not be reformulated in a way that would
get round the objections that have been or might be raised. But since the
economists of that period, if guilty of Psychologism, were certainly much less
guilty of it than were the economists of the next period, we had better defer
discussion of this point until later.

[(b) The Second Postulate: the Principle of Population .] Senior’s second
postulate states the principle of population: ‘That the Population of the world,
or, in other words, the number of persons inhabiting it, is limited only by
moral or physical evil, or by fear of a deficiency of those articles of wealth
which the habits of the individuals of each class of its inhabitants lead them
to require’ (op. cit. p. 26). We take this opportunity to touch briefly upon
the contribution of Malthus and the discussion that developed about it. More-
over, it will be convenient to add a few remarks about the history of the theory
of population in the subsequent period so that we may drop it from our pic-
ture in Part iv. This decision is suggested by the fact that its interest for
analytic economics greatly declined during the second half of the nineteenth
century and that it then grew into a semi-independent science, which it is'
impossible to deal with in this book. [J. A. S. note: ‘but came back in our
time.’]

We have seen already that all the facts and arguments that Malthus pre-
sented in the first edition of his Essay (1798), down to the details of the
analysis as well as of the applications, had been worked out before by so
large a number of writers that we may speak of them as widely accepted at
the beginning of the nineties. The case therefore differs essentially from the
bulk of all those cases, still more frequent in economics than in other sciences,
in which a proposition that we associate with an individual name has been
anticipated by ‘forerunners.’ This does not amount to a charge of plagiarism
or even to a denial of ‘subjective’ originality. But it does reduce Malthus’ con-
tribution to effective co-ordination and restatement. The significance of its
tremendous success at the time — with the profession and with political society
— is underlined by the fact that, for about a century to come, theory of popu-
lation was to mean arguments pro and con the Malthusian theory.

Also, I have already alluded to the attempts that have been made to ac-
count for this success, and for Malthus’ performance itself, by the ideological
mechanism. While giving my reason for refusing to accept this explanation, I
have, however, admitted that there are two facts that do lend some support
to it. The one of them is that the theory was immediately used as an argu-
ment against measures of social betterment. William Pitt availed himself of it.
Malthus himself published a pamphlet, which is judged mildly if described
by no worse term than silly, in which he argued, as Townsend had before
him, that the proposal to encourage parishes to build cottages, must on no
account be entertained because building cottages would encourage early mar-

GENERAL ECONOMICS: PURE THEORY

579

riages ( Letter to Samuel Whitbread * . . 1807). In the public mind this
sort of thing then assumed the form that the masses had themselves to
thank for their economic situation and that nothing much could be done
about it. The second fact is this: Malthus himself related that the argument
developed in his mind in the course of discussions with his 'social-minded'
father; and in the subtitle of the first edition of the Essay, he pointed signifi-
cantly to the 'speculations of Mr. Godwin 5 [the author of the radical bible
of the day], M. Condorcet, and other writers.’ I still think that these facts
do not prove more than that every idea can and will be made to serve some
ideological purpose as soon as it emerges into the limelight.

We are not, however, concerned with the application of this theory to
practical questions — or any applications except the one to the theory of wages,
which will be noticed later — but only with the theory itself. As presented in
the first edition, it clearly was intended to mean that population was actually
and inevitably increasing faster than subsistence and that this was the reason
for the misery observed. The geometrical and arithmetical ratios of these in-
creases, to which Malthus like earlier writers seems to have attached consider-
able importance, as well as his other attempts at mathematical precision, are
nothing but faulty expressions of this view which can be passed by here with
the remark that there is of course no point whatever in trying to formulate
independent 'laws' for the behavior of two interdependent quantities. The
performance as a whole is deplorable in technique and little short of foolish
in substance. But it is at least not open to the criticism that Malthus merely
asserted the horrible triviality that, if increase in population should go on in
a geometric ratio (with a common ratio greater than unity), it must at some
time in the future produce a state of things in which people will be crowding
this earth as herrings crowd a barrel.

The second edition of the Essay on the Principle of Population (1803) is a
completely new work which, besides copious statistics, contains an entirely

8 William Godwin’s (1756-1836) principal work ( Enquiry concerning Political Justice,
1793, 2nd [amended] ed. 1796) and his essays published in 1797 under the title The
Enquirer are highly interesting documents of the time and would have to hold a place
of honor in any history of political thought, as a monument, in particular, of that
bourgeois type of anarchism which condemns not only violence but also any sort of
compulsion. It is essentially anti -etatiste — and posits equality as an end in itself. But
his attempts at economic analysis, as he would have himself admitted, remained too
rudimentary (though less so than those made by other members of the group which
I have chosen Godwin to. represent) to require report, except in so far as his book Of
Population (1820) is concerned. It is curious to write — and should be mentioned to the
credit of Malthus — that when the Essay on the Principles of Population appeared,
Godwin considered its argument not only convincing but new. He changed his mind
about the former point however, and in his own book undertook to annihilate Malthus’
argument. In doing this he showed considerable analytic power. In spite of Bonar’s
adverse judgment ( Malthus and His Work, pp. 369 et seq.), it should I think be
admitted that Godwin succeeded in making several points which can be considered
real contributions.

580 III: FROM 1790 TO 1870

different theory. 6 For the introduction of the prudential check ("moral re-
straint'), though it was no more a new discovery than was anything else in
Malthus’ theory, makes all the difference. Only it does not (1) raise the in-
tellectual level of the performance or (2) make - its results any more tenable
or (3) add to its explanatory value. As regards the first point, it is sufficient to
note that it did not occur to Malthus to discuss any effects of his moral re-
straint other than the effect on numbers — for example, effects on the quality
of the population or on schemes of motivation. As regards the second point,
the new formulation made it indeed possible for adherents to this day to take
the ground that Malthus had foreseen, and accounted for, practically every-
thing opponents might say; but this does not alter the fact that all the theory
gains thereby is orderly retreat with the artillery lost. As regards the third
point, the various "if’s’ that were then introduced leave — of all the claims to
universal validity — only the triviality mentioned above and, beyond this, the
possibility of explaining individual historical situations by the possible failure
of other elements of the environment to develop along with population which
does not require any general principle. Professor Cannan (op. cit. p. 144) did
not exaggerate when he wrote that the Essay "falls to the ground as an argu-
ment, and remains only a chaos of facts collected to illustrate the effect of
laws which do not exist.’

Malthus himself was reluctant to admit all the consequences that lurked in
his qualifications of 1803. On the contrary, he clung to his original conclu-
sions as much as possible, particularly to the relevance of his theory for his
own time. It was therefore by no means superfluous, as some admirers kept
on assuring their readers, that Senior and Everett 7 (also others), either facing
honestly those consequences or else arriving at their conclusions independ-
ently of a study of Malthus’ qualifications, pointed out from different stand-

6 [There is some repetition in this section of material already presented in Chapter 4
and elsewhere which J. A. S. would undoubtedly have taken care of in his revision.]

7 Senior in his Two lectures on Population , to -which is added a Correspondence
between the author and the Rev. T. R. Malthus (1829) developed the views which
were expounded again in his Outline. He always treated Malthus with infinite respect —
he even called him a benefactor of humanity (sic!) — and did all in his power to
minimize his deviation from what he evidently considered to be established doctrine.
All the less justification is there for the practice of some later writers who, with
nauseating pontificality, treated Senior as a none too intelligent pupil who needed to
be set right by Malthus. As a matter of fact, it is perfectly clear that Senior realized
the extent to which Malthus’ qualifications ought to have spelled recantation and to
what degree his adherence to some of his former opinions spelled contradiction.

A. H. Everett, an American diplomatist and newspaper editor, was perfectly right to
call his book New Ideas on Population (1823). For his main point, viz., that increase in
population means increased production of food and is likely to induce improvements
in the methods of its production, was new in his day, much more so at any rate than
anything Malthus ever Said. It introduced one of the two relations that are lacking in
Malthus between the increase of population and the increase of subsistence, and in
general presented, quite independently of the specifically American elements of its
argument, a useful approach to the population problem as a whole.

GENERAL ECONOMICS: PURE THEORY

581

I#:;

points and by different arguments how little there was really left. This is pa-
thetically obvious in Senior’s formulation of the principle in his Outline —
‘that the population of the world.. . . is limited only by moral or physical
evil, or by fear of the deficiency of those articles of wealth which the habits
of individuals of each class of its inhabitants lead them to require.’ Neverthe-
less Senior, unlike Everett, continued to consider it as a fundamental postu-
late of economics, and still more was it so considered by Ricardo, James Mill,
McCulloch, and others. J. S. Mill dealt very briefly with population in his
chapter ‘Of the Law of Increase of Labour’ ( Principles , Book r, ch. 10). It is
true that he explained this by declaring that the subject had been fully dealt
with by Malthus to whom he refers his readers. But one might be tempted
to infer that he was disposed to discount the importance of the principle. He
might have been because, following a trend that had become established by
the time he wrote his Principles , J. S. Mill put the law of population into a
relation to the ‘law’ of diminishing returns from land — which, it is worth
while noting, was entirely absent from Malthus’ Essay — and because he was
prepared, as we shall see, to admit plenty of exceptions and qualifications of
that law. Nevertheless, it is certain that he entertained a strong belief in the
validity and immediate importance of the Malthusian theory. In the Principles
he showed this by his interest in the problems of a stationary population
(Book iv, ch. 6) and in particular by his blunt assertion, which is as categorical
as it is unsupported, that ‘the density of population necessary to enable man-
kind to obtain, in the greatest degree, all the advantages both of co-operation
and of social intercourse has, in all the most populous countries, been at-
tained’ — thereby suggesting that any further increase of (European) popula-
tion would be productive of nothing but ‘pressure.’ Still more convincingly,
however, this belief shows in his indubitable sympathy with birth control. 8

Thus — interesting phenomenon — the teaching of Malthus’ Essay became
firmly entrenched in the system of the economic orthodoxy of the time in
spite of the fact that it should have been, and in a sense was, recognized as
fundamentally untenable or worthless by 1803 and that further reasons for
So considering it were speedily forthcoming. 9 It became the ‘right’ view on

8 See N. E. Himes, ‘John Stuart Mill's Attitude towards Neo-Malthusianism,’ Eco-
nomic History: A Supplement of the Economic Journal, January 1929. Malthus, most
predecessors, and some of his successors, such as Senior, seem to have included birth
control with ‘vice’ or ‘moral evil’ along with prostitution. But all the leading philo-
sophical radicals seem to have looked to it as the true solution of the problem. So did
Bentham himself and, of course, Francis Place. James Mill gave a lead in the same
direction in his Elements (1821, p. 34). Grote. held the Same opinion. In such matters,
it is not safe to trust to logic. Attitudes to these questions link up with intimate ele-
ments of our psycho-physical organism that may exert influences of which we are
entirely unaware: individual ideologies arise not only from social location. I think,
nevertheless, that in the case of J. S. Mill the pressure of a purely economic diagnosis
of the Malthusian kind may be reasonably asserted, at least as a rationalization.

9 It should be observed that this survival was of course greatly facilitated by a surface
observation: clearly, the most obvious reason for misery and squalor in the individual

582 in: FROM 1790 TO 1870

population, just as free trade had become the ‘right’ policy, which only igno-
rance or obliquity could possibly fail to accept — part and parcel of the set of
eternal truth that had been observed once for all. Objectors might be lectured,
if they were worthy of the effort, but they could not be taken seriously. No
wonder that some people, utterly disgusted at this intolerable presumption
which had so little to back it, began to loathe this ‘science of economics,’
quite independently of class or party considerations — a feeling that has been
an important factor in that science’s fate ever after.

The majority of the profession, however, especially in England, submitted.
After 1850 the interest of economists in the population question declined,
but they rarely failed to pay their respects to the shibboleth. So did Marshall,
though he stripped it of practically all its salient features, and so did Bdhm-
Bawerk and Walras, who in their theoretical work never used it at all. At the
end of the century the one leading man to take it seriously and to emphasize
it again and again was Wicksell, who also resuscitated the doctrine of optimal
population which, however, had commanded support throughout. One might
have expected these rumbles to die out but on the contrary, after the First
World War, they actually revived again in a cannonade: Mr. Keynes stepped
forth to hold that the Malthusian issue was as vital as it had ever been; and
that in fact it had entered on a new lease of life since — he put the date some-
where in the first decade of the century — nature had begun to yield a de-
creasing response to human effort. The profession was startled, as presumably
it was intended to be. Sir William Beveridge espoused the opposite view.
But the controversy subsided for the unscientific reason that people had more
pressing concerns in a world in which a spectacular fall in the birth rate and
a no less spectacular torrent of unsaleable foodstuffs and raw materials were
about to set in. Mr. Keynes said somewhere that economics is a ‘dangerous
science.’ It is indeed. 10

The decline of the Malthusian theory or, at all events, of its role within
the system of general economic theory, was not however due to its opponents.
We can pass quickly over their contributions, which — with the possible ex-
ceptions of those of Godwin and Everett which have been mentioned already
— hardly ever met the theoretical issue. One point they made which, as we
haive seen, was not of minor importance where immediate applicability of the

proletarian family was size. The inference that all would have been better off and
happier if all had restricted the number of their children follows by means of the same
fallacy that led people to infer from everyone’s tendency to make the best of his' situ-
ation that, if all are left to their own devices, a maximum of ‘happiness’ must result
for all.

10 Keynes’s first pronouncement on the matter occurs in his famous Economic Con-
sequences of the Peace (1919). Sir William Beveridge presented his view in an address
to Section F of the British Association, published in the Economic Journal, 1923, and
in an article, ‘Mr. Keynes’ Evidence for Overpopulation’ in Economica, 1924. Keynes
replied and the newspapers did their best to confuse issues. See on postwar discussions
in general: A. B. Wolfe, “The Population Problem Since the World War,’ three
articles in the Journal of Political Economy, 1928 and 1929.

GENERAL ECONOMICS: PURE THEORY

5 8 3

theory is in question: they showed more or less effectively that, at best, the
Malthusian theory might apply at some distant future but that it was no good
as an explanation of present poverty. This ground was taken by Oppen-
heimer, 11 but had been taken before — in a sense by Senior and much more
strongly by William Hazlitt (A Reply to the Essay on Population , 1807).
Under this heading we may mention the 'Ricardian socialists’ of the twen-
ties of the nineteenth century such as W. Thompson, 12 who emphasized that
the Malthusian theory would work out quite differently in different forms of
social organization and that, for example, the economic independence of
women and a higher standard of life would alone suffice to put a different
complexion upon the matter; and Karl Marx, who developed this 'institu-
tional relativity’ 13 into the sweeping proposition that 'overpopulation/ as ob-
served in capitalist society, has nothing to do with any immutable laws but
is specific to this form of organization and simply an incident to its mech-
anism of accumulation.

Other objectors tried to replace the Malthusian geometric progression by
other laws of increase (e.g., Sadler, 1830, Doubleday, 1846), which do not
soar toward infinity but display maxima or plateaus that might be reached
before the point of Malthusian pressure. The difficulty was to motivate these
forms without using moral restraint or other Malthusian factors. On this
rock all those ships foundered — nothing was proposed beyond more or less
dilettantic hints. These laws induced others that do not carry causal implica-
tions — not necessarily, at least — but merely aim at describing actual and, by
risky extrapolation, future developments. Verhulst’s (1845) was one of the
earliest of these attempts, and many statisticians have tried their hand at this
task ever since (for example, Knibbs, Pearl, Hotelling). Laws of this type are
of course neutral to the Malthusian issue. Still other objectors pleaded what
might be termed attenuating and compensating circumstances — Carey was one
of the most eminent of these and Chalmers was another — or the undesired
(anti-eugenic) effects of birth control. For our purposes it does not seem neces-
sary to go into this 14 or into the opinions proffered by biologists. But it is
necessary to mention a theory which, whether /or not it can be stated so as to

11 Franz Oppenheimer, Das Bevolkerungsgesetz des T. R. Malthus (1900). .

12 Inquiry into the Principles of the Distribution of Wealth (1824).

13 This term was suggested by Professor A. B. Wolfe’s article on 'Population’ in the
Encyclopaedia of the Social Sciences, to which I take the opportunity of calling the
reader’s attention.

14 A few general references should, however, be added: }. Gamier, Du Principe de
population (1857), a good symptom of Malthus’ conquest in France; A. Messedaglia,
Della teoria della popolazione . . . (1858), an able criticism of Malthus’ workmanship;
L. Brentano, 'Die Malthussche Lehre und die Bevolkerungsbewegung der letzen Dezen-
nien’ ( Abhandlungen der historischen Klasse der Koniglich Bayerischen Akademie der
Wissenschaften, vol. xxiv), interesting because it reflects an opinion that foreshadowed
the important development to be mentioned in the text, if for no other reason. Com-
parison is instructive of this and the earlier book by Travers Twiss, On certain Tests
of a Thriving Population (1845). K. Kautsky, the official head of Marxian orthodoxy,
contributed: Der Einfluss der V olksvermehrung auf den Fortschritt der Gesellschaft

584 III: FROM 1790 TO 1870

become compatible with Malthus’ text, yields the exact opposite of Malthus’
conclusion: Mombert’s ‘prosperity theory' (Wohlstandstheorie) of popula-
tion, according to which we are to expect a fall in the birth rate from the
rationalizing influence on behavior of a higher standard of life . 15 In a sense,
Malthusians might claim this as an elaboration of ‘restraint,' moral or other-
wise. But, so far as it goes, it turns effectively the tables on any prediction
that increase of subsistence (in a wide sense of the word) will always or nor-
mally induce an increase in the rate of propagation.

An ordinary mortal might have thought that the fall in birth rate, first in
the upper then also in the lower strata, first in urban then also in agrarian
areas, and the rapidly approaching goal of a stationary population, should
have set worrying economists at rest. But that mortal would thereby have
proved that he knew nothing about economists. While some of them were
still fondling the Malthusian toy, others zestfully embraced a new one. De-
prived of the pleasure of worrying themselves and of sending cold shivers
down the spines of other people on account of the prospective (or present)
horrors of overpopulation, they started worrying themselves and others on
account of a prospectively empty world.

[As has been pointed out, in note 1 at the beginning, this section was written much
earlier than the other five sections and had not been integrated with the rest of the
chapter. There were numerous notes to be used in revision and rewriting.

There is no discussion here of Senior’s third postulate: ‘That the Powers of Labour,
and of the other Instruments which Produce Wealth, may be indefinitely increased by
using their Products as the means of further Production.' This third postulate is,
however, discussed below in Section 5 (Capital), under the subheading Senior’s Con-
tributions.]

[(c) The Fourth Postulate: Diminishing Returns.] We shall take up the
fourth postulate next: ‘That, agricultural skill remaining the same, additional
Labour employed on the land within a given district produces in general a
less proportionate return, or, in other words, that though, with every increase
of the labour bestowed, the aggregate return is increased, the increase of the
return is not in proportion to the increase of the labour.' It is the fact or
hypothesis or principle or law or tendency of Diminishing Returns. There is
nothing remarkable about Senior's formulation of it except that he stressed
more than did other authors, especially more than did Ricardo, the impor-
tance of the necessary condition of its validity — a given and constant techno-

(1880). Finally, I may quote a later Malthusian: F. Virgilii Problema della popolazione
(1924) and again, R. Gonnard’s Histoire des doctrines de la population (1923), and
especially J. J. Spengler’s scholarly and exhaustive study on ‘French Population Theory
since 1800’ ( Journal of Political Economy, two articles, October and December 1936).

15 Paul Mombert; see, e.g., his contribution on population (‘Bevolkerungslehre’) to
M. Weber’s Grundriss der Sozialokonomik (1914) or his B evolkerungsentwicklung und
Wirtschaftsgestaltung (1932). Among ‘forerunners’ were Brentano (see preceding foot-
note) and, at a stretch. Sir Archibald Alison, The Principles of Population (1840). On
Mombert see below, Part iv, ch. 6, sec. lb.

GENERAL ECONOMICS: PURE THEORY 585

logical horizon, or the proviso, 'agricultural skill remaining the same’ — and
also the importance of true exceptions, which makes a lot of difference to the
tones of the picture. 16 There is, however, a point about his management of
diminishing returns that does merit particular attention. All the leading econo-
mists of that period confined diminishing returns to land and many had as-
serted an opposite ‘law’ for manufactures, especially West and McCulloch. 17
But nobody that I know of has been so emphatic about this ‘law' of increas-
ing returns in manufactures as was Senior, who asserted with little qualifica-
tion that ‘additional labour when employed in manufactures is more, when
employed in agriculture is less, efficient in proportion' ( Outline , pp. 81 et seq.),
without explaining fully to his readers, perhaps without fully perceiving him-
self, that this law of increasing returns, if it exists, is of an entirely different
nature and should never be put as an alternative, with equal rights, alongside
the law of decreasing returns. Thus Senior — or West and Senior — must be
held responsible for the tradition, which took such time in dying, that agri-
culture was the domain of the latter and ‘industry' the domain of the former.
This quite misleading arrangement was not set right until the next period.
Edgeworth took the first steps toward breaking it up. Marshall grew out of it,
of course, but he did not expressly renounce it. To the last he linked de-
creasing returns primarily with the production of raw materials in a way sug-
gestive of Senior’s teaching.

For the rest, we shall avail ourselves of this opportunity to survey the de-
velopment of the principle of decreasing returns during the period. We have
seen that the principle is not found in the Wealth of Nations. In fact, all
that A. Smith says is that ‘progress of improvement’ increases the ‘quantity
of work’ that can be done by the same number of hands ‘comparatively less
rapidly in agriculture than in manufactures.’ This clumsy sentence expresses
a statement of fact that may be true at some times and not at others and
has nothing to do with diminishing ; returns. But it is the germ of an opinion
that greatly influenced the later argument about diminishing returns. As stated
above, Ricardo and others recognized, and Senior emphasized, the fact that
the operation of diminishing returns is interrupted by technological progress.
On the face of it this fact might suffice to break the connection — so funda-
mental for the West-Ricardo-Malthusian picture of economic evolution — of
diminishing returns with the pressure of population. This consequence was

16 It will facilitate matters if we list at the outset the possible meanings of Diminish-
ing Returns. The phrase may mean (1) that if we add equal increments to the quantity
of one of the factors employed, keeping the others constant, total product will from a
certain point on increase only at a decreasing rate; we call this Decreasing Marginal
Productivity; (2) that if we add equal increments to the quantity of one of the factors
employed, total product divided by the quantity of the factor will, from a certain
point on, decrease; we call this Decreasing Average Productivity; (3) that if we add
equal ‘doses’ of all other factors to land, the resulting increments of product or (4) the
resulting average products will decline; these last two propositions, which we call
Millian Diminishing Returns, reduce to the first two.

17 See West’s Essay (1815), jj 25 and McCulloch’s Principles (1825), p. 277.

$86 III: FROM 1790 TO 1870

however avoided — in the end also by Senior — by minimizing the possibilities
of technological progress in agriculture. The Smithian proposition was sharp-
ened into what really was an additional postulate to the effect that in agri-
culture technological progress would not in the long run be strong enough
to get the better of diminishing returns: marginal labor costs of foodstuffs
would actually rise in the calculable future 18 and not merely 'tend to rise/
And this prophecy — there is no other word for it — was, for the Ricardian
group and the public, the really important thing, without which decreasing
returns would have been what it should be: an analytic tool that per se com-
mands but moderate practical interest.

The chief merit of having forged this analytic tool we have assigned, in
spite of the existence of forerunners, to Sir Edward West (see above, eh. 4,
sec. 2) because so far as I know he was the first to create the form it retained
throughout the period and beyond, including the 'prophecy’ or additional
postulate just discussed. 19 He distinguishes the two cases that have become
classical: decreasing returns owing to the necessity of resorting to inferior
land and decreasing returns owing to the 'fact’ that additional labor 'cannot
be bestowed [West does not add: after a certain point] with the same ad-
vantage as before on the old land’ (§ 10). The first case, which we can gen-
eralize so as to include inferior location— as West meritoriously does (§ 9) —
is logically plain sailing, resting securely on the observation that pieces of
land definitely differ in fertility with reference to any given product or method.

However, this does not get us far, since decreasing returns in this sense are
neither necessary nor sufficient for the uses West himself or anyone else ever
made of the 'law/ 20 The second case of decreasing returns is the one that

18 It is necessary to stress that the rise would occur in the calculable future, for this
is what made the proposition practically relevant. Ricardo and Malthus meant more
than that it is possible to assign, for any rates of technological progress, a series of
finite production figures that cannot be reached at all or cannot be reached without
returns decreasing so sharply as to raise marginal costs above what they had been at the
preceding step, whatever the rate of improvement.

19 There is, of course, no reason to question his claim to independent discovery of
the fundamental idea and no doubt whatever about his having been the first to see it
in all its bearings upon questions of economic theory. West’s Essay on the Application
of Capital to Land (1815), though far from faultless, must therefore be ranked among
the most original as well as important performances in that field.

20 Throughout the period and even later, it was this sense, however, that held the
place of honor as it had been the one to occur to Steuart and Ortes. In consequence,
many authors thought they were refuting the West-Ricardo theory of rent by pointing
out that there need not be, in the economic domain, any land so poor as to pay no
rent at all, and by holding that if all land were of uniform quality, there would be
no Ricardian rent. Even Menger used this argument. Ricardo’s text, however, excuses
this to some extent. For he inadvertently makes differential fertility a condition of the
emergence of rent.

Though diminishing returns in this sense do not seem to be very problematical, they
nevertheless came in for adverse criticism. H. Carey’s main objection deserves notice
if only as an example . . . [note unfinished].

GENERAL ECONOMICS: PURE THEORY

587

really matters and ought to be formulated (if we confine ourselves to land) as
follows: suppose that to a given plot of land equal increments of labor (or of
a fixed combination of factors) are successively applied in order to raise a given
crop, then, if other things are kept strictly equal, a point will be reached
after which the consequent increments of that product will monotonically
decrease to zero (and, if further application were persisted in, . to .^absolutely
increasing negative figures). It is Ricardo’s merit. to have — though less rigor-
ously — expressed just this. West also must have had this meaning in mind,
for it is the one which is relevant in the Essay on the Application of Capital
to Land. But his wording is not clear and points, if taken literally, to a 'law’
of decreasing average returns rather than to a 'law’ of decreasing marginal
returns. And it is the former that was subsequently formulated by a ma-
jority of authors, who must either have confused it with the latter or have
erroneously considered it the more important of the two. 21 This is true even
of Marshall (Principles, Book rv, ch. 3, § 1) who worded ‘the law of or state-
ment of tendency to diminishing returns’ almost exactly as did Senior. That
they are not equivalent and that it is the marginal concept which is needed
in alb maximum problems, was not expressly stated until 1911 when Edge-
worth pointed it out. Sound instinct, however, prevented the confusion from
producing mistakes. But it was the main reason I can see why the definitive .
conquest of the idea of diminishing physical returns did not ipso facto and
immediately lead to a marginal-productivity theory and why the latter had a
separate history at all.

21 Senior, e.g., says 'that agricultural skill remaining the same, additional- labour
employed on the land within a given district produces in general a less proportionate
return, or, in other words, that though, with every increase of the labour bestowed, the
aggregate return is increased [indefinitely?], the increase of the return is not in propor-
tion to the increase of the labour.’ Now, the significance of literary statements of essen-
tially quantitative propositions is always doubtful. But I think that both parts of the
sentence are intended to mean this: denoting total return hy y and total labor applied

y j__ Ay y

by x, additional labor Ax, will produce an additional product Ay such that

x -+- Ax x

which is a proposition about average returns. So late and so eminent an author as
Bohm-Bawerk clearly confused average and marginal returns in an unguarded. moment
(but not in his actual work) and has been accordingly taken to task by Professor Karl
Menger (son of the economist). This was done in an article that — amounting to reading
us the logician’s riot act — is immensely useful for any economist who wishes to take his
logical responsibilities seriously, and is strongly recommended for study (‘Bemerkungen
zu den Ertragsgesetzen’ and sequel, Z eitschrift fiir Nationalokonomie, March and
August 1936) although, as Professor Menger himself took care to point out, some of
the logical severities displayed are there only for illustration’s sake and not because of
their importance for the practical handling of those two concepts. It is a curious fact
that in spite of Edgeworth’s decisive contribution mentioned in our text, these matters
were not fully settled until this article appeared — hence, that it took from 1815 to
1936 to clear them up and that it might have taken still longer but for the lucky chance
that the problem happened to attract the interest of an eminent mathematician. This
fact will illustrate how much justification there is for the complaint of some economists
that the profession bestows too much attention on theory.

5B8 III: FROM 1790 TO 1870

The ‘law’ of diminishing returns is of course an empirical statement — a
generalization from observed facts that only further observation can either
verify or refute. It is interesting to report that theorists have almost unani-
mously displayed an aversion to admitting this. One after another has tried
to 'prove’ it from logically anterior and, as they thought, more obvious as-
sumptions. This can in fact be done for the 'law’ of diminishing average re-
turns, which has been shown 22 to follow from assumptions that may be held
to be simpler than is the 'law’ itself. Moreover, this 'law’ also follows, if we
add assumptions nobody will care to challenge, from the 'law’ of decreasing
marginal returns. But the latter cannot be so derived unless we introduce fur-
ther assumptions that reduce the proof to a triviality . 23

2. Value

As we have seen at various turns of our way, the problem of Value must
always hold the pivotal position, as the chief tool of analysis in any pure
theory that works with a rational schema . 1 More or less, this was recognized
by all the economists of that period — by Marx not less than by Say — although
some haze continued to linger on this point. Any impression to the contrary

22 This has been done by Karl Menger (op. cit. pp. 48 et seq.) in his discussion of
the similar though not identical proofs offered by Bohm-Bawerk and Wicksell. These
proofs did not accomplish what their authors evidently wished to accomplish, namely
proof that the law of diminishing returns is a 'theorem of mathematical necessity,’ hut
they did prove that, in the sense stated above, the law of average diminishing returns is.
Thus these proofs are much superior to some that had been offered before, of which
the most primitive one — and, at first sight, most plausible one — was founded on the
erroneous belief that the mere fact of the cultivation of any but the best land was all
that was needed — for, unless returns to additional investment in the best land were
decreasing, why should people resort to inferior land? Some of these arguments have
also been analyzed by Menger, who, moreover, supplied exact proof (p. 43) of the
theorem stated in the next sentence of our text. Though space forbids us to go into
details, it should be mentioned that both Bohm-Bawerk’s and Wicksell’s proofs require
that doubling both the land and the 'capital’ or labor applied should at most double
the product (i.e. the absence of ‘economies of scale’).

23 Factual investigations are therefore called for not only to find particular forms of
marginal-return functions but also to make sure of their fundamental property. A num-
ber of such investigations have been summarized by E. H. Phelps Brown, in a report,
‘The Marginal Efficiency of a Productive Factor,’ published in Econometrica, April
1936. Special forms have also been derived from hypotheses drawn from the physiology
of plants, see E. A. Mitscherlich, ‘Das Gesetz des Minimums und das Gesetz des
ahnehmenden Bodenertrages,’ Landwirtschaftliche Jahrbiicher (1909).

In any case, Wicksell was definitely wrong in holding that the validity of the ‘law
of the soil’ did not stand in need of ‘experimental’ proof. For even in the case of
average returns, there is still the homogeneity assumption to he tested that was men-
tioned in the preceding footnote. But he was right in his counter-criticism of Water-
stradt (two articles published in Thiinen Archiv, 1906 and 1909), who had attacked the
‘law’ by methods so faulty as to put him in the wrong.

1 We have also learned that not every theory does this. >

GENERAL ECONOMICS: PURE THEORY 589

is mainly due to economists’ preoccupation with things other than pure theory
— especially with the institutional aspects of economic life. The value on
which analytic effort converged was exchange value. J. S. Mill only clinched
prevailing practice when he emphasized that the term Value was, in economic
theory, essentially relative and that it meant nothing but the exchange ratio
between any two commodities or services. Similarly, the term price meant
nothing but the exchange ratio between the (arbitrary) unit of any commod-
ity or service and the good selected for money. We may also take J. S. Mill’s
teaching as typical of an attitude that has been much discussed of late: the
problem that really mattered throughout was the explanation of these ex-
change ratios or price relations (relative prices). Money prices (absolute prices)
were treated as an affair of secondary importance, to be dealt with apart in
the chapter on money. Since, then, value was a ratio, it followed as a matter
of course that all values were incapable of increasing or decreasing simultane-
ously. It also followed that there was no such thing as the total value of all
the services of wealth (or of all wealth) taken as a whole, although Ricardo
and Marx took a different view on this point.

Nobody raised the theoretical question whether it is really possible or ad-
missible to carry out the fundamental analysis of the price system in terms of
exchange ratios or relative prices alone. This implies, of course, that the inter-
vention of real money (that is, of money which not only supplies a unit of
account but also actually circulates and in addition functions as a 'store of
value’) does not affect the determination of the exchange ratios themselves
or anything else that is essential to the understanding of the economic process.
Or, to put the same thing in the usual way, this implies that money is in fact
a mere technical device that may be disregarded whenever fundamentals are
on the program, or a veil that must be removed in order to discover the
features behind it. Or, in still other words, this implies that there is no es-
sential theoretical 2 difference between a barter economy and a money econ-
omy. Nobody tried seriously to prove this or even realized the necessity of
doing so in order to establish the validity of that procedure. 3 This was to
come in our own time. For the moment let us merely notice that this ex-
clusive emphasis upon 'real’ analysis may have had its advantages, even if it
should have proved inadequate when confronted at a later stage of analytic
development with higher standards of scientific rigor. It served to counteract
lingering primitive errors. It helped to clarify concepts and relations. It as-
serted the rights of a point of view that stood in need of being asserted then
and perhaps may do so again.

But the economists of that period did not even make a serious effort to
prove the determinateness of an economy without a circulating medium. Sys-
tematic efforts of this kind — since Cournot’s example remained without in-

2 Practically, of course, nobody ever denied that, since the technical device may get
out of order, a society’s system of money and credit always does make a lot of difference
to its economic process.

3 See, however, J. S. Mill, Principles, Book iii, ch. 26.

59 ° III: FROM 1790 TO 1870

fluence — cannot be said to antedate Walras (see below, Part iv, ch. 7). How-
ever, in this as in other instances, in economics as in other sciences, we find
that intuitive perception of the inherent logic of things led beyond what was
actually proved. Like the leading theorists of the preceding period, the
'classics’ sensed the existence of what we now call economic equilibrium and,
if they did not try to prove its existence, they made it, as it were, plausible,
embodying their intuition in certain empirical rules, such as the tendency of
‘profits’ to be roughly equal in different but similarly conditioned lines of
business. 4 We derive a similar proposition from the principle of maximizing
net returns and associate it with the principle of substitution. The ‘classics,’
it has been held, 5 were not in possession of the latter principle. 6 This is true
and so it is that this constitutes one of the most serious shortcomings of their
analytic apparatus. But if they did not formulate it explicitly and did not
apply it systematically, neither were they entirely unaware of it. They used
it in individual cases. And it is implied in some of their propositions.

(a) Ricardo and Marx . By theories of value we mean attempts at indicating
the factors that account for a thing’s having exchange value or — though this is
not strictly the same — the factors that ‘regulate’ or ‘govern’ value. Let us
begin with Ricardo. A. Smith, we remember, may be credited with three
different theories of value: the labor-quantity theory illustrated by his beaver
and deer example; the labor-disutility theory conveyed by his reference^ to
‘toil and trouble’; the cost theory he actually used in the central part of his
analysis. We also know that in addition he recommended labor (along with
‘corn’) as a relatively stable unit by which to express commodity values
( numeraire ). 7 Ricardo, starting his theoretical work by a study of the Wealth
of Nations, was displeased with what he rightly felt to be a logical muddle
and came to the conclusion that the labor-quantity 8 theory of value as con-
veyed by the beaver and deer example was the one to adopt, not only for
‘primitive’ conditions in which there was no scarce factor other than labor,

4 Their concern with differences in the rates of return earned, at the same time and
place, in different occupations — discussion of which was, since A. Smith, part of the
stock in trade of every textbook — was chiefly motivated by a desire to protect the
fundamental assumption of equality.

5 See, e.g., G. J. Stigler, ‘Stuart Wood and the Marginal Productivity Theory/
Quarterly Journal of Economics, August 1947, p. 647.

6 As has been noted above. Senior made the maximum principle explicit. But it has
also been noted that neither he nor anyone else knew how to make full use of it.

7 It cannot be repeated too often that choosing labor for this role — for instance on
the ground that the significance of a man-hour is less subject to change than is the
significance of an ounce of gold, no matter whether this is so or not — has nothing
whatever to do with adopting a labor theory of value. Malthus, for instance, was an
opponent of the latter. But he recommended labor days for the purpose of expressing
values (for ‘measure of value’). Though this should be quite clear, it is worth emphasiz-
ing again because these two things have so often been confused even by first-flight
theorists such as Ricardo.

8 Meaning the quantity of labor that a commodity ‘embodies.’

GENERAL ECONOMICS: PURE THEORY 59 1

but generally for all cases, even where there were also other scarce factors.
His first chapter is an attempt to carry out this idea. A. Smith’s cost theory
he evidently thought logically unsatisfactory (perhaps circular). The labor-
disutility theory he neglected, probably because it did not occur to him that
it was different from the labor-quantity theory. And throughout, he mixed
up his argument against A. Smith’s lapse from the labor-quantity theory of
value with an argument against A. Smith’s (and Malthus’) choice of labor as
a measure of value. 9 Before going on, I shall first try to remove this diffi-
culty from our path.

Two things must be distinguished. On the one hand, Ricardo, like every-
body else, was of course aware of the fact that there can be no commodity
(labor no more than any other), the exchange value of whose unit could serve
as an invariant standard by which to measure the variations in the exchange
values of other commodities ( Principles , ch. 1 , § 6). On the other hand, his
labor-quantity theory of value seemed, subject to qualifications that will be
discussed presently and are neglected for the moment, to provide a method
by which to measure these variations all the same: where the exchange value
of a unit of labor was bound to be unsatisfactory, the unit of labor itself — *
since according to this theory the amount of labor embodied in a commodity
'governs’ its value — really was what was needed in order to have a measure of
exchange values after all. Subject to the qualifications we are now neglecting,
all that was necessary in order to have a commodity of at least theoretically
invariant value was to imagine one that always embodied the same quantity
of labor. Such a commodity would then provide a stable yardstick with which
to measure the variations in the relative prices of all the others. The pounds
and shillings of his numerical examples must be understood to stand for such
a commodity. 10

It is very important to grasp the implications of this logical tour de force.
By virtue of it, commodities acquired absolute values, which were capable of
being compared, added up, and of increasing and decreasing simultaneously,
the very thing that was impossible so long as exchange value was defined sinu
ply as exchange ratio. This is what pleased Marx so much about Ricardo’s
theory of value. But the latter failed to work out the idea completely. More-
over, he created much unnecessary confusion by adopting for his concept the
term Real Value. Our own meaning of this term, which refers to the value
of a monetary quantity in terms of the goods it will buy, was gaining currency
at that time, and people were puzzled by Ricardo’s use of it according to
which, for example, 'real’ wages might be falling (if the quantity of labor em-

9 Meaning the quantity of labor a commodity ‘commands’ in the market, which
differs in general from ‘labor embodied.’

10 Ricardo derived some satisfaction from thus fulfilling Destutt de Tracy’s precept
that values should be expressed in units of values as lengths are expressed in units of
length. In this, however, he erred. For, whatever we may think of Destutt de Tracy’s
precept, a little reflection will show that Ricardo did not satisfy it or rather that he
satisfied it only by means of a verbal trick: the values he measured in terms of physical
labor hours were not themselves (though they were for Marx) just labor hours.

592

III: FROM 1790 TO 1870

bodied in the goods that constitute real wages in our sense was decreasing,
owing, for instance, to technological improvement) when everybody else would
say that they were rising (if the quantities of those goods themselves were
increasing).

Another point must be mentioned which is of considerable importance for
understanding Ricardo’s theory of distribution — which was primarily con-,
cemed with relative shares — and in particular his famous theorem that ‘there
can be no rise in the value of labour [real wages in his sense] without a fall
of profits’ (see, e.g. § 4, Principles, ch. 1). The true significance of this theorem
will be discussed later. But, in the place referred to, Ricardo reduced it to a
triviality by explaining that, if the product be divided between capital and
labor, ‘the larger the proportion that is given to the latter the less will remain
for the former’ — which is in fact how James Mill and many later interpreters
(e.g., A. Wagner) understood the theorem. How was this possible? Evidently
Ricardo, when he penned this passage, thought that relative shares are always
rendered by the relation between the labor hours embodied in the absolute
shares. This, however, is not true generally but only if the total quantity of
labor applied is kept constant. (On this tangle, see Cannan, op. cit. pp. 341
et seq.)

Ricardo, then, tells us on the first page of his work that utility is a neces-
sary condition for the emergence of exchangeable value and that ‘possessing
utility, commodities derive their exchangeable value from two sources: from
their scarcity, and from the quantity of labour required to obtain them.’ II-
logically identifying scarce commodities with commodities, the quantity of
which cannot be increased by labor, and setting them down as rare exceptions,
he turns to the category of those that may be increased by human industry.
I cannot stay — but the reader should — to point out all the shortcomings of
this start and shall proceed at once to state the central theorem of the Ri-
cardian theory of value: in conditions of perfect competition (which Ricardo
failed to specify) the exchange values of commodities will be proportional to
the quantities of labor contained or embodied in them.

The first thing to be observed about this proposition, which hails from the
Wealth of Nations (Ricardo referred specifically to Book 1, ch. 5), is that it is
not in itself a theory of value in the sense defined above. Such a theory is
contained in Ricardo’s next sentence, ‘that this [i.e. labor applied or embodied,
J. A. S.] is really the foundation of the exchangeable value of all things.’ The
proposition in question is a theorem on values intended to be valid in perfect
equilibrium only. Of this Ricardo was perfectly aware. In Chapters 4 and 30,
he therefore dealt with the Cantillon-A. Smith concept of market price, which
he made dependent, like the price of monopolized commodities, on supply
and demand as if determination of price by supply and demand were entirely
different from, and incompatible with, determination of price by quantity of
labor embodied. But, not being in full possession of an explicit perfect-
equilibrium concept, he expresses this by saying that his labor-quantity law
applies to natural prices, that is, to the relative prices that will ultimately
prevail when fluctuations due to temporary disturbances shall in each case

GENERAL ECONOMICS: PURE THEORY

593

have subsided. This is the reason why interpreters and indeed Ricardo him-
self spoke of his law — and of his reasoning in general — as ‘abstract’ and as
envisaging fundamental or long-run tendencies only. He did not use the Mar-
shallian term Long-Run Normal but he had got the idea.

The second thing to be observed is that our theorem would be true (for
perfect equilibrium in perfect competition) if labor — and labor of one kind
and quality — were the only requisite of production. In fact, it would then
follow as a special case from the more general marginal-utility theory of a
|f later time. 11

h The third thing, then, to be observed about Ricardo’s labor-quantity law

f is the manner in which he tried to overcome the difficulties that stand in the

| way of generalizing a result that holds — though he never proved it — in a spe-

| cial case. The rest of his first chapter ($$ 2-7) is devoted to an attempt to

|f’ show that his labor-quantity law of equilibrium values, though not generally

K true, yet constitutes an acceptable approximation throughout the range of per-

i'l feet competition. But this chapter does not deal with the fundamental diffi-

!.-• culty that arises from the existence of scarce natural factors: their elimina- |

\ ■: tion from the problem is left for the second chapter. Following suit, we also i!

h- neglect them for the moment. i

: Ricardo saw, of course — what Marx was to elaborate — that the labor whose j

quantity is to ‘govern’ or ‘regulate’ values must be . of the quality a laborer j

! normally does in any given time and place, not more or less efficient than j

f that, and that it must be applied according to the prevailing standards of

;v- ‘ technological rationality: to use Marx’s term, it must be socially necessary

[-!' labor. The time employed in acquiring skills, including the labor of the

teacher, must be counted in 12 and so must be ‘the labour also which is be-
stowed on the implements, tools, and buildings with which such labour [the
directly applied labor, J. A. S.] is assisted’ (sec. 3). But what about natural
skills or those elements in skills that are not themselves acquired by labor?

Following the eighteenth-century tradition noticed above, RiGardo did not
think much of their importance. For the rest, he relied, as had A. Smith, on
the market mechanism to determine a scale for the evaluation of different
(natural) qualities of labor by means of which an hour of superior labor may
be expressed as a multiple of the normal labor hour: if a ‘working jeweller’

11 In order to show this, it is sufficient to refer to a theorem that is rationally
deduced within the marginal utility theory, though it has been frequently implied in
‘classical’ pieces of reasoning, especially where the ‘classics’ made use of the ‘law’ of the
uniform rate of profit. This theorem reads that, in equilibrium, all factors will be allo-
cated to all their possible uses in such a way that the last increments of each factor
employed in all these uses produce increments of products that are of equal value.

If the products are beavers and deer, and if labor is all that is needed in order to kill
them, beavers killed per hour of hunting must be worth as much as deer killed per
hour of hunting and beavers will hence exchange for deer in inverse proportion to the
time it normally takes to kill them. But this is the Ricardian theorem, which, by the
same token, cannot be true if there are also other scarce factors.

12 This Ricardo did not say explicitly. But it is only fair to interpret him in this sense.

594 in: : from 1790 to 1870

is being paid twice as much per hour as is a ‘common labourer/ one hour
worked by the former will simply be counted as two hours worked by the
latter. Since such relations do not vary greatly from year to year, they have
‘little effect, for short periods, on the relative value of commodities.’ 13 This
may or may not be so. But it should be noticed that this appeal to market
values — that are evidently not determined by any quantity of labor — in the
course of an argument that is to expound the labor-quantity law spells in strict
logic the surrender of the latter, no matter whether this be acknowledged
or not.

But acknowledgment of failure of the labor-quantity principle came in
Sections 4 and 5. There, Ricardo faced the facts that relative values of com-
modities are not ‘governed’ exclusively by the quantities of labor embodied in
them but also by ‘the length of time which must elapse before’ they ‘can be
brought to market.’ For this is what his argument amounts to: unequal pro-
portion between that part of capital which ‘is to support labour’ and that
part which ‘is invested in tools, machinery and buildings/ and unequal dura-
bility of the latter or unequal rate of turnover of the former — which are the
facts discussed — are relevant to the relative values of the products only be-
cause of that time element which they bring into the picture of the pro-
ductive process. 14 They simply mean different periods of investment of the
(possibly) equal quantities of labor embodied in the capital goods or (to put
quite bluntly the common-sense business fact of which Ricardo was think-
ing) different amounts of carrying charges that, logically, are on a par with
quantity of labor in influencing ‘natural/ that is, equilibrium, values.

So the murder is out. To be sure, Ricardo tried to minimize the damage
to his fundamental construction by pointing out that quantity of labor still
remains the most important determinant of relative value, which is why above
we have described his theorem as an approximation. This seems to do more
justice to his thought than does the interpretation that appeals to other his-
torians: these, following a lead of Marshall’s, prefer to say that Ricardo had
‘really’ a cost theory of value. It is true that in effect Ricardo ended up by
co-ordinating the element of accrued profits with the element of quantity of
labor. It is also true that sometimes (see ch. 30, first sentence) he did make
Cost of Production (evidently including the former element) the _ ‘ultimate
regulator’ of values. But if this were all, his exposition would reduce simply
to a roundabout way of stating a view that was current in his time: it would
be difficult to see what it was he fought for with so much insistence and what
the ensuing controversies were about.

Only if we recognize that he believed, wrongly of course, that labor ap-
plied is something more fundamental or important than are accrued profits,
shall we understand why he first introduced his theory of values under the

13 It is of some interest to note that Ricardo, while professedly arguing about long-
run phenomena, displayed in this case no compunction at using a short-run argument —
another instance of his extreme carelessness.

14 Let us notice once more that this constitutes an important link between Ricardo
and Bohm-Bawerk.

GENERAL ECONOMICS: PURE THEORY 595

assumption that capital structures were exactly similar in all industries. The
comfort is of course quite illusory that he drew from the fact that then (if
we accept his elimination of the influence of natural agents) the relations of
quantities of labor applied would 'regulate' relative values. Logically it would
be just as admissible to say that, with equal quantities of labor applied, it is
capital structure or 'time' which regulates relative values. Therefore, he must
have thought that the former proposition is true in some sense in which the
latter is not. And our interpretation — the interpretation that is characterized
by the word approximation — seems to me the most obvious one in the case
of a writer who was quite free from either emotionalism or philosophical
preconceptions.

Another point must be mentioned, however. What Ricardo did in Chap-
ter 1, Sections 4 and 5 was to recognize the fact that carrying charges do in-
fluence relative values. He also formulated some of the consequences of this
fact. But he did so, as it were, with a shrug of his shoulders and did not
make the slightest attempt to explain it unless we accept the phrase 'just com-
pensation for the time that the profits were withheld' as a token of such an
explanation. Here as elsewhere he was content to remain on the surface of
things. But he did worry about what his admission would do to his pet propo-
sition that 'no alteration in the wages of labour could produce any alteration
in the relative value of . . . commodities/ which is, throughout the book, the
practical spearhead of his theory of value. On principle, it must also be given
up, of course (see § 5, last paragraph). But actually it is retained, again, as
I like to say in order to be as fair as possible to him, as an approximate truth.
The effect of the admission is confined to a particular theorem: if wages, say,
rise, the relative prices of goods into the production of which 'fixed capital’
or . 'fixed capital’ of high durability enter largely will fall, and the relative prices
of goods 'which are produced chiefly by labour with less fixed capital or with
fixed capital of a less durable character than the medium in which price is
estimated 15 will rise,’ a proposition that has been dubbed in our time, the
Ricardo Effect — and a curiously devious way of admitting something of which
one does not wish to admit the implications.

It is not worth our while to stay to describe the way in which the inner-
circle Ricardians, James Mill, De Quincey, and McCulloch, handled Ricardo’s
theory of value and the spurious problems it created. 16 But it will be con-

15 This is correct. Marx slipped when he replaced this by the average composition of
total capital.

16 However, we may note in passing a device that McCulloch used to generalize
Ricardo’s labor-quantity theorem. Recognizing that, looking at the matter from Ricardo’s
standpoint, the main trouble was connected with the element of time, he simply took
the view that the labor quantity embodied in durable capital goods goes on to do
further labor during their lifetime. A harsh critic might call this a purely verbal expe-
dient and an inept one at that. But it is also possible to see in it a particular way toward
renunciation of the labor-quantity theory and toward recognition of a multiplicity of
'factors’ or services of production, all of which help to create product value. If we look
at his reasoning in this light, it amounts to generalizing the concept of labor. In itself

596 III: FROM 1790 TO 1870

venient, before we take up the contributions of Ricardo’s opponents and
then the half-way house position, of J. S. Mill, to consider with the utmost
brevity some essentials of the doctrine of Ricardo’s only great follower, Karl
Marx.

Marx’s theory of exchange value is also a labor-quantity theory, perhaps, if
we neglect such stepping-stones between Ricardo and Marx as W. Thompson,
the only quite thoroughgoing one ever written. At first we are, indeed, struck
by the similarity of Marx’s argument to Ricardo’s. Marx asked himself what
it is that makes commodities, so heterogeneous as to value-in-use, comparable
at all, and emerges with the conclusion that is the fact that they are all the
products of labor. Having established to his own satisfaction this highly de-
batable proposition — for the fact that all commodities have value-in-use is
not only as true but more general — Marx proceeded to deal with the difficul-
ties that beset this approach at the threshold almost exactly as Ricardo had
dealt with them. He added precision and elaboration here and there — I have
already mentioned the ‘socially necessary labor’ — but failed, like Ricardo, to
notice the danger that lurks behind the assumption that the market prices
of labor of different nonacquired qualities may be used in order to reduce
labor hours of superior quality to multiples of standard ones.

I take this opportunity to mention a point of technique that Marx con-
sidered one of his most important contributions to economic theory: his dis-
tinction between labor, the quantity of which is measured in hours, and
‘labor power’ (Arbeitskraft), the value of which is given by the quantity of
labor that enters into the goods the workman consumes (including the goods
and services used up in bringing him up and training him) and in a sense
‘produces’ his labor power. These goods and their real value are, of course,
essential elements also of Ricardo’s analysis. But he did not identify explicitly
this real value with the real value of the commodity labor power. Senior, as we
know, took a step toward doing so. Marx, however, not only completed this
step but also, in his exploitation theory (see below, sec. 6b), put the labor-
power concept to a use of which neither Ricardo nor Senior had thought or
would have approved.

But even non-Marxist historians should have realized — though, mostly, they
have not— that there is a much more fundamental difference between the
labor-quantity theory of Marx and the labor-quantity theory of Ricardo. Ri-
cardo, the most unmetaphysical of theorists, introduced the labor-quantity
theory of value simply as a hypothesis that was to explain the actual relative
prices — or rather the actual long-run normals of relative prices — that we ob-
serve in real life. But for Marx, the most metaphysical of theorists, the labor-
quantity theory was no mere hypothesis about relative prices. The quantity of
labor embodied in products did not merely ‘regulate’ their value. It was (the
‘essence’ or ‘substance’ of) their value. They were congealed labor. Lest non-
metaphysically disposed readers should refuse to be very much impressed by

this does not do much for us. But it points in the direction of a more fruitful theory
all the same.

GENERAL ECONOMICS: PURE THEORY 597

this, let me at once point out the practical difference that this made for our
two authors' analytic structures.

When Ricardo recognized that the element of time — or of the carrying
charges that accrue in the course of the productive process — entered into the
determination of values or relative prices, this meant for him the necessity
of admitting that his hypothesis was contradicted by the facts and that, in
the manner described above, it had to be reduced to a mere approximation.
But Marx had recognized from an early stage of his thought — certainly before
he published the first volume of Das Kapital (1867) 17 — that exchange ratios
do not, not even as a tendency, conform to Ricardo's equilibrium theorem on
values, which accordingly forms no part of Marx’s teaching . This, however,
was no reason for him to modify his value theory: value was always, for every
commodity as well as for output as a whole, identical with labor embodied,
however relative prices might behave, and his problem was precisely to show
how, in consequence of the mechanism of perfect competition, these absolute
values without being altered came to be shifted about in such ways that in
the end commodities, while still retaining their values, were not sold at rela-
tive prices 'proportional to these values. For Ricardo, deviations — other than
temporary — of relative prices from his proportionality theorem spelled altera-
tions of values; for Marx, such deviations did not alter values but only re-
distributed them as between the commodities. This is why we may say that
Marx actually went through with the idea of an absolute value of things, 18
whereas Ricardo, although his argument implies this idea in spots, never made
it the pivot of his analytical structure. Or, to put it differently: whereas for
Ricardo relative prices and values were essentially the same thing and whereas
hence the economic calculus in terms of values was the same thing as the
calculus in terms of relative prices, values and prices were not the same thing
for Marx, so that he created for himself an additional problem that apparently
does not exist for Ricardo, namely, the problem of the relation between the
two calculi or the problem of W ertrechnung und Preisrechnung . 19

17 This fact is evident from the material published in the Theorien iiber den Mehr-
wert (1905-10) and hence was not evident at all before the publication of these volumes.
In consequence, even the greatest of nineteenth-century Marx critics, Bohm-Bawerk,
took the view that Marx expounded a labor-quantity theory in the first volume of D as
Kapital which Marx's later thought convinced him to be hopelessly at variance with
facts, so that he was driven to shifting his ground in those writings that were, after his
death, published by Engels (1894) as the third volume of Das Kapital — Marx's aversion
to continuing publication of his work was interpreted as a confession of failure. In
other words, the value theory of the first volume was interpreted too much in Ricardo’s
sense. This was an error, and one that spelled missing the essential point of Marx’s
value theory. This is not to deny, of course, that some of the criticisms proffered retain
validity in spite of this error. Nor do I wish to assert that Marx carried out the pro-
gram appropriate to his point successfully. This is sufficiently obvious from our text,
although it is impossible to clear up the matter fully within the space at our command.

18 He was the only author who ever did.

19 See on this Ladislaus von Bortkiewicz (1868-1931), ‘Wertrechnung und Preis-
rechnung im Marxschen System,' three articles in the A rchiv fiir Sozialwissenschaft

598 in: FROM 1790 TO 1870

Some of the implications and applications of this value theory will be dis-
cussed later on. But three points about it should be made before we tempo-
rarily leave the subject. First, for us it is nothing but a construction devised
for purposes of analysis and to be judged in the light of considerations of
analytic usefulness and convenience. For orthodox Marxists it may indeed be
sacred truth in some extra-empirical realm of Platonic ideas, where the '‘es-
sences’ of things are exhibited. And it may have been something of the kind
Jfii, for Marx himself. Actually, however, there is nothing mystic or metaphysical
about the Marxist theory of value. Its central concept in particular, absolute
value, has nothing to do with the meanings we attach to this word in some
parts of philosophy. It is nothing but Ricardo’s real value fully worked out
and fully made use of. Second, if readers have followed the argument, they
will realize that the objections that may be made against Ricardo’s use of
the concept of real value do not apply to Marx’s theory. Even if we do not
admit that labor embodied is the '‘cause’ of exchange value in the ordinary
sense, there is no logical rule to prevent us from defining labor embodied as
exchange value, though this gives another and perhaps misleading sense to
the latter term. For, on principle, we may call things what we please. 20 Third,
whereas Ricardo simply recognized the actual existence of carrying charges and
then stopped, Marx made at least an attempt, successful or not, to absorb
them into his schema. For him, the carrying charges were also part of the
labor embodied in total output. Ricardo had to add them to labor cost and
ought to have explained them. For Marx there was no problem of explaining
why these elements of product value exist. His only problem was to explain
how they come to be clipped off from a total of value that exists independ-
ently of them. At this we must let the matter rest for the moment. At a later
stage of our argument we shall see that it was after all the same difficulty,
namely, the influence of time, which, owing to their different approaches, pre-
sented itself to them in the guise of different problems. To use a Marshallian
phrase, for Ricardo time was the great disturber of his analytic pattern. But
it was also, though less overtly, the great disturber of Marx’s.

(b) The Opponents of the Labor-Quantity Theory of Value. Remember:
the Ricardians were always in the minority, even in England, and it is only
Ricardo’s personal force which, as we look back, creates the impression that
his teaching — his coinage of Smithian metal — dominated the thought of the
time and that the other economists were just opponents of what was then
called the New School — opponents, too, that were not quite up to the latter’s
doctrines. The opposite is nearer the truth, in the matter of value as in others,

i| (1906 and 1907) and the same author’s ‘Zur Berichtigung der grundlegenden theoret-

ischen Konstraktion von Marx im dritten Band des “Kapital,” ’ Jahrbiicher fiir National-
okonomie und Statistik (1907).

20 But Marx would no doubt have avoided much confusion and futile controversy had
he named his absolute-value concept differently. The word ‘value’ was not at all well
chosen to express its actual analytic significance. But much agitatorial glamour would
have been lost by choosing a different one. Also, he may have wished to join up with
Ricardo’s real value, which was not less misleading.

GENERAL ECONOMICS: PURE THEORY

599

although our impression is no doubt reinforced by the fact that nearly all
those opponents, whatever else they may have been, were with but few ex-
ceptions inferior to Ricardo as controversialists.

Discussion of the problems of value on non-Ricardian lines that carried over
from the eighteenth century collided with the Ricardian forces and blazed into
controversy about 1820, the year in which Malthus’ Principles appeared. The
active phase of this controversy lasted little more than ten years and notwith-
standing the testimony of a very few stalwart defenders — McCulloch and
Marx stood arm in arm at this point — and of some historians ended in the
defeat of Ricardianism. It had its full complement of mutual misunderstand-
ing and of logical errors, but on the whole it moved on a creditable level.
The peak performance was Bailey's 21 (see above, ch. 4, sec. 3c), the influence
of whose criticism was much greater than appears on the surface. He showed
up the weaknesses of Ricardo’s analytic structure forcefully, in particular; the
futility of Ricardo’s method of eliminating natural agents from the value prob-
lem, the arbitrariness involved in calling quantity of labor ‘the sole determin-
ing principle of value,' the defects of the concept of real value and of the
Ricardian theory of profit, and so on. The discourteous reply from some Ri-
cardian in the Westminster Review (1826) was pathetically inadequate, and
though but few contemporaries did justice to him, it became clear in time
that he had in fact turned the tide and dealt a fatal blow. Considerations of
space forbid the describing of the controversy in detail. 22 Instead, we shall eon-
fine ourselves to what was, for the time being, the main point at issue be-
tween Say, Malthus, and Ricardo, noticing other names and aspects only so
far as this purpose requires. 23

To get at that main point, we must first recall that the pioneer perform-
ances of the marginal utility theory, which the period produced, failed in-
deed to exert any perceptible influence, but that many writers perceived that

21 Samuel Bailey, A Critical Dissertation on the Nature, Measures, and Causes of
Value; Chiefly in Reference to the Writings of Mr. Ricardo and His Followers (1825),

22 Three other main contributions, however, should not go unmentioned: first, a
tract entitled Observations on Certain Verbal Disputes on Political Economy . . .
(1821), which displays sound sense for the spurious or fictitious nature of part of the
issues involved; second, another tract, entitled An Essay on Political Economy . . .
(1822), notable for an early recognition of the logical weakness of any explanation of
value by cost and of the fact that cost affects value only through affecting supply; and
a third, already mentioned, C. F. Cotterill’s Examination of the Doctrines of Value
(1831), which, though inferior in vigor of thought to the one just mentioned, should
not be forgotten because of his defense of (most of) Bailey’s tenets. [The two anony-
mous tracts are mentioned by Seligman, Essays in Economics, pp. 81-2.]

23 Say and Malthus were, so far as value is concerned, as much on one side as they
were on opposite sides in the question of saving and general gluts. But there was ho
perfect agreement between the two in the first case, and no perfect agreement between
Say and Ricardo in the second. Ricardo’s position in the controversy on value may be
pretty completely understood from his Letters to Thomas Robert Malthus, 1810-1823
(ed. J. Bonar, 1887), his Notes on Malthus ’ ‘Principles,’ and chs. 20 and 30 of his own
Principles.

600 III: FROM 1790 TO 1870

utility was more than a mere condition of exchange value, in the sense in
which Ricardo meant this phrase, and that in fact it was the ‘source’ or ‘cause’
of exchange value. Only they were no more able to do anything with this
idea than were the Ricardians, who, precisely for this reason, refused to accept
it. And so this approach came to nothing. J. B. Say, for instance, following the
French tradition (Condillac, in particular), made exchange value dependent
upon utility but, failing (like Condillac) to add scarcity, stumbled over the
fact, so often explained before him, that such ‘useful’ things as air or water
normally have no exchange value at all. He said that actually they do have
value; only this value is so great, infinite in fact, that nobody could pay for
them and hence they go for nothing. 24 It is true that he did not stop at this
ineptitude. He did rise to the imperfect (yet so significant) statement that
price is the measure of the value of things and value the measure of their
utility, a statement that heralds Walras’: les valeuts d’echange sont propor-
tionnelles aux raretes [marginal utility, J. A. S.]. Mostly, however, he merely
used a rather primitive supply-and-demand analysis. The same applies to Her-
mann (see above, ch. 4, sec 5). As in France, perhaps in part under French
influence, a utility-theory tradition had developed in Germany. But it was
equally inoperative: it stopped at recognitions of the utility element that are
difficult to distinguish from the Ricardian way of assigning to utility the role of
a condition of value. Hermann went further than others but he also confined
himself substantially to working with supply and demand. Some English econ-
omists, such as Craig 25 and Senior, did better. As regards the latter, there is
truth in the common view, shared by Walras, that credits him with the no-
tion of marginal utility. But I can only repeat: he did not go through with
it and, after a glimpse, it practically vanished behind mere supply and de-
mand. Lord Lauderdale and, more elaborately, Malthus went straight to the
Supply-and-demand apparatus and concentrated entirely upon it.

Thus, for Ricardo, the main point at issue was from the first labor quantity
versus supply and demand. The utility theory of value, which he had glanced
at and rejected (as the ‘source’ or ‘cause’ of exchange value), was not really
in the picture, though he criticized it in his chapter on ‘Value and Riches.’
The cost theory of value was not wholly an enemy. For he looked upon his
own theory as a reformulation of it and frequently himself invoked cost in
terms of labor and capital. The true enemy was the supply-and-demand theory,
which ‘has become almost an axiom in political economy, and has been the
source of much error’ (ch. 30, third paragraph). The reader should observe

24 Condillac, on the contrary, states that such things have a price — which consists in
the effort to appropriate them, for instance, by breathing, drinking, and so on.

25 John Craig’s Remarks on Some Fundamental Doctrines in Political Economy . . .
(1821) is a performance of considerable merit. Among other things, he understood the
mechanism by which variation in any price will, through setting free or absorbing money
income, influence other prices. He also understood, like Say, that (margihal) value in
use must be ‘accurately measured’ by (must, in equilibrium, be proportional to) value in
exchange. If we may indulge in what is no doubt a mistake and read into his statement
all that our bracketed reformulations convey, we find a whole Marshall in nuce.

GENERAL ECONOMICS: PURE THEORY

601

how very interesting this is and how revelatory of ‘the ways of the human
mind/ It implies, of course, that Ricardo was completely blind to the na-
ture, and the logical place in economic theory, of the supply-and-demand ap-
paratus and that he took it to represent a theory of value distinct from and
opposed to his own. This reflects little credit on him as a theorist. 26 For it
should be clear that his own theorem on equilibrium values is only tenable,
so far as it is tenable at all, by virtue of the interplay of supply and demand.
Ricardo could not have failed to discover this, had he tried to deduce that
theorem rationally instead of merely positing it intuitively. That is to say,
had he but stopped to ask why exchange values of commodities should be
proportional to the quantities of standard labor embodied in them, he would,
in answering this question, have found himself using the supply-and-demand
apparatus by which alone (under appropriate assumptions) that ‘law’ of value
can be established. Then he could never have denied the validity of the ‘law 7
of demand and supply for the long-run normal prices of the goods the quanti-
ties of which can be indefinitely increased by human industry, while admit-
ting its validity for short-run market prices and for the prices of monopolized
or ‘scarce’ goods. For, as Malthus pointed out painstakingly ( Principles , ist
ed., ch. 2, §§ 2 and 3), supply and demand come in quite generally 27 to de-
termine prices in both the long-run and the short-run cases, and the differ-
ence between them consists only in the level at which supply and demand fix
them, which has certain properties in the one case that are absent in the other.
In other words, the concepts of supply and demand apply to a mechanism
that is compatible with any theory of value and indeed is required by all. But
so great was Ricardo’s personal authority with some later writers that traces
of this mistake of his may be found not only in J. S. Mill’s but even in A.
Marshall’s Principles.

However illogically, the supply-and-demand mechanism actually drifted into
the place of a theory of value, 28 the exponents of which may even be said
to have held the fort against the labor-quantity theory throughout the period.
This was not only due to Ricardo’s carelessness but also to their own. We
have seen that they failed in their analysis of the element of utility, though
they brushed against it time and again. No more than Ricardo did they
trouble to work out a theory of exchange which, in their case as in his, among
other things, accounts for faulty handling of the concept of scarcity — the
basic importance of which for the whole field of value theory was, however,

28 The same applies to Marx, who took the same view without observing that his
exploitation theory presupposes that supply and demand do their work.

27 This is not strictly true except in pure competition in Professor Chamberlin’s sense.
In the case of monopoly there is no supply function; in the case of monopolistic com-
petition, also in Professor Chamberlin’s sense, there is neither a demand nor a supply
function of the kind that exists in the case of pure competition. To be true, the state-
ment above must be confined to the latter case.

28 .Malthus ( Principles , 1st ed., p. 495) went so far as to call ‘the principle of supply
and demand’ the ‘first, greatest, and most universal principle’ of Political Economy.
[All future references are to the first edition of the Principles .]

6o 2

III: FROM 1790 TO 1870

asserted by Lauderdale, Malthus, and Senior — and for failure to understand
monopolistic pricing. 29 But the sponsors of supply and demand, again with
the unnoticed exception of Cournot (and very few others, such as C. Ellet
and D. Lardner), even experienced difficulty in setting on its feet the very
supply-and-demand apparatus, the claims of which to a place in economic
theory they tried to assert. They talked of desires or desires backed by pur-
chasing power, of 'extent’ of demand and ‘intensity’ of demand, of quantities
and prices, and did not quite know how to relate these things to one an-
other. The concepts, so familiar to every beginner of our own days, of de-
mand schedules or curves of willingness to buy (under certain general con-
ditions) specified quantities of a commodity at specified prices, and of supply
schedules or curves of willingness to sell (under certain general conditions)
specified quantities of a commodity at specified prices, proved unbelievably
hard to discover and to distinguish from the concepts — quantity demanded
and quantity supplied. Malthus made indeed some progress toward clarifica-
tion. But the reader needs pnly to look up Senior ( Outline , pp. 14 et seq.) to
satisfy himself of the blundering way in which he tried to explain these sim-
ple matters. Or were they so simple after all? Is it not a fact, which stares at
us from the histories of all sciences, that it is much more difficult for the
human mind to forge the most elementary conceptual schemes than it is to
elaborate the most complicated superstructures when those elements are well
in hand?

Lauderdale, Say, Malthus, and others all asked themselves the question how
cost of production fits with supply and demand. Say’s contribution is en-
shrined in the proposition that cost of production is nothing else than the
value of the productive services that are consumed in production; and that
the value of the productive services is nothing else than the value of the com-
modity which is the result — another of those sayings of his that indicate pos-
sible insights without making them explicit enough for contemporaries and
later critics to understand. Malthus, however, though he probed less deeply,
explained things much better so far as he saw them. In particular, he nicely
indicates the locus of cost of production, which ‘only determines the prices
of commodities, as the payment of it is the necessary condition of their sup-
ply’ ( Principles , ch. 2, § 3) — a turn of phrase that points far ahead toward
Jevonian teaching. Another lesson to conclude with. Many circumstances com-
bined to keep the theory of those writers in a state that cannot be described
as anything but primitive; but one of them was obviously the lack of the

29 This is the more remarkable because Cournot produced within the period (1838)
his classic theory of monopoly, which, however, passed unnoticed. One of the conse-
quences of this state of things was the prevalence of very loose ideas on what monopoly
really is.* Even Senior spoke of a 'monopoly in land.’ But in his case nothing more was
involved than misleading terminology: he did not mean more than scarcity of land and
did not actually try to explain rent by a nonexistent monopoly in it. Others did, however,
and it is not always easy to tell whether a given author only used current phraseology
in order to denote operation of scarcity in the case of a 'costless’ factor of production or
actually meant to assert what would be true only if landowners acted like a single seller.

GENERAL ECONOMICS: PURE THEORY

603

appropriate technique: essentially quantitative relations cannot be stated satis-
factorily without mathematics. It is the same defect that also marred J. S.
Mill’s attempt at summing up.

(c) J. S. Mill’s Half-Way House. ‘Happily, there is nothing in the laws of
Value which remains for the present or any future writer to clear up; the
theory of the subject is complete.’ So J. S. Mill wrote in 1848 ( Principles ,
Book hi, ch. 1, $ 1 )-^evidently well pleased with the analytic structure he
was about to erect from existing material. Actually, the structure is not an
attractive residence. Its main merit consists in the fact that it showed up its
defects so clearly as to make even casual visitors desirous of remodeling it.

On the one hand, there is no doubt that Mill himself sincerely wished to
restate Ricardian doctrine in an improved form. And so his work in this field
has been and is being interpreted to this day. Leaning heavily on De Quincey’s
exposition of that doctrine. Mill accepted Utility and Difficulty of Attain-
ment as conditions of exchange value. But the energy with which he insisted
on the relative character of the latter completely annihilated Ricardo’s Real
Value and reduced other Ricardianisms to insipid innocuousness. Also, ab-
stinence takes its place along with quantity of labor as an element in ‘cost.’ In
other points, shifts of emphasis do the rest to destroy what it was Mill’s in-
tention to rebuild.

But on the other hand. Mill’s own main contribution was to develop the
supply-and-demand analysis so fully that, as Marshall himself was to indicate,
there remained not so very much to do beyond removing loose ends and add-
ing rigor in order to arrive at something not far distant from Marshallian
analysis. He did not achieve perfect clarity 30 or in fact a complete and correct
statement of the theory of supply and demand. But he went much further
than the majority of economists before him — always excepting Cournot — and
may be said to have been the first to teach its essentials. In particular, he
wrote out, in words, the Equation of Demand and Supply, and he made full
use of it in his chapter on international values, which is discussed below.

It is quite true that he paid token tribute to Ricardo’s shadow by intro-
ducing supply and demand in the modest role of determinants of value in
the case of commodities that are ‘absolutely limited in quantity’ (Book ill,
ch. 2) — with which he classed, erroneously of course, monopolized commodi-
ties, whereas he let the commodities ‘which are susceptible of indefinite mul-
tiplication without increase of cost’ be determined by this cost (ibid. ch. 3)
and commodities ‘which are susceptible of indefinite multiplication, but not
without increase of cost’ by ‘cost of production in the most unfavourable

30 See, e.g., his comments upon Senior’s statement that limitation of supply is essen-
tial to the value of labor itself (‘Notes on N. W. Senior’s Political Economy; by John
Stuart Mill,’ publ. by Professor F. A. von Hayek in Economica, August 1945). Mill
replied that ‘labour being painful, would not be incurred without some sort of equiva-
lent pleasure and advantage even if labourers could be multiplied indefinitely by a
volition or if every man could work a hundred thousand hours in the four and twenty.’
But disutility of labor is only relevant because it operates to limit the supply of labor.

604 iii: FROM 1790 TO 1870

existing circumstances’ (ibid. ch. 5). But he was concerned not so much with
supply and demand per se as with the level at which supply and demand 31
will fix equilibrium price in each of those cases. And he was truer to his
thought when he formulated the ‘law of supply and demand’ quite generally
as he did in his ‘Notes on Senior/ defining supply and demand as quantity
supplied and quantity demanded: ‘the value of a commodity in any market
will always 32 be such that the demand shall be exactly equal to the supply.’
And I maintain that this, in fact if not in intention, replaces Ricardo’s law
of equilibrium values and, incidentally, completes the scrapping of Ricardo’s
central concept of real value.

This interpretation is reinforced by a passage in the chapter on interna-
tional values: whenever the ‘law of cost of production is not applicable,’ we
must ‘fall back upon an antecedent law, that of supply and demand’ (Book
hi, ch. 18, § 1). Should this not mean that Mill embraced — without being
fully aware of it — the very same analysis that was anathema to Ricardo, then
the sense of this passage escapes me. Nor is there anything to oppose this
interpretation in the heap of blundering propositions that Mill called ‘Sum-
mary of the Theory of Value’ (Book in, ch. 6). Quite unimportant conces-
sions are made to the’ labor-quantity theory 33 (see especially propositions xm
and xv). On the other hand, definitely anti-Ricardian doctrine is repeatedly
asserted (see especially propositions 1, v, vm). And the Ricardian theorem
that rent is not an element in the cost of production is upheld with qualifica-
tions which, if correctly stated and developed (which Mill did not do), amount
to renouncing it (see proposition ix) and point toward the opportunity cost
theory. 34 A muddle, all this, no doubt. But it was not a hopeless muddle. Let
us rather call it a fertile one — for this muddle contained all the elements that

31 [Throughout this book J. A. S. refers to ‘supply and demand’ whereas Mill and
Marshall usually wrote of ‘demand and supply.’]

32 The proposition is true only for competitive equilibrium, which is all he meant by
‘natural’ or ‘necessary’ price. Yet Mill, while perfectly aware of this, used the word
‘always.’ I mention this because we shall meet, in sec. 4 on Say’s Law, a similar difficulty
of interpretation. Let me therefore point out at once that ‘always’ or -necessarily,’ when
they occur in those old writers who were so delightfully lacking in precision, do not
necessarily mean assertions of identities. Mill obviously meant an equation and not an
identity. He meant ‘always in equilibrium.’ And so may have Say.

33 But a disutility-plus-abstinence theory fits better into his general system of thought.
It would be almost though not quite correct to say that Mill (and Cairnes) transformed
the Ricardian labor-quantity theory into the Marshallian ‘real-cost’ theory.

34 See also Book hi, ch. 16, ‘Of Some Peculiar Cases of Value,’ which, another
proof of how hastily the work was put together, strays far from the matters to which
it is germane and in which we read ($ 1): ‘Since cost of production here fails us, we
must revert to a law of value anterior to cost of production, and more fundamental,
the law of demand and supply’ [my italics, J. A. S.], and this after a statement, made
only three paragraphs before, which seems to exclude cases of free competition from
the operation of the law of supply and demand, precisely the only ones to which it
applies strictly. Indeed, for Mill Malthus had written in vain.

GENERAL ECONOMICS: PURE THEORY

were necessary to straighten it out. 35 Caimes was the first to try to do this,
though without any great success. Marshall did succeed in doing this, though
not without invoking ideas from outside Mill’s range of vision (see Part iv,
chs. 5 and 6).

3. The Theory of International Values

Some of the aspects of that period’s policy of internation^ trade have
already been dealt with (chs. 2 and 5). Its monetary aspects will be surveyed
in the next chapter. Here we shall consider, with the utmost brevity, 1 the
purely theoretical core of the 'classic' teaching in international trade for which
J. S. Mill introduced the phrase Theory of International Values. We are pri-
marily interested in two things: in the contributions this theory made during
that period to the analysis of international trade; and in the relations of
these contributions to the theory of 'domestic’ value sketched out above. The
'classic’ writers, being most of them ardent free traders, were no doubt much
concerned with pointing out the advantages or 'gains’ that accrue to a coun-
try from international trade. Therefore, much of what they had to say on
the subject pertains to the field of welfare economics and constitutes in fact
their most important exploit in this field. But this is of secondary importance
from the standpoint of this section.

As regards contributions to the analysis of international economic relations
—remember, we now neglect the monetary angle 2 — we have three novelties
to record: (1) a distinct theory of international values; (2) the theorem of
Comparative Cost; and (3) the theory of Reciprocal Demand. The first was
that a distinct theory of international values emerged at all. This was, in a
sense, in conformity with old tradition, since already the mercantilist writers
had looked upon foreign trade as something that differed essentially, in na-
ture and effects, from domestic trade. But for the 'classics/ who did not ac-
cept the rationale of the mercantilist distinction, it was by no means evident
that there was any theoretically — or even practically — relevant difference or, if

35 As regards methods that had been new in his youth, he was surprisingly backward:
for instance, ch. 15, 'Of a Measure of Value’ does not contain a single reference to
price index numbers — an indication of narrowness of outlook that might be illustrated
also by other examples.

1 The resulting inadequacy is more tolerable than it would be otherwise because
readers may be referred confidently to an excellent study of the subject in Professor
J. Viner’s Studies in the Theory of International Trade, chs. vm and ix.

2 The fact that it is possible to neglect the monetary angle and to consider the barter
angle separately is of course due to a property of the 'classic’ pattern of economic
analysis that has been discussed above. It would not be possible within every system of
economic theory. We may add that in the conditions of that epoch it was somewhat
less unrealistic than it would be now to identify international economic relations with
trade in commodities and services and to consider this trade as a barter of commodities
against commodities — though, on principle, it was just as inadmissible as it would be

6 o6

m: from 1790 to 1870

there was, what it consisted in. In fact, economists have never quite agreed
on this. 3 The group in which Ricardo was the brightest light selected immo-
bility of factors of production as a criterion. That is to say, they defined do-
mestic trade as the trade relations of industries or firms between which capi-
tal and labor move without hindrance, thus assuring, in equilibrium, equal
rates of return to investment and work of the same difficulty, riskiness, and
so on — which was quite essential to their ‘domestic’ theory; and they defined
foreign trade, as the trade relations of industries or firms between which — for
reasons such as distance, 4 difference in language, difference in legal institu-
tions, unfamiliarity with conditions of life and habits of business — capital and
labor do not move freely. This has often been misunderstood. The ‘classics’
were, of course, not unaware of the facts of international migration of both
labor and capital, just as they were not unaware of the fact that neither is
completely ‘mobile’ within a country. All they did was to set up, for purposes
of analytic convenience, the two limiting cases as ‘ideal types’ that, though
neither actually occurs in real life, represent important constituents of what
does occur in real life. It is another question how the lack of realism involved
affects the practical applicability of this schema. It could be shown, however,
that, so long as there is any difference at all between domestic and interna-
tional mobility, a theory based upon this schema will retain relevance. It can
also be shown, moreover, that what the ‘classic’ theory of international value
thereby loses in applicability in the field of international relations it gains in
the field of domestic relations, where imperfect mobility prevails. Cairnes
{ Leading Principles, Part 1, ch. 3) conceptualized this by introducing the
terms Industrial and Commercial Competition. The former term denotes trade
relations with mobility and the latter, trade relations without mobility. He also
introduced the concept Non-competing Groups to denote groups of workmen
(local and occupational) or of firms, the members of each of which will not
or can not normally move into any of the others. Using this terminology, we
may say that the ‘classics’ really developed, in addition to what purported to
be a general theory of value, a theory of value for the case of non-competing
groups or of commercial competition. They did this, no doubt, because they
thought primarily of the application to the analysis of international trade; but

3 Perhaps the most obvious difference between foreign and domestic trade follows
from the fact that most people take different attitudes toward the advantage of their
own and the advantage of a foreign country. The common habit of expressing oneself
as if it were nations as such that trade (and not individuals) is in part due to this
difference in attitude. But some authors have stressed the importance of national
monetary and credit systems. Others have looked upon problems of location as the core
of the theory of international economic relations.

4 The element of distance thus did enter the picture. But it entered the picture only
in this and in no other way. The ‘classic’ writers did not make distance per se,
i.e. cost of transportation, the center of their picture. This was done by some of their
later followers or critics, Sidgwick in particular, but must not be confused with the
quite different and much more modest role that was assigned to distance by Ricardo
and Mill.

GENERAL ECONOMICS: PURE THEORY 607

the theoretical characteristic of their new doctrine is, all the same, not con-
fined to this practical purpose.

The second contribution, as everybody knows, was the theorem of Com-
parative Costs. As Professor Viner (op. cit. p. 440) has pointed out, A. Smith
never went beyond stating that under free trade everything would be pro-
duced in the place where costs (taking account of transportation costs) were
lowest. He also has pointed out that some earlier writers had formulated the
more general proposition that, under free trade, commodities would be im-
ported whenever they can be obtained most cheaply in this way. This includes
the case of exports that cost less than it would cost to produce the corre-
sponding imports at home, and thus implies the theorem of Comparative
Costs. 5 I also follow Viner, however, in believing that there was distinctive
merit in stating explicitly that imports can be profitable, even though the
commodities imported can be produced at less cost at home than abroad.
This merit belongs to Torrens (The Economists Refuted, 1808) and to Ri-
cardo. The former baptized the theorem, the latter elaborated it and fought
for it victoriously. 6 The simplest way of conveying it is to let Ricardo’s famous
example do duty once more. Take two countries, England and Portugal, and
two commodities, wine and cloth. Portugal, being more efficient than Eng-
land in both lines of production, can produce a certain quantity of wine by
the labor of 80 men and a certain quantity of cloth by the labor of 90 men,
whereas in England the production of the same quantities of wine and cloth
takes, respectively, the labor of 120 and of 100 men. Under these circum-
stances, Portugal will advantageously ‘specialize’ in wine and import cloth,
while England will ‘specialize’ in cloth and import wine provided, of course,
that wine and cloth exchange on any terms between the limits of one unit
of English cloth for % of a unit of Portuguese wine and one unit of English
cloth for % units of Portuguese wine. In the former case, all the advantage
goes to England, and Portugal is no better off than she would be without
trade; in the latter case all advantage goes to Portugal, and England is no
better off than she would be without trade. So far as this goes, any inter-
mediate exchange ratio is possible with advantage to both countries, and if
traders in both countries acted as monopolists, the exchange ratio would be
indeterminate between those limits. Ricardo and his immediate followers did

5 To the instance mentioned by Viner may perhaps be added M. Delfico’s argument
in his memorandum Sulla liberta del commercio (1797).

6 In spite of weak resistance that was in part supported by incompetent argument,
the theorem may be said to have conquered in England. In the United States it did
not catch on so well and still less did it do so on the continent of Europe, where it was
widely misunderstood even among free traders. But Cherbuliez gave a good account of
it. And von Mangoldt improved it, or carried it further, in one very important point
(see Viner, op. cit. pp. 458 et seq.; but if the reader refers to the original text, he
should turn to the first edition of Mangoldt’s Grundriss, which appeared in 1863 and
contains the relevant appendix that the editor of the posthumous second edition of
1871 thought fit to omit; see above, ch. 4, sec. 5).

6o8

III: FROM 1790 TO 1870

not worry about this but glibly assumed that the advantage would be halved —
which may have spelled error -but also may have been merely carelessness.

Other writers, among them Torrens, realized however that the indetermi-
nateness of the terms of trade or exchange ratios would be in general removed,
at least under conditions of perfect competition (or of one-sided monopoly),
by the mechanism of what Torrens was, I think, the first to call Reciprocal
Demand (in print). J. S. Mill, surpassing himself in generosity, not only de-
fended Ricardo against any charge of having committed a mistake but also
disclaimed credit for the original conception of this idea, although he had
developed it in all essentials in an essay written as early as 1829-30 but not
published before 1844 (in his Some Unsettled Questions). From it, he took
the substance of Sections 1-5 of the famous Chapter 18 of his Principles
(Book in) 7 that to all intents and purposes set the theory of reciprocal de-
mand on its feet — the third novelty that was contributed during that period
to the general analysis of international economic relations.

The problem being complex and quite beyond his command of technique,
J. S. Mill dealt with it by means of a number of simplifying assumptions some
of which he tried to remove in Sections 6-9 of the chapter. In particular, he
confined his argument at first to the case of only two commodities and of
two countries — the latter, it should be added, of similar size and productive
capacity — and it is in fact in this case that the principle involved can be best
displayed. In order to determine the point at which, within the limits set
by comparative costs, the exchange ratio or the terms of trade between the
two countries and commodities will tend to be fixed. Mill fell back once more
upon the 'antecedent’ (logically fundamental) law of supply and demand. He
perceived that (under fairly comprehensive assumptions) the equilibrium ex-
change ratio would be determined by the condition that the quantity of each
of the two products that the importing country is willing to take at this ratio
be equal to the quantity that the exporting country is willing to give at this
ratio (Equation of International Demand). 8 It is assumed that, if the one
country is willing to take more or less at this ratio than the other is willing
to give, competition of 'buyers’ or 'sellers’ will adjust the exchange ratio until

7 It is only these five sections of that chapter that have attained such fame. The
rest of the chapter, added in the third edition, in deference to the ‘intelligent criti-
cisms’ of friends, has had no share in the applause and has been voted 'laborious and
confusing’ even by good Millians such as Bastable and Edgeworth. I cannot quite
share either opinion. There are valuable contributions in the rest. For instance. Mill
never came so close to a grasp of the nature and use of the concept of elasticity of
demand (which he called ‘extensibility’) as he did in J 8 of that chapter. Some of the
criticisms that were leveled at it rest on nothing but the clumsiness and ambiguity of
expression that are unavoidable in a verbal presentation of this topic reinforced by
nothing except numerical examples.

8 The equivalent formula that the ratio is such as to equalize the values of exports
and imports is simpler but brings out less well than does ours that the proposition is
an equilibrium condition and not an identity.

GENERAL ECONOMICS: PURE THEORY 609

it fulfils this condition. 9 It should be recorded to Mill’s credit that he saw
that this will not exclude multiple equilibria, 10 and there are more delicate
questions that cannot be touched upon here. Also it should be recorded that
he put the apparatus he created to good use. His treatment in Section 5 of
the effects of. technological improvement in an export industry that are not
necessarily favorable to the exporting country deserves to be mentioned in
particular. For further light on the matter the reader is primarily referred to
Professor von Haberler’s well-known treatise. 11

Let us note at once that in this field Marshall did not do more than to
polish and develop Mill’s meaning. He cast it into an elegant geometrical
model (T he Pure Theory of Foreign Trade, 1879) that greatly clarified the
theory. 12 But he was well aware (see Memorials of Alfred Marshall, ed. by
A. C. Pigou, 1925, p. 451) that his curves ‘were set to a definite tune, that
called by Mill.’ This applies even to the geometrical apparatus: Mill’s reads
almost like a somewhat clumsy instruction for choosing these curves rather
than any others. Edgeworth’s famous restatement {‘The Pure Theory of Inter-
national Values,’ Economic Journal, 1894, reprinted in Papers Relating to Po-
litical Economy, vol. 11) added many interesting details but also did not go
beyond Mill in fundamentals. Serious attacks do not antedate the 1920’s, and
even then leading masters in the field substantially adhered to his teaching.

Since advocacy of free-trade policy was the main practical purpose the
‘classical’ writers had in mind when they developed their theory of interna-
tional values, they were naturally much interested in displaying the ‘gains’
that accrue to a nation from foreign trade. We have noticed elsewhere the

9 This implicit assumption of Mill’s really constitutes an additional condition, the
so-called secondary or stability condition.

10 The matter is a little complicated. On the one hand, as Professor Viner has
pointed out (op. cit. p. 537), Mill had the correct idea of the nature of his equation of
supply and demand, i.e., he saw and asserted against objectors that it was an equi-
librium condition and not an ‘identical proposition,’ which would, of course, be
incapable of determining an equilibrium point. This passage from a letter of his to
Caimes ( Letters , ed. by Hugh S. R. Elliot, 1910) should be borne in mind pre-
cisely because it proves that he understood this difference perfectly. But, on .the other
hand, he stated ($ 6 of the chapter on international values) that ‘it is conceivable that
the conditions [of the equation of international demand] might be equally satisfied by
every numerical rate which could be supposed,’ and this would make an identity of
that ‘equation.’ If, however, we read this passage in its context, we readily realize that
it does not really mean more than the perception of the possibility of the existence of
more equilibrium positions than one, and then a distinct merit emerges to claim recog-
nition instead of the demerit to which critics — including Edgeworth— -have called
attention.

11 G. von Haberler, The Theory of International Trade (1936, chs. 9-12). The refer-
ence also covers the subject of comparative costs and is intended to help all those
readers who will find my brief account unsatisfactory or even ununderstandable.

12 On this model, see Haberler, op. cit. pp. 153 et seq.; also Appendix J of Marshall’s
Money, Credit and Commerce. There is a London School Reprint (1930) of the papers
of 1879 under the title, Pure Theory ( Foreign Trade — Domestic Values).

6io III: FROM 1790 TO 1870

bias which this imparted to their argument and their tendency to underesti-
mate the possibilities of unilateral gain from protection. Here we are more
interested in finding out how they defined these gains and how they tried to
quantify them. Of course, in the early stages of the discussion it was quite
sufficient to say that foreign trade will supply a nation with commodities which
it could not produce at all or could produce only at higher cost. The latter
element having been reinforced by the introduction of the comparative-cost
principle, it was not less natural for Ricardo to stress the resulting saving in
cost per unit of product. There are two aspects to this. On the one hand,
this comes to the same thing as stressing the gain in quantity of product per
unit of costs. 13 Ricardo recognized, of course, that foreign trade cannot in-
crease the sum total of real value (in his sense) in a country, but 'it will very
powerfully contribute to increase the mass of commodities, and therefore the
sum of enjoyments’ ( Principles , eh. 7). There he stops because he strongly
believed that utility (value in use) cannot be measured . 14 But still we might
express Ricardo’s meaning by saying that foreign trade increases enjoyment
per unit of his real value. In any case, this is as far as he went into the wel-
fare economics of foreign trade — further, however, than is commonly believed.
On the other hand, foreign trade does bear upon the structure of Ricardian
real value in this way: if, as was the case with England, imports consist to a
considerable extent of foodstuffs and other necessities — such as cotton — that
enter largely into the consumption of the vyorking class, then the share of the
latter in total value will fall and the real value of profits and the rate of profit
will rise. Needless to say, this is an essential part of Ricardo’s free-trade argu-
ment: foreign trade increases indeed the ‘happiness of mankind’ by improving
the allocation of resources and by giving ‘incentives to saving and to the
accumulation of capital’ — ‘by the abundance and cheapness of commodities’
which it brings about — but does not, except temporarily, raise profits unless it
is instrumental in reducing the Ricardian real value of wage goods just as
would a technological improvement in their production.

So far as there is anything at all in Mai thus’ argument on the subject, it
does not contradict Ricardo’s. Of course, as Professor Viner has pointed out
(op. cit. p. 531), he might have said that the ‘sum of enjoyments’ is a treach-

13 Referring to the example by which Ricardo explained the operation of the com-
parative-cost principle, we observe that if England and Portugal each produced one unit
quantity of cloth and one unit quantity of wine without trade, this would take 390
labor units in all whereas, after specialization through free trade, these same four unit
quantities would take only 360 labor units.

14 But since he said that foreign trade will increase the sum of enjoyments (the word
’sum’ is out of place, of course, if utility is not measurable), he should not have said
that utilities cannot he compared. The latter is in fact implied by the comparative-cost
principle, which is relevant only because comparison of utilities is possible. At a stretch,
we might credit Ricardo with the modern idea that there is such a thing as ’ordinal
utility,’ although there is no such thing as ‘cardinal utility’ — that a utility is capable
of being greater or smaller than another, although it is not capable of being a multiple
of another.

GENERAL ECONOMICS: PURE THEORY

6ll

erous concept to use because foreign trade will influence the distribution of
incomes, conceivably in a direction that may be unfavorable to small incomes.
But he did not say this. Nobody did at the time excepting some politicians
who argued on this line, in the English corn law controversy, on behalf of
farmers. I do not maintain, of course, that either Ricardo or Mill handled the
welfare aspects of foreign trade satisfactorily. Objectively, Mill’s theory of
reciprocal demand was a step in advance because it pointed more directly
toward welfare (utility) aspects. But Mill himself did not exploit the possi-
bilities, such as they were, that his approach suggests. This was reserved for
Marshall and Edgeworth, who developed methods which, though they have
become obsolete by now, gave satisfaction to many in the 1890’s (see below.
Part iv, ch. 7, Appendix). They, Edgeworth especially, criticized Mill for esti-
mating benefit from foreign trade exclusively by the criterion of exchange
value (terms of trade). 15 In view of Ricardo’s emphasis on increase of means of
enjoyment, this criticism hardly applies to him. In the case of Mill there is
more to it, but not much more. Both saw the nature of the 'social gains of
trade’ correctly. It is truer to say that they did not attempt to measure them
at all — and there is something to be said for stopping at what Cairnes regret-
fully called an 'indefinite and vague result’ ( Leading Principles, p. 506 of Eng-
lish ed.; the pagination differs in the American ed.) — than it is to say that
they attempted to estimate them from the terms of trade.

Let us now ask the question how were the theories of comparative cost and
of reciprocal demand related to Ricardo’s and Mill’s general theories of value
or, to put it in the usual way, what was the relation between their theories
of foreign and domestic value?

First of all, what was the relation of the theories of comparative cost and
of reciprocal demand to one another? Mill’s generosity has obscured the ob-
vious answer. As we have seen, in his Essays on Some Unsettled Questions,
1844 (Essay 1, ‘Of the Laws of Interchange between Nations’), he presented
his equation of reciprocal demand as a modest supplement to Ricardo’s
comparative-cost principle that the great pioneer had had no time to add
himself. Most historians and critics have taken the same view. But it should
be clear that this view is entirely wrong. The demand-supply schedules, whose
intersection gives the geometrical picture of the equation of reciprocal demand,
represent an approach that Ricardo always rejected except for temporary fluc-
tuations and for monopolized commodities. They introduce a new and more
general principle just as, in the monetary department, the general theory of
the rates of foreign exchange does not supplement the proposition that, under
international gold monometallism, exchange rates fall within the gold points —
and are, in this sense, ‘determined’ by them — but ousts it from the key posi-
tion it used to hold. Just as a general theory has reduced the gold-point theorem

15 That is to say, Edgeworth and others accused Mill of believing that a country’s
total gain from trade always increased or decreased as its gain per unit of exports (the
quantity of German linen that England received for a unit of her cloth) increased and
decreased, just as writers on wages sometimes assume that the national pay roll always
increases or decreases when wage rates do.

6l2

III: FROM 1790 TO 1870

to the status of one of many propositions about a special case, so the theory
of reciprocal demand has reduced the comparative-cost principle to the status
of a proposition about a particular aspect of trade under commercial competi-
tion, that indeed retains some importance — because it is particularly useful in
destroying a prevalent error — but is no longer fundamental to the theory of
international values. 16 Thus the two are not complements of one another,
any more than they are alternative theories of international values, but their
relation is that of a particular theorem and a comprehensive theory.

Now for the relation of comparative cost and reciprocal demand to the
general value theories of their authors. As regards Ricardo, we may look upon
the comparative-cost principle as an exception from the labor-quantity law,
for it describes a case where commodities no longer exchange according to this
law. This exception is the more serious because it covers not only international
values but also, in all cases of less than perfect mobility of labor, domestic
values. In fact, together with all the other exceptions and qualifications that
Ricardo was forced to make, it really rips up the entire fabric of Ricardo’s
theory of value. But we can also, with almost equal justification, interpret the
comparative-cost principle as an outgrowth of the labor-quantity theory from
the standpoint of which the problem of international value did present itself
to Ricardo and which does supply the technique of his argument. Accord-
ingly, it has been held by high authorities (Ohlin, Mason) that Ricardo’s anal-
ysis of international trade is vitiated by its dependence on an obsolete theory
of value. But it must not be forgotten that, as Haberler has shown, the prin-
ciple of comparative cost admits of restatement in terms of opportunity costs.

Quite different is the relation between Mill’s reciprocal demand and his
general theory of value. Reciprocal demand — notwithstanding an impression
to the contrary that might be created by Mill’s wording, which was as we
know at times misleadingly Ricardian — is completely independent of any labor-
quantity or even real-cost theory of value. On the contrary, it blends perfectly
with his general supply and demand theory, which, by virtue of reciprocal
demand, is successfully extended to the case of international values. 17 This

16 I quite agree with Professor von Haberler’s phrase that the comparative-cost prin-
ciple ‘merges’ into a general theory of international value of which the equation of
reciprocal demand is the central theorem (op. cit. p. 123). But precisely because I
approve of this phrase, I cannot approve of the other phrase Haberler uses in the same
place, viz., that the theory of reciprocal demand is ‘an essential supplement to the
theory of comparative costs.’

17 We may thus consider Mill’s theory of international values (or of commercial
competition) as a particular case of his general supply and demand analysis, defined
by the assumption that there be no mobility of factors. But there is nothing to stop
us from putting it the other way round and from saying that the general case is repre-
sented by his theory of international value and that domestic value constitutes the
particular case, which is defined by perfect mobility of factors. This is worth our while
to observe because a similar situation has emerged of late with respect to Keynesian
doctrine: most economists would describe the difference between the Walrasian and the
Keynesian models by saying that the latter is, as it were, cut out of the former by means
of several restrictive (‘particularizing’) assumptions; but Lord Keynes himself regarded

GENERAL ECONOMICS: PURE THEORY

6l 3

case, joining the list of all the other cases in which analysis by "cost of pro-
duction’ also fails, thus helps to strengthen and to unify Mill’s theory of
value, whereas it weakened that of Ricardo. Now, supply and demand, con-
sidered as a theory of value (which it is not really, as we know), is a half-way
house between real-cost and marginal-utility theories. Therefore, Mill’s equa-
tion of reciprocal demand constitutes another step away from the former and
toward the latter. And this is the reason why the theory of international values,
as formed by Mill, stood up under the fire of criticism so much better than
did the rest of the ' classical ’ system and why it remained dominant doctrine
right into the 1920’s.

A discussion of the criticisms— both justified and unjustified — that were lev-
eled, then and later, at both the comparative-cost principle and the equation
of reciprocal demand would be interesting in itself and highly revelatory of
the amount of ability and analytic power that went into economic controver-
sies at various times. More important still, such a discussion would greatly
improve the reader’s understanding of the theory of international values and
of what it can and cannot do. But it is quite out of the question to embark
upon such a discussion here. Fortunately, however, reference to the works of
Viner and Haberler will amply fill this lacuna. 18 Recommending careful study
of both, I can therefore conclude with the following two remarks.

First, the student of the 'classical’ literature on international values must
bear in mind that he is dealing with very rough groundwork rather than with
a complete structure. For instance, neither Ricardo nor Mill can have looked
upon a theory that deals only with two commodities and two countries as
more than an illustration of principles — Mill did in fact treat briefly the cases
of three commodities and three countries (Book in, eh. 18, jj 4) — though they
certainly believed the task of generalizing it to n commodities and n countries
to be easier than it was. 19 The same goes for the 'classical’ practice of con-
fining analysis to the case of constant costs: variable costs, increasing and de-
creasing, must no doubt be introduced into the 'classic’ theory, but the critic
who cannot do this should blame himself rather than the pioneers. Also, the
'classics’ did not ask themselves what the dropping of their assumptions of

his theory as the general case from which the writers whom he described as classics
(Marshall and his immediate followers) cut out the special case which yields full-
employment equilibrium by assuming away certain facts. The reader will observe that
this, though in strict logic a distinction without a difference, matters a great deal in
the psychology of scientific warfare.

18 This must not be interpreted to mean that I agree with those eminent authors in
every detail of their analysis.

19 Mill held that trade among any number of countries and in any number of com-
modities 'must’ take place on the same essential principles as trade between two coun-
tries and in two commodities. This is not quite so. The generalization to more than
two countries presents indeed no great difficulties. It was undertaken within the period
by several writers, who also realized how far this extension affects the validity of results.
But extension to n commodities raises more difficulties. So far as I know, it was first
tackled by M. Longfield ( Three Lectures on Commerce, 1835).

614 III: FROM 1790 TO 1870

‘free’ competition and of full employment of resources might do to their
theories. It can be shown, however, that monopolistic competition and perma-
nent unemployment do not destroy the validity of either the comparative-
cost principle or the equation of reciprocal demand, although both do make
considerable difference to the practical inferences to be drawn. 20

Second, when we indict the many slips and inadequacies that no doubt
disfigure the ‘classical’ analysis, we should never fail to notice that many of
them may be removed without much injury to essentials and that they are
fairly matched by slips and inadequacies on the part of their critics. An ex-
ample is the manner in which the ‘classics’ treated the question of the ‘ratios
... in which the advantage of the trade may be divided between the two
nations.’ Mill had explained already in the Essay of 1829 (published 1844)
that these ratios may vary all the way between the limits set by comparative
costs and even considered the ‘extreme case’ in which ‘the whole of the ad-
vantage . . . would be reaped by one party.’ He may have underrated the
likelihood of such cases — for example, he hardly thought of the case of a
large and a much smaller country — and there are other criticisms to make of
his treatment of this question. In substance, however, he was all right, and
the corrections that might be applied leave his argument substantially intact.
But even if that were not so, the case would be of serious importance only
with two commodities, two countries, and constant costs — conditions that
would be automatically eliminated in any more realistic presentation of the
theory. Another though related example is the manner in which the ‘classics’
treated the question of the extent to which countries would specialize in the
line of production in which they have a comparative advantage. Ricardo’s
carelessness, assisted by the carelessness of his critics, has created the impres-
sion that he considered nothing but complete specialization and that he con-
sidered such complete specialization to "be the theoretically and practically
ideal case. But even if these allegations were wholly true — which is debatable —
they would not amount to much. As regards the first, complete specialization
of the trading countries, if physically possible — that is to say, if both countries
are big enough — would indeed be the rule under the Ricardian assumption
of constant costs. If we drop this assumption, as we must do in any case, we
also get rid of the offending proposition. As regards the advantages of com-
plete specialization in comparison with partial specialization or with no trade
at all, Ricardo and Mill certainly did not think the matter through properly.
And critics found it easy to show that complete specialization is necessary in
order to reap the full advantages of international trade only in a limiting
case whereas, in general, partial specialization may be more ‘advantageous’
and, in other limiting cases, complete specialization may not be better than
no trade at all. Since, however, trade that is not ‘advantageous’ in the Ricardo-
Mill sense will also not be profitable, the requisite corrections again do not

20 The simplest way of convincing oneself of this as regards persistent underemploy-
ment of resources is to consider the argument for protection that gains in force —
though it may he debatable how much it gains — in this case.

GENERAL ECONOMICS: PURE THEORY 615

greatly matter. Their effect may indeed be to obscure fundamental truth rather
than to reassert it.

Not all weaknesses of the 'classical’ analysis of international values are
venial. Even Mill had a very imperfect conception of all the repercussions
of international trade upon the structure of domestic values, which he also,
though not so much as Ricardo, took as given or, which is not much better,
as adjusting themselves appropriately. Primitive technique and bias for free
trade, moreover, account for the nearly complete neglect of all those cases in
which well devised tariffs might greatly benefit at least one and conceivably
all of the trading countries . 21 But on the whole it is more misleading than it
is true to say that the 'classic’ theory of international values has ever been
refuted , 22 though, as has been said already in another connection, some of
the practical inferences that the 'classic’ writers drew from it have been re-
futed. And the 'classic’ theory was altogether unequal to the burden they put
upon it in making it a 'guide to policy.’ Above all, it does not ‘prove free
trade.’

4. Say’s Law of Markets

In a famous chapter of his treatise (Traite d’economie politique), }. B. Say
expounded a doctrine that has come to the fore again during the last decade:
his loi des debouches or Law of Markets . 1 The fact that it has become the
target of adverse criticism from Keynes and the Keynesians has invested it
with an importance not naturally its own. Because of this, we shall have to
return to it in our discussion of the Walras-Marshall system, of which, ac-

21 That this neglect should not be attributed to bias only is shown by the case of
Edgeworth, who did much to remedy that state of things and still remained a strong
free trader. At the time, it was Torrens especially who in his tracts on The Budget
(1841-4) pointed out the possibilities enshrined in the 'classic’ theory, for an analysis
of protective measures that does not quite bear out the 100 per cent argument of the
more ardent free traders (which must in fact be explained by England’s position and
interests rather than by any theory), who, for. tactical reasons, were very reluctant to
admit the real extent of the possibility of unilateral advantage from protection. Cournot’s
contribution to the theory of international values lies in this field. Only it does not
lie in the argument of Chapter 12 of his Recherches, which has come in for deroga-
tory criticism time and again and part of which he disavowed himself, but in the
argument of Chapter 10 which, though not faultless either, shows successfully that,
under international trade without barriers, the total quantity produced of a commodity
may conceivably be smaller than it would be if the two markets were completely iso-
lated from each other. But he does not seem to have realized the 'limitations of this
argument.

22 See O. von Mering, Tst die Theorie der internationalen Werte widerlegt?’ Archiv
fur Sozialwissenschaft, April 1931.

1 Book 1, ch. xv, pp. 76-83 of the Prinsep translation (1821). It occupied four pages
only in the first edition of the Traite (1803) but in response to criticism continued to
expand, in successive editions, growing more woolly all the time. Law of Markets is
the usual English version of the French loi des debouches. The term Outlets would
render Say’s meaning better. Prinsep used the term Vent.

6i 6

in: FROM 1790 TO 1870

cording to some Keynesian critics, it is a basic proposition. For the same rea-
son, we must now discuss its original meaning and its earlier fortunes with
greater care than would otherwise be called for.

Our first task is to find out what Say’s original meaning really was. With
so inexact a writer this is not always easy. But in this instance his meaning is
clear enough, illustrated as it is by his examples and conclusions. Let us start
with one of these examples, which he added by way of comment upon the
plight of the English export industries around 1810, that was a standard ex-
ample of Sismondi’s for the deadlocks that unrestrained production might
cause. Say’s argument was that the trouble did not lie with the superabun-
dance of the English products but with the poverty of the nations that were
expected to buy them. Take the case of Brazil. If English producers were
unable to dispose of the wares they tried to export to that country, there
could be only two reasons for it: either English exporters were making mis-
takes as regards the commodities the Brazilians wanted — as, in the then state
of information about distant countries, they actually did — or else the Bra-
zilians had nothing to offer in return or to export to third countries in order
to procure the money with which to pay the English producers. In other
words, the trouble was not that England produced too much but that Brazil
produced too little. Also, as Say did not fail to emphasize, it would not have
remedied the situation if the Brazilians had produced acceptable equivalents
but had been prevented from exporting them by import restrictions in Eng-
land or in third countries. So far as this goes. Say’s reasoning amounts simply
to part of the ordinary free-trade argument, which was gaining currency at the
time and was to be formulated later by Sir Robert Peel in the adage: ‘in order
to be able to export, we must open our ports to foreign commodities’ — an
oversimplification no doubt, but one that contained a good deal of funda-
mental truth and of practical wisdom. This stands out particularly when we
remember that, in the picture of the ‘classics,’ international economic rela-
tions reduced wholly, or almost wholly, to commodity trade: if we exclude
movements of short- and long-term capital and disregard the vagaries of gold
production, then exports and imports must ‘ultimately’ pay for one another.

More clearly than did others, Say perceived however that this argument de-
rives from a more general principle that applies also to domestic trade. Under
division of labor, the only means normally available to everyone for acquiring
the commodities and services he wishes to have is to produce — or to take
part in the production of — some equivalent for them. It follows that produc-
tion increases not only the supply of goods in the markets but normally also
the demand for them. In this sense, it is production itself (‘supply’) which
creates the ‘fund’ from which flows the demand for its products: products are
‘ultimately’ paid for by products in domestic as well as in foreign trade. In
consequence, a (balanced) expansion in all lines of production is a very dif-
ferent thing from a one-sided increase in the output of an individual industry
or group of industries. To have seen the theoretical implications of this is one
of Say’s chief performances. We have now to make them clear to ourselves.

Consider an individual industry that is too small to exert perceptible in-

GENERAL ECONOMICS: PURE THEORY

617

fluence upon the rest of the economy and upon the social aggregates such as
national income. Therefore, the conditions in the rest of the economy may be
considered as data for the purposes of an investigation into the operations of
this industry, a procedure that we shall discuss in Part iv. Chapter 7, under
the heading of Partial Analysis. 2 In particular, the demand schedule for the
product of the industry in question is derived from the income generated by
all the others: its own contribution to total income being negligible, that
schedule may be considered as given independently of its own supply and so
may (in general) the prices of the factors it uses. We then have given inde-
pendent demand and cost schedules that summarize the whole of the eco-
nomic conditions of society to which the industry in question has to respond
and which may be said to determine the output it will produce at each price
(supply schedule). The 'right' or equilibrium amount thus being, in general,
well defined by this demand and this supply schedule, there is no difficulty
or ambiguity in saying that, in any particular case, the industry has produced
‘too little' or ‘too much’ and in describing the mechanisms that will be set
in motion by such under- or overproduction. But it stands to reason that the
particular industry’s equilibrium output, the output that is neither too great
nor too small, is the right output only with reference to the outputs of all
the other industries. There can be no point in calling it right irrespective of
them. In other words, demand, supply, and equilibrium are concepts with
which to describe quantitative relations within the universe of commodities
and services. They do not carry meaning with respect to this universe itself.
Strictly speaking, there is no more sense in speaking of an economic system's
total or aggregate demand and supply and, incidentally, of overproduction
than there is in speaking of the exchange value of all vendible things taken
together or of the weight of the solar system taken as a whole. But if we do
insist on applying the terms demand and supply to social totals, we must be
careful to bear in mind that they then mean something that is entirely dif-
ferent from what they mean in their usual acceptance. In particular, this ag-
gregate demand and aggregate supply are not independent of each other, be-
cause the component demands ‘for the output of any industry ( or firm or indi-
vidual) comes from the supplies of all the other industries (or firms or indi-
viduals)' 3 and therefore will in most cases increase (in real terms) -if these
supplies increase and decrease if these supplies decrease. This is the proposi-
tion which (like Lerner) I call Say’s Law and which I believe renders Say's
fundamental meaning.

As stated. Say’s law is obviously true. Nevertheless, it is neither trivial nor
unimportant. In order to convince ourselves of this, we need only notice the
errors that arise to this day from the mistaken application to social aggre-

2 The argument above is unnecessarily restricted. The essential point is actually inde-
pendent of the particular assumptions of partial analysis. But our exposition is not
materially impaired and gains much in simplicity by the use of the restrictions involved.
For- the same reason, also, we confine ourselves to the case of perfect competition.

3 A. P, Lerner, ‘The Relation of Wage Policies and Price Policies/ American Eco-
nomic Review , Supplement, March 1939, p. 158.

6 18

IIIC FROM 1790 TO 1870

gates of propositions derived by means of the demand-supply apparatus. Thus,
observing that ‘depression in a particular industry may be cured by a restric-
tion of output/ the man in the street sometimes believes that ‘to cure de-
pression in the economy as a whole all that is necessary is that there should
be a general restriction of output/ 4 and less crude reasoning of this kind oc-
curs too often, even in writings of scientific standing, to permit us to brush
aside Say’s law as a stale truism. Moreover, Professor Lerner’s example may
be reformulated, I think, in a manner that will bring out the considerable, if
negative, importance of Say’s law for the theory of crises or ‘gluts.’ It avers
correctly that crises can never be causally explained solely by everybody’s hav-
ing produced too much. Finally, the law, at least by implication, amounts to
a recognition of the general interdependence of economic quantities and of
the equilibrating mechanism by which they determine one another, and there-
fore has a place — as have other contributions of Say’s — in the history of the
emergence of the concept of general equilibrium.

But Say himself was little interested in the analytic proposition per se
which for us constitutes the merit of his chapter on debouches. Like many
other economists of all times, he was much more anxious to exploit it for
practical purposes than to formulate it with care. He was an addict to the
Ricardian Vice (see above, ch. 4, sec. 2). The chapter, being mainly an argu-
ment for laissez-faire and against restrictions upon production, abounds in
reckless statements, which were precisely the ones to attract attention. His
readers were treated to a picture of the capitalist process that showed only
a triumphant onward march of industry with nothing to disturb permanent
advance at full employment except sectional maladjustments and restrictive
government policies. All the other ills under which people , groaned vanished
before the battle cry, Supply creates its own Demand, which was made to
mean much more than it can possibly mean when properly interpreted. It is
not worth our while to stay in order to collect the grains of truth that even
this picture contains and to point out, for example, that the difficulties ex-
perienced by French industry in 1811, 1812, and 1813 were in fact largely
caused by the policy of the Napoleonic regime (Milan Decree and the rest)
and that it was the lack of complements to what it produced, rather than
the quantities of what it did produce, that accounts for the economic vicissi-
tudes of those years. But it is worth our while to note that Say’s careless state-
ments, whatever else of merit or demerit impartial criticism may find in them,
gave ample scope to the propensity of hostile critics to speak of capitalistic
apologetics — ‘whitewashing/ reckless denials of real difficulties, shallow op-
timism, ‘dwelling in a dreamland of equilibrium/ and the like. Still more is it
worth our while to scrutinize some of the analytic consequences of his care-
lessness.

The first point to be made is that, though Say’s law is not an identity, his
blundering exposition has led a long series of writers to believe that it is one
— and this in no less than four different senses.

4 Lemer, ibid.

GENERAL ECONOMICS: PURE THEORY 619

i. Some writers have defended Say’s law on the ground that it asserts not more than
that ‘whatever is sold is bought’ or that the sum the seller receives is the same sum
that the buyer pays. This interpretation is obviously wrong. But a sentence in Say’s
chapter actually reads as if he had intended to mean precisely that. It may be re-
marked that, as has been shown by Richard Goodwin in an unpublished paper, the
truism just stated is by no means useless. Only it is not Say’s law.

n. Other writers, who are disposed to allow Say’s law to stand for the case of a
barter economy and who base their objection to it entirely on the neglect of the role
of money which it seems to them to imply, point to the fact that in a barter economy
every ‘seller’ is inevitably also a ‘buyer.’ In this sense, there is indeed identity of selling
and buying and again it is true that Say himself may be quoted in support. But this
identity is quite irrelevant for Say’s purposes. To make it relevant, it would be neces-
sary to prove that, in barter, everyone’s offer is at all exchange ratios equal to what
other people wish to take at the same ratios. This is obvious nonsense, of course, for
disequilibrium is as possible in a barter economy as it is in a money economy, though
the latter may display additional sources of disturbance. This mistake had already been
made by Malthus and has been often repeated.

hi. Still another interpretation of Say’s law as an identity has been adopted by Lord
Keynes and will be presented in the more exact form that O. Lange has given to it
(‘Say’s Law . . .’ in Studies in Mathematical Economics and Econometrics; Lange,
McIntyre, Yntema eds., 1942). Denoting by pi the going price of a representative
commodity or service i, by Di the quantity demanded, and by S< the quantity supplied
at that price, he makes Say’s law mean, if there are n — 1 commodities (exclusive of

mone y) : « -1 «-i

23 piEb = 23 p * s *

which, if money be considered as the nth commodity, is equivalent to D» == S n .
It is perhaps not superfluous to state explicitly that my interpretation of Say’s law
amounts to replacing the identity signs (==) by equality signs (=), valid only in a state
of perfect equilibrium of the system. Of course, there is nothing to stop us from devel-
oping, as a useful exercise in pure theory, the consequences of the hypothesis, D n = S n .
But it should not be called Say’s law, because Say, though he did not consider the
problem of hoarding, did consider the problem of increasing the effective quantity of
money in case increase in transactions should require it. Once more, however. Say him-
self is to blame for this interpretation. In his excessive zeal for establishing the prac-
tical importance of his theorem, he expresses himself in several places as if indeed the
total monetary value of all commodities and services supplied (exclusive of money)
would have to equal the monetary value of all commodities and services demanded
(exclusive of money), not only in equilibrium but ‘always and necessarily.’ This is, of
course, logically wrong if he actually meant it, but is practically wrong even if he
meant only ‘always and necessarily in equilibrium’ but at the same time believed —
as perhaps he did — that reality actually conformed, or would conform in the absence
of government interference, to equilibrium conditions most of the time: the reader
will realize how easily these two meanings can be confused.

iv. The last type of identity or tautology was ludicrously created by Say for the
express purpose of making his law unassailable. Driven to something very like despair
by the attacks upon his law, he simply reformulated his concept of production so as to
confine it to the production of things, the price of which will cover cost. What could
not be sold except at a loss does not constitute production in the economic sense any

620

III: FROM 1790 TO 1870

more so that overproduction is excluded by definition! 5 The professional world has
laughed at him ever since. Space does not permit us to analyze the psychology of this
miscarriage or to make the attempt to discover a defensible kernel in it.

The second and only other point that needs to be made here about Say’s
carelessnesses concerns his treatment of the element of money, which must
prove a vicious hurdle for anyone who relies on the model of a barter econ-
omy. Say’s few and fragmentary pronouncements on the subject may be divided
into two -groups: pronouncements of a theoretical nature and pronounce-
ments concerning the practical doubts his readers might harbor about the
realism of his rosy picture. The former may be reduced to a single theorem:
the intervention of money does not make any difference of principle to his
law. With or without money, products exchange, in the last analysis, for prod-
ucts, since money is nothing but a medium of exchange that, owing to the
losses of satisfaction or business gain that are incurred by keeping it idle,
everybody will try to spend as promptly as the given habits of income and
business payments permit. Now we are being taught a different doctrine so
generally that it is necessary to emphasize that there is nothing wrong with
this theory per se if it is stated and used with due regard to its abstract char-
acter and to the assumptions it involves . 6 The main criticism that may be
leveled at it and the main reason why we prefer another theoretical pattern
is that Say, like practically all the theorists of that age, neglected the store-
of-value function of money and therefore the fact that there is an element in
the 'demand’ for it that is not accounted for by his theory. Whatever the
theoretical consequences for the whole organon of economic theory that may
follow from this, they do not justify wholesale rejection of this theory or re-
fusal to recognize that as an early step in analysis it had its value. Much point-
less controversy might have been spared us,- and much confusion among be-
ginners might have been avoided, if we had been content to insert the 'de-
mand for cash to hold’ into the theoretical pattern that Say adopted and to
speak of supplementing rather than of refuting it or of adding a second to his
first approximation.

The 'practical’ group of Say’s pronouncements on the monetary questions
raised by his law may be rendered as follows. Unlike his interpreter J. S. Mill,
he evidently did not think much of the practical importance of the phenom-
ena that might be produced by widespread refusal to spend receipts promptly
either on consumption or on ‘real’ investment (that is, investment involving
demand for goods and services). Had he been asked whether he admitted
that such refusal, if it occurred, would create disturbances and, if so, why he

5 This new concept of production was first presented in a letter to Malthus (1820);
see Melanges et correspondence . . . , p. 202) and then in two articles in vols. 23
and 32 of the Revue encyclopedique (see especially the earlier one entitled ‘Sur la balance
des consommations avec les productions’) and is embodied in the 5th ed. of the Traite
(1826) and in the Cours complet (1828-9).

6 Inasmuch as loss of satisfaction or interest is made the reason why people should
spend promptly, it might even be claimed that in this passage Say pointed beyond his
sketch toward a more complete theory.

GENERAL ECONOMICS: PURE THEORY

621

had not pointed this out, he might with justice have replied that he was
writing for readers of normal intelligence. But he did advert, in a perfunctory
note ( Traite , op. cit. p. 77), to the fall in price level that would be induced
by expansion of output if the circulating medium failed to expand correspond-
ingly. He answered, however, that if the increase in traffic requires more
money, this want will be "easily supplied’ by the creation of substitutes such
as trade bills, bank notes and demand deposits and that in addition money
will "pour in’ from abroad. This was taking the matter a great deal too lightly
and shows that his opponents had at least that much of a case: Say’s argu-
ment was practical in intention, and he understated unjustifiably the gulf that
separates his theorems from the realities of the economic process to which he
applied them uncritically. 7

We turn to the controversy that developed around Say’s law. Critics being
mainly interested in its practical implications, this controversy turned chiefly
on the question of "general gluts.' Therefore, a few remarks are sufficient for
the moment.

Say’s teaching — wheat and chaff — was accepted by Ricardo ( Principles ,
ch. 21) and the Ricardians. James Mill, as his son claimed, may even have
discovered the law independently. 8 It was attacked almost simultaneously by
Sismondi and by Malthus, 9 who were followed by Chalmers and others. Some
of their arguments were wrong to the point of ineptness (though Say’s replies
were not much better), and J. S. Mill, in summing up in favor of Say (Prin-
ciples, Book hi , ch. 14), had little difficulty in disposing of them. In doing so,
and in pointing out that difference of opinion in this matter involves "rad-
ically different conceptions of Political Economy, especially in its practical
aspect,' he applied an important improvement to Say’s exposition, though it is

7 Moreover, we are here giving him the full benefit of the implications of his footnote.
His text, where he tried to dispose of the whole problem by asserting that the true , fund
of purchasing power is goods and that any amount of money will do for any amount
of physical transactions — statements that are also not simply wrong but hold only in
the sphere of abstract logical principles — is still more objectionable. It is interesting to
note, however, that part of his argument — that which attacks the view of the business-
man, who blames scarcity of money for his troubles — had been expounded already by
Sir Josiah Child.

8 It appeared first in James Mill’s Commerce Defended (1808), so that Say’s priority
is. beyond question. Let me add that he, and especially Ricardo, went beyond Say on
one point (see Ricardo’s Principles, ch. 21, note 2). Say admitted that abundance of
disposable capitals relative "to the extent of employment for them’ or, as we say, to
the available investment opportunity, will reduce the rate of interest, although he
held that at falling rates of interest this investment opportunity will indefinitely expand.
This — with appropriate qualifications with regard to the conditions that prevail in
depressions — is quite correct and evidently involves no contradiction. But Ricardo
thought that it does and held — which is also correct but only within his own theo-
retical model and not without it — that, except for a rise in ( the real value of) wages,
investment is possible to an indefinite extent without depressing the rate of "profits.’

9 The first edition of Sismondi’s Nouveaux Principes was published in 1819; the first
edition of Malthus’ Principles in 1820.

622

III: FROM 1790 TO 1870

quite clear that he did not look upon it as a correction of Say’s thought. He
fully admitted that there are times of crisis at which 'there is really an excess
of all commodities above the money demand; in other words there is an
under-supply of money. . . Almost everybody is therefore a seller and there
are scarcely any buyers: so that there may really be ... an extreme depres-
sion of general prices, from what may be indiscriminately called a glut of
commodities or a dearth of money.’ This passage is very interesting in various
respects. First, it shows that, Say’s wording notwithstanding, an eminently
competent follower of Say did not interpret his doctrine as implying denial
of the actual occurrence of 'general gluts.’ Second and a fortiori, the passage
disposes of all those interpretations of Say that turn his law into an identity
of some kind or another and reinforces ours. 10 Third, there is a curiously
modern ring about this passage, which should not go unnoticed. Notice, in
particular, the phrase ‘under-supply of money,’ which evidently does not mean
that mines or printing presses have not produced a sufficient quantity of
money but is the exact equivalent of the modern phrase ‘excess demand of
firms and households for cash to hold.’ This goes some way toward reducing to
their proper proportions the objections that may be raised against Say’s cavalier
treatment of the monetary factor — besides setting an example for the man-
ner in which such deficiencies in their predecessors should be treated by serious
and fair-minded workers.

So far as this point is concerned, there seems to be no difference at all
between Mill and Marshall. Both recognized the importance that the desire
to hold money, rather than to spend it on goods and services, may acquire
in certain situations — crises and depressions in particular. And the only dif-
ference there is on this point between Mill and Keynes is this: the former
confined this excess demand for money to situations of this kind, of which
it is one of the consequences and which therefore cannot be explained by it;
whereas the latter considered the excess demand for money in depressions
only as the most spectacular form of a phenomenon that, in less spectacular
forms, is well-nigh ubiquitous or is well-nigh ubiquitous at least in certain
phases of capitalist evolution, so that it may become the cause of either cycli-
cal downturns or 'secular stagnation.’ Malthus seems to have taken the latter
view. 11

A much more important reason for Malthus’ dissent from Say and much
more basic to his principle of effectual or effective demand was, however, his
opinion that saving, even if promptly invested, may lead to deadlock if car-
ried beyond a certain optimal point (op. cit., ch. 7, § 3). He did not go as

10 It might be objected that J. S. Mill himself asserted the identity that has been
discussed under (n) above in a passage of his ch. 14, § 2, where he stated that every
buyer is a seller ex vi termini. But the later argument of Mill’s chapter proves suffi-
ciently that sellers may refuse to become buyers and therefore that, if they do buy,
they do so from choice and not by virtue of the meaning of the term Sellers.

11 This is how I interpret, as did Lange (op. cit. p. 61), the passage in Malthus,
Principles (footnote on pp. 361-2 of the 1st ed.).

GENERAL ECONOMICS: PURE THEORY

623

far as Lauderdale , 12 who was the real anti-saver of the age. He granted to the
pro-savers even more than he should have done, namely, that increase in capi-
tal cannot be effected in any other way than by saving. But he maintained
that, carried beyond an optimum point, saving would create an untenable
situation: the effectual demand for consumers' goods from capitalists and
landlords would not increase enough to take care of the increased supply of
products that results from an ever-increasing conversion of revenue into capi-
tal; and the effectual demand for consumers' goods from laborers, though it
would increase indeed, cannot constitute a motive for further accumulating
and employment of capital. It is this which constitutes Malthus' fundamental
objection to Say’s law. The mistake involved will be analyzed below. But it
cannot be charged to Keynes. Though many passages in Malthus and also in
Lauderdale undoubtedly are suggestive of part of today’s (or yesterday’s) anti-
saving argument, I cannot help thinking that Lord Keynes should not have
approved of Malthus' every word so. sweepingly . 13 However, the idea of a
schedule of aggregate demand for consumers’ goods taken as a whole, though
without any awareness of the problems this concept raises , 14 is in fact present
in Malthus’ analytic set-up, and it may be therefore claimed with justice that
he anticipated Wicksell, who was the next first-flight economist to adopt it.

Since the question of general gluts will come up again in the next chapter,
I leave the matter at this point. And since neither Say* nor Malthus, nor
Mill was aware of the problems of determinateness of equilibrium that the
monetary factor may raise, we shall leave this aspect for the next Part. But
some readers may welcome a summary with further reference to Keynes’s
analysis, which accordingly I shall present now.

Keynes, of course, never meant to contradict the proposition that has been
called Say’s law above. This shows in his warning that his Aggregate Supply
Function and Aggregate Demand Function 15 must not be confused with

12 Malthus, in referring (op. tit. p. 352 n.) to Chapter 4 on Parsimony in Lauder-
dale’s Inquiry and in expressing the opinion that Lauderdale went ‘as much too far in
deprecating accumulation as some other writers [Smith included] in recommending it,’
wrote a sentence that is worth quoting both because of its wisdom and because it is
so characteristic of the man: ‘This tendency to extremes is exactly what I consider as
the great source of error in political economy.’

13 See General Theory , pp. 362-4 and especially the essay on Malthus in Keynes’s
Essays in Biography (1933, pp. 139-47) on the controversy between Malthus and Ricardo
on our subject, where generous enthusiasm carried" Keynes beyond all bounds of reason;
There he punctuated his report with applause for Malthus and derogatory comments on
Ricardo’s ‘blindness’ and became blind himself to obvious weaknesses in the former’s
and to all the strong points in the latter’s argument. But the collection of extracts he
presented is nevertheless interesting, especially because it contains some pieces that have
not as yet been published elsewhere.

14 Therefore, the principal comment to make upon Malthus’ dissent from Say is not
that he may not have done justice to possible elements of truth in Say’s practical con-
clusions, but that he did not understand the theory at the back of them.

16 For the meaning of these terms, see General Theory of Employment, Interest and
Money, p. 25. The warning, with respect to the concept of aggregate supply price
occurs on p. 24, n. 1. This does not alter the fact that this terminology is misleading.

624 in: FROM 1790 TO 1870

supply and demand functions 'in the ordinary sense.’ But he believed that
Say’s law asserts 'that the aggregate demand price of output as a whole is
equal to its aggregate supply price for all volumes of output’ (op. cit. p. 26);
that is, he interpreted Say’s law as Lange did later on. Our own interpreta-
tion may be restated as follows if, in order to facilitate comparison, we waive
our objection to the concepts of aggregate demand price and aggregate sup-
ply price: the law asserts that aggregate demand price of output as a whole
is capable of being equal to its aggregate supply price for all volumes of
total output; or, alternatively, that equilibrium within total output is pos-
sible for all volumes of output whereas equilibrium is not possible for all
outputs of shoes; or, still differently, that there is no such thing as equilibrium
or disequilibrium of total output irrespective of the relations of its com-
ponents to one another. 16 If correct, this interpretation seems to remove
Keynes’s objection. Actually this is not so, however. For the weaker proposi-
tion which asserts only the possibility of equilibria at all levels of total output
and no identity of 'demand for and supply of total output’ still yields the
further proposition — which is, however, not equivalent to it — that competi-
tion between firms always tends to lead to an expansion of output up to the
point of full utilization of resources or maximum output. 17 And this is the
proposition to which Keynes really meant to object. Since, however, the only
reason he had for objecting was that people do not spend their whole in-
come on consumption and do not necessarily invest the rest 18 — thus barring,
according to Keynes, the way toward 'full employment’ — it would have been
more natural not to object to this proposition either, just as we do not object
to the law of gravitation on the ground that the earth does not fall into the
sun, but to say simply that the operation of Say’s law, though it states a
tendency correctly, is impeded by certain facts which Keynes believed impor-
tant enough to be inserted into a theoretical model of his own. 19

So it gets down to this. A man of the name of J. B. Say had discovered a
theorem of considerable interest from a theoretical point of view that, though

16 From this it is no great step to a more usual formulation, which will be familiar
to many readers, viz., that total output is always in neutral equilibrium. In itself it is
meaningless, since there is no equilibrium of output as a whole. But I believe that some
at least of the writers who expressed themselves in that way meant just this. If so, they
stated a true proposition although in a very misleading way.

17 If readers refer to the second paragraph on p. 26 of the General Theory, they will
find that Keynes formulates this proposition much more strongly as the drift of his
argument requires. But there is no justification, from any standpoint, for going beyond
the formulation of the text— unless it be that Say was just as much given to over-
statement.

18 This statement is crude. Possibly rigidity of wages constitutes another reason.
But we cannot go into this here. See below. Part v, ch. 5.

19 This would have made Keynesian theory a special case of a more general theory.
But Keynes preferred to start from a pattern that contained the obstructions to full
employment, which he believed he saw, and then to look upon what he called the
classical theory as the theory of the special or limiting case in which those obstructions
assume the particular value of zero.

GENERAL ECONOMICS: PURE THEORY

625

rooted in the tradition of Cantillon and Turgot, was novel in the sense that
it had never been stated in so many words. He hardly understood his discovery
himself and not only expressed it faultily but also misused it for the things
that really mattered to him. Another man of the name of Ricardo understood
it because it tallied with considerations that had occurred to him in his anal-
ysis of international trade, but he also put it to illegitimate use. Most people
misunderstood it, some of them liking, others disliking what it was they made
of it. And a discussion that reflects little credit on all parties concerned
dragged on to this day when people, armed with superior technique, still keep
chewing the same old cud, each of them opposing his own misunderstanding
of the flaw' to the misunderstanding of the other fellow, all of them con-
tributing to make a bogey of it.

5. Capital

Under this heading we shall carry on our discussion about the 'classic' anal-
ysis of the structure of the productive process beyond the point reached in
Chapter 5. But first we must attend to some matters of terminology.

(a) Terminological Squabbles about 'Wealth and Income. No better illus-
trations than these squabbles can be found for what has been said above on
the futility of the 'method' of hunting for the meaning of words, which
nevertheless we cannot afford to neglect entirely (1) because the manner in
which writers conceptualize may serve as a measure of their analytic maturity
or experience; (2) because it is interesting to see how they fitted recalcitrant
facts into the conceptual arrangements they adopted; and (3) because in many
cases terminological discussion is only the garb of more significant things and
in particular reveals parts of a writer's analytic set-up or model. 1

The chief divisions of 'classic' economics being production and distribution,
the first question seems to be what it is that is being produced and con-
sumed. The answer was Wealth. 2 But this only served to raise discussions on
what this wealth is or, since it is obviously identical with the goods produced
and distributed (or, possibly, their value), what ought to be included in these.
TTiese discussions display a surprising degree of analytic immaturity. Authors
wavered between wealth considered as a fund or stock and wealth considered

1 Of this the reader can best convince himself by a perusal of Malthus’ Definitions in
Political Economy (1827), which may be called the standard work of the genus and,
to repeat, merits much more attention than it has received. Among other things it
contains one of the best criticisms of Ricardo’s theoretical set-up ever written (ch. 5).
Also one cannot fail to admire the wisdom of the Rules for the Definition of Terms
(ch. 1).

2 Many authors. Senior in particular, in making Wealth the fundamental concept of
economic theory, emphatically disclaimed any idea of implying that Wealth was more
important than Happiness, Welfare, Virtue, and the like. As for Ricardo, it suffices to
point out that the argument for free trade that is so important a part of his work was
entirely a welfare argument.

626

III: FROM 1790 TO 1870

as a flow of goods; s they sometimes even failed to make it clear whether
they meant a social total or wealth per head; they gravely discussed the 'prob-
lem' of the relation between wealth ('riches’) and value or the 'problem' of
the relation between social (national) wealth and private wealth; in defining
goods some were insensitive to redundance or irrelevance of criteria; and even
some of those who did not hold either a social philosophy according to which
labor alone produces the whole product or a labor theory of value insisted on
the element of human exertion as a definiens of wealth or economic goods.
To adduce instances of blemishes of this kind would serve no useful purpose.
It is sufficient to state that that discussion substantially centered on A. Smith’s
definition — material objects that are useful and transferable and cost labor
to acquire or produce — and that Senior partly improved and partly condensed
this into 'all things that have exchange value.’ The improvement consisted in
the replacement of the labor-cost requirement by the requirement of ‘limita-
tion of supply’: Senior at least realized clearly the logical relation between
the two, that is, the fact that limitation of supply is the logically decisive cri-
terion and that difficulty of attainment comes in only as one of the factors
that limit supply. But J. S. Mill did not see this clearly although he also de-
fined wealth by choosing 'all useful and agreeable things’ for genus praximum
and exchange value for differentia specified .

The way in which economists dealt with recalcitrant cases may be illus-
trated by the case of human services not embodied in any physical commodity.
No difficulty arose for those who, like Lauderdale and J. B. Say, did not re-
strict the concept of economic goods to material objects . 4 But those who did
were faced by a spurious problem, that is, a problem that owed its existence
solely to their own conceptualization. We have already noticed, first, an
egregious instance of a verbal solution of a verbal difficulty (Ferrara’s handling
of a 'material’ goods concept). Second, we may notice a device adopted by
Senior. He counted human beings and their ‘health, strength, and knowledge,
and all the other natural and acquired powers of body and mind’ as articles
of wealth, a thing which was done, then and later, by a great many econo-
mists . 5 And then he declared that, for example, a lawyer does not sell services

3 The latter meaning prevailed as the popularity of the phrase, Distribution of
Wealth, suffices to show. It was the meaning adopted in the Wealth of Nations.

4 The question of nonmaterial wealth is, of course, wider than that, for such wealth
also comprises claims (which cancel out in a closed domain) and such things as patents
and good will. The question of what to do with them continued to attract undeserved
attention throughout the century and even beyond. Bohm-Bawerk’s first publication was
on Rechte und Verhaltnisse . . . (1881). There is no need for us to go into this,
however.

6 E.g. by Walras. There is? a slight advantage in doing this: the three agents of pro-
duction, land, labor, and capital, then receive more symmetrical treatment. I take the
opportunity to advert in passing to the attempts that recur from time to time at evalu-
ating statistically the economic value of man. One of the best performances of this
kind that belongs, however, to the next period is Ernst Engel’s Der Wert des Menschen
(1883).

GENERAL ECONOMICS: PURE THEORY 6lJ

but sells Himself — the difference between him and a slave being that he does
so by his own will and for his own benefit and only for a definite time and
purpose, whereas the slave is sold by his owner and for good. The objections
to this, however, should not be that, legally. Senior's construction is nonsense
and that there is no such thing as a ‘sale' for a limited time and purpose: for
the construction might still be analytically convenient. The true objection is
that this conceptual arrangement offers no advantage and is completely un-
necessary. But it acquires a certain interest from the fact that Marx — and
later on Walras — adopted it also . 6

It was only toward the end of the period under survey — and then not so
much in England as on the continent of Europe — that economists started the
discussion on what ‘should be’ called income, individual or national, that
produced another not exactly fascinating literature later on . 7 But we must not
infer from this that the economists of that period overlooked income aspects:
elements of what we now call Income Analysis were, on the contrary, much
in evidence in their writings. The reason why the word Income does not occur
in them more often 8 is simply that they used other words. Wealth was one
of them. We have seen that the ‘classics’ were not very clear concerning the
differences between funds and flows, and between wealth and the services of

6 In Marx’s schema workmen do not sell labor (i.e. services) but their labor force
or power (A rbeitskraft) . It might be urged that, in this case, this arrangement is not
otiose but serves a definite analytic purpose. We shall, in fact, see that it comes in
handily for his exploitation theory. But, quite independently of other objections to this
theory, a little reflection will show that his argument could also have been couched in
terms of the labor services themselves. Moreover, the reason why Marx liked his arrange-
ment so much — he considered it as one of his main contributions to economic theory —
derives from a factual assumption that is patently false: he conceives that the 'capi-
talist,’ having bought the laborer’s ‘force,’ then decides arbitrarily how many hours the
workman is to work. This is not so even where the labor contract does not specify
hours: for these as well as other conditions are always implied. An instructor in eco-
nomics may be simply ‘appointed,’ but he knows well enough how many hours of
teaching that means at the institution he contracts with; and this applies to all kinds
of employments. The reader should make sure that he understands why it is no objection
to say that workmen, having no other sources of income but their labor power, have
no choice but to accept ‘any’ conditions — even in cases where as a matter of fact this
is or was true. With Senior, however, this construction served no such purpose and
in fact none except to remove an entirely imaginary difficulty. At the bottom of this
difficulty was a disability that Senior shared with most economists of his and even a
later time: they found it surprisingly difficult to grasp the distinction between wealth
and service of wealth — so much so, in fact, that there was some novelty about it even
in 1906 when Irving Fisher, in Nature of Capital and Income, insisted upon it.

7 Toward the end of the period under survey two factors helped to start that discus-
sion: first, the growing interest in income statistics (Robert D. Baxter’s National
Income appeared in 1868), and, second, the growing interest, on the. Continent espe-
cially, in the problems of the income tax (A. Held’s Die Einkommensteuer appeared
in 1872).

8 This applies to the English ‘classics.’ Continental writers of the period did use it
more. We have already noticed in ch. 4 above the works of Storch and Sismondi.

628

III: FROM 1790 TO 1870

wealth. Mostly, however, they actually meant flows of income goods (or even
services) when they spoke of wealth, so that at least in part we have already
been commenting on their concept of income when dealing with wealth.
This applies in particular to A. Smith, whose wealth is simply the 'whole
annual produce of a country's land and labour,’ which, alternatively, he also
called Gross Revenue (Book 11, ch. 2, Modem Library ed., p. 271). Barring
technicalities, this is substantially what we mean by Gross National Product.
This quantity minus ‘the expence of maintaining . . . capital’ is his Neat
Revenue or (again: substantially) our Department of Commerce National In-
come. Most economists of the period discussed these definitions — some, like
Say, accepting them with minor amendments; 9 others, like Ricardo, 10 finding
fault with them.

A. Smith then gave what he evidently thought was only another way of
formulating the same thing: ‘neat revenue’ or, as we should say, income was
what people, individually and collectively, ‘without encroaching upon their
capital . . . can . . . spend upon their subsistence, conveniences, and amuse-
ments’ (ibid., p. 271). This is the basis of what became known in Germany
as the Hermann-Schmoller income definition. 11 The modem discussion on
what it means to keep capital intact or to maintain capital — another spurious
problem — grew from that root.

On Productive and Unproductive Labor. We digress for a while in order to
touch briefly upon the famous controversy on productive and unproductive
labor. The only reason why this dusty museum piece interests us at all is that
it affords an excellent example of the manner in which the discussion of
meaningful ideas may lose sight of their meanings and slip off into futility.
In the case before us, two meaningful distinctions may be discerned. The one

9 1 do not think that Marx was right in charging Say with the ridiculous mistake of
overlooking depreciation. All Say intended was to emphasize the basic importance of
the ‘gross’ concept. See Theorien iiber den Mehrwert.

10 Principles, ch. 26. This chapter read so strangely even to Ricardo himself that he
felt it desirable to insert qualifying footnotes. But on referring to this chapter, the
reader will find that on the last page of it (including footnote) Ricardo successfully
corrected an error committed by A. Smith and another error committed by Say. The
first four paragraphs of the chapter seem to restrict the net income of a country to
profits and rent, and to treat wages like depreciation charges. The reason given for. this
misleading arrangement is that only profits and rent constitute the national surplus
from which taxes and savings can come. But profits are, according to Ricardo himself,
not or not wholly a disposable surplus, and wages, according to his own admission, do
contain, in general, some disposable surplus — another example of Ricardo’s exasperating
way of first insisting on a proposition with tremendous energy and then blowing it up
himself. But the argument points to a unitary concept of profits plus rent — wholly
foreign to Ricardo’s usual reasoning — from which Marx may have learned something.
The argument also points toward a conception of income that may have some uses and
certainly has a great hold on the popular mind, namely, the conception of income as
a surplus over necessities.

11 Hermann, see above, ch. 4. Gustav Schmoller, ‘Die Lehre von Einkommen . . .

Z eitschrift fur die gesamte Staatswissenschaft, 1863.

GENERAL ECONOMICS: PURE THEORY

springs from the fact that a private-enterprise system generates incomes that
provide for consumption in two ways: directly for the consumption of those
who 'earn’ them, and indirectly for the consumption of those, who are 'sup-
ported' by them, for example, children and the retired aged. It stands to rea-
son that the relation between the two, in our example determined (in part)
by the age distribution of the • population, is no matter of indifference but
on the contrary one of the most important characteristics of a society’s eco-
nomic life. Controversies about the question whether or not, there are also
types of employment that, for some purposes or for all, should be treated as
'supported' out of the incomes earned in the business process, for example,
whether public officers should be so treated on the ground that their incomes
derive from the taxation of other incomes, may be entirely meaningful. 12 The
other meaningful distinction springs from the fact that services of labor (or
of natural agents) that are directly bought and consumed by households, such
as the services of servants, teachers, and physicians, occupy a position in the
economic process that is different from the position of services of labor that
are bought and 'consumed' by firms and have, economically speaking, still to
go through a business process. That this is not a distinction without a differ-
ence — although, of course, these services, in the form of products, also reach
the consumers’ sphere eventually — is readily seen from the fact sufficiently
expressed by the common slogan that these services are paid from some firm’s
capital, whereas the former are paid from some household’s income or rev-
enue. 13 So soon as the servant has received his wages or their equivalent in
goods, there is no further problem. When the factory worker has received his
wages, further problems arise of selling the product he has helped to produce,
of lags, risks, discounts, and so on, all of which are pertinent to the determina-
tion of those wages themselves. Thus the distinction is indeed relevant to
the structure of the economic process and imposes itself upon the analyst at
many turns of his way (e.g. in matters of the wage-fund doctrine, see below,
subsec. 6f).

It will be seen that these two distinctions are entirely independent of one
another: each has meaning without reference to the other. But both — and a
lot of confusion in addition — were bequeathed to the writers of that period
by A. Smith. On the first page of his Introduction, he placed great emphasis
upon 'the proportion between the number of those who are employed in
useful labour, and that of those who are not so employed.’ For lack of space,
I must leave it to the reader to satisfy himself that, with an admixture of
extraneous matter, this passage really adumbrates the meaning of our first

12 Compare the controversies that have arisen in our own time in connection with
the statistics of national income on the question whether or not public administration
should be considered as an industry like any other so that there would be no analytically
relevant difference between the salary of a government official and the wages of, say,
a workman in a motor-car factory.

13 As will be pointed out presently, this must not be confused with the case of people
who live on derived income in the sense intended under the first distinction, e.g. the
case of the retired aged.

630 III: FROM 1790 TO 1870

distinction. Only it does so hazily and, by employing the vague term ‘useful,’
gives the clue to all the confusion that disfigured the subsequent controversy
on productive . and unproductive labor, though this phrase does not figure in
Book 1 of the Wealth of Nation. This phrase does emerge in Chapter 3 of
Book 11, where A. Smith, having experienced physiocratic influence, developed
his theory of Accumulation. He had no use, of course, for the physiocratic
proposition that only labor employed in agriculture is productive any more
than he had use for the ‘mercantilist’ proposition that only labor employed in
export industries is. But pouring away the physiocrat wine, he retained the
bottles and filled them with wine of his own: he defined labor as productive
that ‘adds to the value of the subject upon which it is bestowed’ (op. cit.
p. 314) and exemplified this by the case of factory workers who, as he adds
by way of explanation (ibid. p. 316), live on 'that part of the annual produce
of the land and labour which replaces capital’ (with a profit); and he defined
labor as unproductive that does not add (exchange) value to anything and ex-
emplified this by the labor of the menial servant and that ‘of some of the
most respectable orders in the society’ such as the sovereign ‘with all the
officers both of justice and war who serve under him’ and ‘are maintained
by part of the annual produce of the industry of other people.’ Two things
are clear: he had got hold of our second distinction; and he had confused it
with the first.

The first man to see this quite clearly was Marx, who adopted our second
distinction, giving A. Smith ample credit for having uncovered so important
an element of the structure of capitalist society, and pointing out that this
piece of insight was, in the work of A. Smith, wrapped in considerations that
Marx thought superficial and in any case quite unconnected with it. 14 Of
course, nobody missed the point entirely — most writers made, tacitly or ex-
plicitly, use of it when analyzing the demand for labor. But when they dis-
cussed the distinction as such, they lost sight of it and always thought of the
first distinction. Nor is this all. We have seen that this distinction also may
be made meaningful. But giving themselves up to the associations evoked by
the terms ‘useful’ and ‘productive,’ economists concentrated on such ‘issues’
as which activities were worthy of these honorific epithets. Teachers and civil
servants did not like to be called ‘unproductive,’ feeling — sometimes rightly
and sometimes wrongly — that this phrase was intended to carry a derogatory
meaning. 15 And so a meaningless discussion became a standard item of nine-

14 Marx elaborated this at length in his discussion of Smithian doctrine in the
Theorien iiber den Mehrwert. From his standpoint the decisive distinction was between
labor that does ‘produce surplus value’ and labor that does not. But the distinction
between labor that is paid from business capital and labor that is paid from ‘revenue’
is preferable: a servant might work more hours than are embodied in the ‘value’ of his
labor and hence might be ‘exploited’ just as may a factory worker. The former’s
employer may also derive a surplus. The point is, to continue in Marxist language, that
this surplus need not be ‘realized’ in any market.

15 Some such feelings assert themselves again each time modem economists discuss,
for the purposes of national-income statistics, the conceptual treatment to be accorded
to government salaries.

GENERAL ECONOMICS: PURE THEORY 631

teenth-century textbooks in spite of the increasing awareness of its futility,
which eventually killed it. An account of all the ramifications and of all the mis-
spent ingenuity that sometimes went into it would fill a volume. But it could
serve one purpose only, namely, to display the word-mindedness of economists
and their inability to tell a real problem from a spurious one . 16 [J. A. S. in-
tended to have this digression On Productive and Unproductive Labor printed
in small type so that the average reader could skip it easily.]

(b) The Structure of Physical Capital . 17 On its most abstract level, the anal-
ysis of economic choice, which is really all that is involved in what we are
accustomed to learn in the particular form of a theory of value, can be carried
out in terms of unspecified things called 'goods’ that have no other properties
than those of being desired and of being scarce. It stands to reason, however,
that in order to make headway beyond the most arid generalizations we must
pick, from our vision of reality, further restrictions upon economic choice such
as are implied in our ‘know-how’ or, less colloquially, in the limitations of a
given technological horizon, which will permit some, and exclude other, trans-
formations of our initial stock of goods. In any case, we must postulate given
wants, a given technological horizon, given environmental factors such as land
and personnel of given kinds and qualities, and a given stock of produced
goods with which to start. But this is not enough. This initial stock of goods
is neither homogeneous nor an amorphous heap. Its various parts complement
each other in a way that we readily understand as soon as we hear of build-
ings, equipment, raw materials, and consumers’ goods. Some of these parts
must be available before we can operate others; and various sequences or lags
between economic actions impose themselves and further restrict our choices;
and they do this in ways that differ greatly according to the composition of
the stock we have to work on . 18 We express this by saying that the stock of

16 This discussion induced a related one on the concepts of productive and unpro-
ductive consumption that may be illustrated by a statement of Senior’s (op. cit. p. 57):
‘if a judge . . . required by his station to support an establishment costing £2,000 a
year, should spend £4,000, half of his consumption would be productive and the other
half unproductive.’ Productive consumption, then, was ‘that use of a product which
occasions another product.’ The idea that commodities and services do not leave the
economic process for good as soon as they enter the sphere of the households that con-
sume them, but that they ‘produce’ there the productive services of the members of
these households, turns up again and again. In our day it has been adopted by Leontief,
in whose system households are treated as an industry that consumes productively like
any other.

17 Some readers will find this subsection difficult reading. It attempts to explain
an unconventional view of the role of physical ‘capital’ within the logic of the economic
process that might be pressed into this phrase: from the standpoint of analysis, capital
means a set of restrictions: This will become quite clear before long, and I believe
that the reader will derive some benefit from taking the trouble involved in mastering
this subsection.

18 The stock of wealth of all kinds that exists at an instant of time has been called
Capital by Irving Fisher ( Nature of Capital and Income , 1906, p. 52), who has success-
fully shown that, properly thought out, the capital definitions of most, if not all, of

632 III: FROM 1790 TO 1870

goods existing at any instant of time is a structured quantity or a quantity
that displays structural relations within itself that shape, in part, the subse-
quent course of the economic process. Naturally we wish, for the purposes of
pure theory, to reduce these structural characteristics to as few and as general
ones as possible, steering as best we can between the Scylla of unmanageable
lifelikeness and the Charybdis of sterile simplicity. Ever since the time of
Cantillon and Quesnay, when scientific model-building began, economists
have, of course, been aware of all this. In the preceding chapter we have al-
ready had a glimpse of the manner in which the writers of the ‘classic' period
took — haltingly — the first two steps in the analysis of the structural properties
of the economic process: the one was to recognize capital as a ‘requisite’ of
production and the other was to adopt the physiocrat (Cantillon-Quesnay)
idea of ‘advances.’ We have now to fill in the more important of the remain-
ing elements of this analysis, which constitutes what is commonly known as
theory of capital.

The reader need not be afraid that we shall have to wade through another
morass of verbal controversy. The theory of capital does indeed enjoy a reputa-
tion for this kind of thing that is rivaled by few other fields. People kept on
asking the meaningless question: What is Capital? And some have tried to
answer it by speculations about the original meanings of the words caput ,
capitale, xsrpaXaiov, and the like. Senior even held that ‘the term Capital has
been so variously defined that it may be doubtful whether it have any gen-
erally received meaning’ ( Outline , p. 59). In a sense, this is true. 19 But it is
true only: first, owing to relatively minor faults of conceptualization commit-
ted by the individual authors, and these we can disregard if their analytic in-
tention is clear enough; second, owing to the wish, the father of so many
futile controversies, to have a unitary or all-purpose concept of capital, and
this wish I do not share; third, owing to the not less unwarranted wish of
many authors to approximate the ‘capital’ that is useful in their analysis to
either the asset or the liability side of a business concern’s balance sheet;
fourth, owing to occasional waverings between physical capital concepts, on
the one hand, and monetary concepts, on the other, which will be noticed in
the next footnote. For the rest, the matter is much simpler than it looks be-
cause there really is only one dominant analytic purpose to describe that
practically all the leading economists tried to serve.

Since it was a requisite of production, capital consisted of goods. 20 More-

the writers of the period under survey come precisely to this. We shall not adopt
Fisher’s concept here but instead we shall simply use the excellent Smithian term Stock.
This will make it easier to distinguish it from various other meanings of the term
Capital without adding each time: ‘in our sense.'

19 Readers interested in the history of economists’ use of the term are referred to
Irving Fisher (op. cit. ch. 4, § 2 ) or to the chapter on the concept of capital in the
second volume of Bohm-Bawerk’s great work.

20 But even those authors who expressed themselves most strongly in favor of a physical
capital concept sometimes drifted into the preserves of a monetary one. Ricardo and
J. S. Mill, among others, occasionally penned sentences which carry meaning only if

GENERAL ECONOMICS: PURE THEORY 633

over, like our initial stock, it was a stock of goods. But, unlike out initial stock,
it did not include all goods existing at an instant of time. From these the
‘classics’ separated out their capital by excluding from it, first, natural agents
(though not ‘improvements’ such as drains, fences, and the like) and, second,
all consumers’ goods other than the means of subsistence of productive labor.
Let us stop for a moment in order to make this clear.

First of all, it should be understood that the division of the stock of
wealth existing at an instant of time into a mass of things that are capital
and another mass of things that are not is a device for describing what we
have called above the structure of, or the structural relations within, the uni-
verse of goods. The second thing to observe is that the effect of excluding nat-
ural agents was to set up, in addition to labor, another ‘original’ factor of
production, though many, especially the Ricardians, failed to realize the im-
plications of it. This, then, would have left us with the stock of produced
goods. But, third, the structure of the mass of these produced goods was fur-
ther analyzed by means of a distinction that warred between two of an in-
definite number of possibilities.

On the one hand, if we want to separate out that part which is a requisite
of production in the technological sense, we arrive at the concept of produced
means of production or, as it was to be called by the Bohm-Bawerkians, of
intermediate products. It is, however, one of the salient characteristics of the
theoretical schema of the English ‘classics’ and their continental followers
that they understood the term ‘requisite of production’ in a wider sense which
included the consumers’ goods that support labor during the process of pro-
duction. There is no logical reason for not including also the consumers’
goods that support landowners — Senior even included those that support capi-
talists — during that process but, actually, these were mostly excluded by the
Ricardians because their schema prevented them from considering rent as an
element of cost.

On the other hand, if we want to separate out that part of the mass of
wealth existing at an instant of time which is in the business process or
serves business purposes — or, as A. Smith put it, from which ‘profit is ex-

they refer to monetary capital. This has been critically noticed, for the first time I think,
by Tchemychevsky, in U economic politique jugee par la science (1874), an elaborate
analysis of Mill’s Principles. It is still more obvious in the Manual of Mill’s follower,
Fawcett. With Mill, capital is ‘expended’ on raw materials, goes from hand to hand,
migrates from industry to industry and from country to country in a manner that sug-
gests that he was thinking of balances and not of goods. It may be replied, of course,
that sums of money may be thought of as representing goods and also that, especially
within the theoretical organon of that time, monetary processes may be reduced to
‘real’ processes in the last analysis. But such reductions are dangerous short cuts at best
and involve neglecting monetary mechanisms that give rise to many essential problems.
Thus, even if the fundamentals of the economic process could in fact be satisfactorily
described in real terms, we should still have to observe that, in capital theory as else-
where, the ‘classic’ attempt to carry , out fundamental analysis in real terms only was
seriously at fault.

634 in: FROM 1790 TO 1870

pected’ — we are led to include besides plant, equipment, raw materials, and
the 'means of subsistence of productive labor/ also other items, in particular
the following two. One is another mass of consumers' goods — which in part
overlaps with the one included among requisites of production — namely, the
mass of consumers’ goods that is still in the hands of manufacturers, whole-
salers, and retailers irrespective of who (laborer or capitalist) is going to buy
them. The other is cash in hand. The implications of this, though not un-
interesting, cannot be considered here. All that can be said is that this dis-
tinction is not more right or wrong than is the other. Both serve relevant ana-
lytic purposes; that is, both are useful in describing relevant aspects of reality.
But we shall keep to the first one (‘requisite of production’ in the wider sense)
because it is more germane to what I have called above the dominant analytic
purpose of the epoch, especially of the work that was summed up by J. S. Mill.
Marx would have approved of our choice. He was all for the first distinction.
The second he considered to be incapable of serving any purpose other than
that of copying the surface of reality as it appears to the capitalist.

What has been said above, barring details, reproduces the actual way in
which A. Smith ‘structured’ what he called the ‘general stock of any country
or society’ by separating out capital ( Wealth , Book n, ch. 1) and by enumer-
ating its chief components. It matters little that he (and Malthus) did not
specifically include wage goods or the means of subsistence of labor. For he
always argued as if he had included them. 21 Also, the capital concept de-
scribed represents fairly well the wording of most of the leaders. Thus, Ri-
cardo defined the concept: ‘Capital is that part of the wealth [my italics] of
a country which is employed in production, and consists of food, clothing,
Tools, raw materials, machinery, etc., necessary to give effect to labour’ ( Prin-
ciples , ch. 5). This does not differ in essence from Senior’s definition: ‘an
article of wealth, the result of human exertion [meaning, as he explained a
few lines further on, ‘of labour, abstinence, and the agency of nature/ or
simply, a produced article of wealth] employed in the production or distri-
bution of wealth.' Nor does it differ from J. S. Mill’s influential passage:
‘What capital does for production, is to afford the shelter, protection, tools,
and materials which the work requires, and to feed and otherwise maintain
the labourers during the process. . . Whatever things are destined for this
use . . . are Capital’ (Book 1, ch. 4, $ 1). 22 Marx added nothing to this ex-
cept that, in obedience to his principle of amalgamating economics and so-
ciology, he confined the term capital to those things of this class that are
owned by capitalists — the same things in the hand of the- workman who uses
them are not capital.

21 See, e.g.. Wealth, p. 316 [Modem Library ed.]. No additional comments are needed
on A. Smith’s inclusion of ‘the acquired and useful abilities of all the . . . members of
the society/ a precedent that was widely followed: Roscher even included ‘virtue.’ For
this remained entirely inoperative. Note, however, the parallelism with ‘the improve-
ments of land’ that may have suggested the Marshallian concept of quasi-rent.

.. 22 The merely verbal concession to the labor theory of value (pointed out above) that
is contained in this formulation could be easily rectified.

GENERAL ECONOMICS: PURE THEORY

635

'What capital does for production/ however, means two very different
things, and the distinction between wage capital and the rest — we shall call
it technological capital — readily suggests itself and so does a coefficient, de-
scriptive of the quantitative relation between the two, which must obviously
constitute one of the most important characteristics of the structure of capi-
tal. Nevertheless, it was left to Marx to point this out in so many words
and introduce such a coefficient explicitly. Denoting by the term constant
capital (c) what has just been called technological capital, and by the term
variable capital (v) 23 what has just been called wage capital, he chose for

structural coefficient the ratio: — - — , which he called the Organic Composi-

c + v

tion of Capital. 24 The merit there is in introducing such a concept explicitly
must not be underrated. But, of course, the writers from A. Smith to J. S.
Mill had not failed to recognize the peculiar role of wage capital within total
capital. This is abundantly indicated by the fact that wage capital is identical
not only with Marx’s variable capital, but also with the 'classic’ wage fund.
Moreover, both Ricardo and Mill sometimes used the Marxist concept inad-
vertently: they sometimes meant variable capital when they actually wrote
Circulating Capital. 25

Not less obvious is the necessity of analyzing the internal structure of tech-
nological capital. It was quite clear to the physiocrats, whose various avarices
A. Smith replaced by the distinction between Fixed and Circulating Capital.
The former he defined as capital from which the owner derives profit by
keeping (using) it, such as factory buildings and machines; the latter he de-
fined as capital from which the owner derives profit by 'parting with it’
(turning it over), such as raw materials. Ricardo saw that there was some-
thing of deeper significance behind A. Smith’s common-sense and common-
place distinction, which accordingly he brushed aside. 26 Let us make an at-
tempt to reconstruct his thought.

23 He expressed both in terms of labor embodied. But inasmuch as his -coefficient
always refers to a given point of time, expression in money values does just as well. It
should be observed that both measures carry full meaning and in particular allow of
intertemporal comparison only for states of perfect equilibrium. The reason why Marx
chose those terms (and why we cannot accept them here) is that, in his theory, techno-
logical capital transmits to the product only its own value — or that, in the productive
process, its value in terms of labor embodied remains constant-— whereas wage capital,
as it were, swells in the process by virtue of the labor hours that workers add to the
labor embodied in it.

24 Thus, since the labor-hour dimension is present in both numerator and denomi-
nator and therefore cancels out, this coefficient is a pure number. Still it is worth while
to remember that the components of the coefficient are values and not physical
quantities.

25 Thus, Ricardo wrote in § 4 of ch. 1 of the Principles : 'In one trade very little
capital may be employed as circulating capital, that is to say [my italics], in the support
of labour. . .’ Other instances are found in ch. 31.

26 See Principles, ch. i, sec. 4, first footnote. This footnote — saying as it does that
the distinction between fixed and circulating capital is not essential — reads strangely in

6 36 in: from 1790 to 1870

Evidently, Ricardo’s attention was drawn to the problems of fixed capital
by the fact that its presence causes exchange values of products to diverge
from the labor-quantity law unless, of course, all the branches of industry
employ ‘the same proportion of fixed and circulating capital.’ He also per-
ceived, apparently without difficulty, the further fact that, in order not to
disturb this labor-quantity law, this fixed capital would in addition have to be
of the same durability everywhere. Finally, however, he perceived something
else, namely, the analogy that exists between different durabilities of the fixed
capital used in different lines of production and the different rates of turn-
over of different kinds of circulating capital, such as the farmer’s seed and
the baker’s flour. This, then, makes three apparently different facts that have,
at first sight, nothing in common except that they all interfere with the op-
eration of the labor-quantity law of value. Now, by what almost amounted to
a flash of genius, he saw that all three of them did so for the same reason or,
to put it differently, he saw the same fundamental element in all of them,
namely, the time distance between investment and the emergence of the
corresponding consumers’ good. 27

This was very easy to see in the case of differences in periods of turnover:
wheat that is being used as seed and wheat that is being worked up into
flour directly differ (from Ricardo’s standpoint) by the time distances between
each of them and the emergence of flour and by nothing else. But it was not
so easy to see that the difference which the presence of fixed capital goods
and of fixed capital goods of different durability makes to the process of pro-
duction, and hence to values, is of the same kind in that it also may be
looked upon as a matter of differences in these time distances or rates of turn-
over. Consider, for example, a machine that, in the Ricardian manner, has
been produced by labor alone, say, in a single day. Suppose it is to last ten
years. During these ten years, the machine or the labor embodied in it ma-
tures into consumers’ goods exactly as will raw materials or semifinished prod-
ucts. Each of the days of service ‘contained’ in it — becoming available in a
definite sequence — behaves like the seed in the ground until its turn comes.
This definite sequence is a restriction upon economic decision or action, analo-
gous to the restriction placed upon the farmer’s decision by the circumstance
that he must wait until his seed matures into a crop. There is thus in fact, at
least on the most abstract level, no essential difference and no clear line of
demarcation between fixed and circulating capital, as Ricardo pointed out in

view of the fact that the whole argument of Section 4 turns upon problems of fixed
capital. But our reconstruction of his thought will make it clear that he meant not
more than that A. Smith’s distinction failed to bring out the essential point involved.

27 I call this a flash of genius without necessarily committing myself to the theory
of capital that developed from this flash. In order to clarify a very important piece of
doctrinal history, I refrain entirely from criticism at this point. Professor Knight himself,
who rejects the theory in question, could therefore accept my exposition just as could
have F. W. Taussig, who made it bis own. The essential thing, for the moment, is to
see the relation between Ricardo’s analysis and Bohm-Bawerk’s, which has been empha-
sized by both Knight and Taussig.

GENERAL ECONOMICS: PURE THEORY

the footnote referred to above. Both are nothing but immature (elements of)
consumers’ goods — intermediate products or 'inchoate wealth’ as Taussig was
to call them about eighty years later. Or both may be 'resolved’ into hoarded
labor — James Mill’s term, which expresses Ricardo’s meaning very well and
was to be used again by Wicksell, also about eighty years later 28 — though we
.must not forget that the various agglomerations of hoarded labor embodied
in the various goods carry different indices of time distance or indices of places
in the time sequences to which they belong.

Thus, Ricardo’s rudimentary capital analysis issues in a time concept of
technological capital, 29 time being the element that unifies all its specific
forms. Those who entertain sympathies for the labor-quantity theory of value
might claim with some justice that he thereby saved the latter by making it
valid (to some extent at least) for labor quantities that carry different time
indices. Those who accept Bohm-Bawerk’s theory of capital might claim, also
with some justice, that Ricardo worked up a bad theory of value into a good
theory of capital. In any case, Ricardo was clearly Bohm-Bawerk’s forerunner
so far as this set of problems is concerned. This is not to say that Ricardo’s
theory of capital was complete or that he saw all the implications of his flash
of genius. In particular, he neglected all its short-run implications. 30 Also,
though he did study cases of conversion of circulating into fixed capital — the
most important case is to be found in his chapter On Machinery — and occa-
sionally brushed against the manifold relations of substitution that exist
within the universe of technological capital — the 'Ricardo effect’ if thought
through would afford an instance — he was, as were most of the 'classics/ too
much given to accepting time sequences as technological data and to neg-
lecting the fact that durabilities, and, in general, the relations between the
quantities of capital goods : of different types, also the relation between wage
capital and non-wage capital, are economic variables that depend, and in turn
react, upon wage rates, efficiency of labor, rate of interest, and other factors.
But this is only another way of restating the fact that his theory was no more
than a preliminary sketch — a fact that must always be borne in mind, just
as much when we are criticizing as when we are defending his performance.

(c) Senior’s Contributions. Two most curious facts now call for our atten-
tion. On the one hand. Senior realized that Ricardo used the terms fixed and
circulating capital in a sense that differed from A. Smith’s use ( Outline , pp.
62-3). But the true meaning of Ricardo’s capital analysis escaped him so com-
pletely that he saw nothing in that difference except a reprehensibly unusual

28 More precisely Wicksell said saved-up services of labor and land, and should have
added the services of previous accumulations.

29 If the line of thought, for which he offered but fragments, were carried on to its
logical consequences, we might even say that his analysis comprised technological plus
wage capital, resolving all physical capital into wage capital or rather into a general
subsistence fund. This idea is still more clearly indicated in James Mill’s Elements.
Nevertheless, its explicit recognition belongs to Jevons and Bohm-Bawerk, though
implicitly it is also present in one of the various aspects of the wage-fund theory.

30 Such as that fixed capital, in the short run, behaves like ‘land.’

638 III: FROM 1790 TO 1870

use of terms. On the other hand, in spite of this failure to understand the
Ricardian analysis, he actually carried it further in two directions — an excel-
lent example of the way in which we blunder along.

First, there is Senior’s third postulate or elementary proposition, which
reads: 'That the powers of Labour, and of the other instruments which produce
wealth, may be indefinitely increased by using their Products as the means
of further Production.’ This proposition, which might have been derived from
Rae, improves Ricardo’s theory by adding the powers 'of the other instru-
ments which produce wealth’ to those of labor. But it adds also something
else that lies entirely beyond Ricardo’s analysis. With Ricardo, the time ele-
ment comes in to cause deviations of values from the labor-quantity law by
putting a brake on the supply of the products of the capitals that turn over
more slowly than others: the man whose products take relatively long spans
of time to reach their markets simply 'must’ be compensated for this disad-
vantage. According to Senior, however, there is more to this higher value of
such products than the mere fact, if it is a fact, that a profit of £100 accruing
every second year is not economically equivalent to a profit of £50 accruing
every year. The profit from the two-year investment will be more than twice
the profit from two successive one-year investments of the same quantity of
(say) labor, because the productive 'power’ of this labor, hence its product, is
increased if the product of the first year be used 'as the means of further pro-
duction’ in the second year. Now, Ricardo’s: real value of a product cannot in-
crease simply because the same quantity of labor produces a greater quantity
of product in the two-year process than it would in two successive one-year
processes. But Senior’s value may. 31 This puts an entirely new face upon the
matter and points straight ahead toward Bohm-Bawerk — who, by the way,
did not understand Senior any better' than Senior did Ricardo, but who never-
theless carried on Senior’s capital analysis exactly as Senior carried on Ri-
cardo’s. The relation that exists on this point between Senior and Bohm-
Bawerk will stand out particularly if we observe that using a product as the
means of further production might well be called using it in a 'roundabout’
way. The only difference is that Senior confined himself to stating that the
productive power of labor is increased 'indefinitely’ by using it in that way;
whereas Bohm-Bawerk added the hypothesis that the rate of this increase
decreases as the 'length’ of the productive process increases.

Second, there is Senior’s abstinence theory of capital. Though his name is
chiefly remembered because of this contribution, it (abstinence) is actually
much less important, as an analytic performance, than is the contribution
just discussed (using a product as the means of further production). It will be
as well to distinguish two different aspects of Senior’s abstinence. On the one
hand, if for reasons good or bad, we choose to analyze the structure of techno-
logical capital in terms of what we have called the time indices of its com-

31 No difficulty arises from the fact that the value of the greater quantity of product
that results from the two-year process need not have a greater value than the smaller
quantity that results from two successive one-year processes. For in this case the two-
year process will not be used.

GENERAL ECONOMICS: PURE THEORY

639

ponent elements, the fact we wish to emphasize is that these component
elements (that is, the various capital goods) have different rates of turnover
or that their products become available or ‘mature' after lapses of time of
different lengths, which somehow or other intrude into the list of costs of
production. Whenever we mean this, we had better use the term Waiting
that was to be suggested later on. by McVane and to be adopted by Marshall.
On the other hand, if we adopt the theory that technological capital is the
result of a ‘conversion of revenue’ into something that is expected to yield
revenue in the future, but, in order to do so, has to be withdrawn from the
sphere of revenue for good, then we had better use the term Abstinence. In
this case we reserve the term for the psychic cost of saving or, if we keep-
saving sufficiently close to investment, of the capital goods in which past sav-
ing has been invested. This element of psychic cost then becomes analogous
to the ‘psychic cost’ of labor, later on called Disutility. Going a step further,
we can constitute abstinence itself — instead of the saving or the capital goods
that result from it — as a factor of production. 32 This is the sense in which
Senior’s abstinence has been commonly understood and in which the phrase
will be used in this book, although his own definition shows that he meant
to comprise in his concept also what above has been called Waiting. 33

Recognition of what the term abstinence — in the strict sense — is intended
to denote is, of course, as old as is the recognition of the role of saving. A.
Smith’s parsimony or frugality means nothing else. Practically all the econo-
mists who wrote after 1776 deal with it in one way or another, though not
all were prepared to accord to it everything that A. Smith claimed for it. It
also entered the theoretical schemata of anti-savers like Lauderdale and
Malthus. Ricardo’s schema considers waiting rather than abstinence but in
any case this schema requires, as our exposition amply shows, a conceptual
complement of this kind. Actually, however, the concept was formally estab-
lished by Read and especially by Scrope. The latter stands to Senior in this re-
spect in the same position as did Rae in respect to the postulate about increas-
ing the productive powers of factors by using their product for further produc-
tion. No reflection on Senior’s subjective originality is intended, but it is impor-
tant to note that objectively Senior did no more than is implied in bringing
an existing doctrinal tendency to a head. Propelled by the sponsorship of
J. S. Mill, Cairnes, and, to some extent, Marshall, abstinence analysis became
firmly established in English economics, though it was never so popular else-
where. It is not difficult to guess the reason why the spearheads of the attack

32 It does not greatly matter whether we call this factor a ‘primary’ or a ‘secondary’
one. Senior did the latter but later tendencies favored the former.

33 Senior defined abstinence as ‘the conduct of a person who either abstains from the
unproductive use of what he can command, or designedly prefers the production of
remote to that of immediate results’ ( Outline , p. 58). The first alone denotes saving or
conversion of revenue into capital and is abstinence stricto sensu ; the second means
only rearrangement within the capital structure and is what we mean by waiting. Senior
was evidently aware of the distinction, the validity of which is not impaired by the
possibility of reducing one to the other by appropriate wording.

640 in: FROM 1790 TO 1870

upon it are to be found in the writings of Marx and Lassalle, who saw noth-
ing but the apologetic possibilities that the word Abstinence suggests. But
this will be more conveniently dealt with below under the heading of profits.

(d) J. S. Mill’s Fundamental Propositions Respecting Capital. Some addi-
tional points about the ‘classic’ theory of capital may be conveniently made,
and others may be restated by way of comment on the four connected ‘propo-
sitions respecting capital’ that J. S. Mill presented in Chapter 5 of Book 1
of his Principles; 34

‘The first of these propositions is, That industry is limited by capital,’ though
of course industry does not always work up to this limit. Total employment
of labor is not so limited, however, since it also proceeds from ‘revenue.’ J. S.
Mill believed erroneously that ‘industry’s’ being limited by capital 35 implies
that ‘every increase of capital ... is capable of giving additional employment
to industry; and this without any assignable limit’ (J 3). Carefully stated (and
the ‘capable’ properly emphasized), this can be shown to be true, and the
use of this proposition against the opinions of Malthus, Chalmers, and Sis-
mondi 36 — who asserted that ‘wealth’ is at any time limited not only by pro-
ductive power but also by the system’s capacity to consume — is perfectly
legitimate. Only it should have been stated as an additional proposition — we
might call it the Theorem of Hitchlessness — for it does not follow from in-
dustry’s being limited by capital and, though Mill’s argument against those
three authors was successful as far as it went, it falls far short of proving
this theorem. Moreover, the theorem is interesting only if it be made to hold
for the total of technological plus wage capital. But Mill restricted it to the
latter so that the proposition he meant to defend amounts only to this: ‘the
portion which is destined to their [the laborers’] maintenance, may (suppos-
ing no alteration in anything else) be indefinitely increased, without creating
an impossibility of finding them employment’ 37 — which is either trivial or

34 This chapter, though disfigured by slips, inadequacies, and clumsinesses, is not
without logical beauty. The reader who knows how to mend these shortcomings will
be impressed by its symphonic qualities.

35 At the end of this chapter’s section 1, Mill uses this proposition to combat what
he considered a popular fallacy about the effects of a protective tariff. The reader’s
attention is called to this curious mixture of truth and error, which exemplifies excel-
lently a situation that occurs so frequently in economic arguments: an incontestable
truism is used in an inadmissible manner so as to produce a result that should be false
and nevertheless is not (wholly) so, because elements of truth extraneous to the logic of
the argument may be invoked in order to peg it. Unfortunately, considerations of space
forbid us to explain this fully. Mill was no trickster. But the passage nevertheless
exemplifies a well-known trick, namely, the trick of making some politically relevant
result follow apparently from an obvious truth so that the political opponent is subtly
put into a position which it is implied only an absolute fool could take.

36 Mill failed to add Barton.

37 In the same paragraph Mill inadvertently used a nonphysical capital concept
when he spoke of the other ‘portion’ of capital that is fixed in machinery, buildings,
and the like. Capital that is fixed in machines instead of consisting in machines cannot
be capital in the sense of his own definition.

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lit

GENERAL ECONOMICS: PURE THEORY 64 1

false. It is a very interesting question to ask why he should have thus maimed
a theorem that was certainly not beyond his range of vision. 38 The answer
cannot be that in the short run technological capital is an assemblage of spe-
cific goods, the kinds and quantities of which constitute data. For Mill evi-
dently did not intend to write a treatise on short-run analysis. Rather, the an-
swer seems to be that, while of course he was not unaware of the fact that
the relation between technological and wage capital is variable, he was in-
clined on principle — that is, when arguing matters of fundamental principle —
to take it for granted, perhaps as technologically fixed,- and to neglect the
substitutability between the two, the nature and importance of which, though
emphasized by Barton and Longfield, were hardly clear to him. This is why
he found it so easy (as had Ricardo) to follow the example set by A. Smith
and to speak of a 'portion of capital' or of a fund that is 'destined for the
maintenance of labour,’ that is, to speak of a wage fund. Let us observe at
once that one of the most characteristic features of the so-called wage-fund
theory, namely, the implied assumption or at least suggestion that this fund
is a sort of datum, thus rests on nothing but primitive technique. 39

We take another step toward understanding the wage-fund theory when we
consider Mill's 'second fundamental theorem respecting Capital [which] re-
lates to the source from which it is derived’ and which makes capital 'the
result of saving’ (§ 4): capital increases by revenue’s being converted into it.
We know already (see above, eh. 5, sec. 6) that the 'classic’ schema of eco-
nomic evolution was at fault both through overrating the importance of mere
increase in the items that constitute capital and through overrating the role
that (voluntary) saving plays in this increase. Also, the 'classics,' in their anx-
iety to emphasize the fundamental meanings of economic mechanisms, were
given to drawing together much too closely decisions to save and decisions to
invest. These decisions, though never quite identified, 40 tended to shade off
into each other to the exclusion of all that may intervene between them, 41

88 This theorem should read that on the long-run trend (that is to say, neglecting
the effect of temporary disturbances) there are no assignable limits to investment oppor-
tunity at appropriately falling rates of interest, except possibly, institutional ones.
Lauderdale, Malthus, Storch, and others denied this, but Mill, of course, accepted it,
and there was no good reason for him not to put it in so many words, especially since
it had already been stated by James Mill.

39 It is not true, however, that Mill’s refutation of Malthus’ argument depends upon
this or on any other part of the wage-fund doctrine, as Lord Keynes seems to have
believed ( General Theory, p. 364).

40 What they may indeed be said to have identified is (the schedule of) savings and
(the schedule of) loanable funds: what was saved was ipso facto made available for real
investment either in the saver’s business or in someone else’s except in times of deep
depression; and for them there was no other source of loanable funds except saving —
the money created by bank credit never being taken into account when fundamental
principles were under discussion.

41 Malthus, on this point, fully shared the prevailing view. See, e.g., his turn of
phrase: 'parsimony or [my italics] the conversion of revenue into capital . . .’ (Prin-
ciples, p. 369m).

642 in: FROM, 1790 T° 1870

so that saving unconditionally enriches and spending unconditionally impov-
erishes both individuals and nations. Like Say, Mill reasserted all this; in
other words, he reasserted — with added emphasis even — the Turgot-Smith
theory of capital formation . 42

But then how was it that he was able to hold (as he evidently did) — also
in conformity with dominant tradition — that saving, and saving alone, in-
variably increases not total capital only but also wage capital, the wage fund,
'without assignable limit’? No difficulty arises immediately, because the fixed
capital, to the production of which the labor is assigned that is compensated
from the new addition to savings, must be first produced. Provided that acts
of investment follow sufficiently closely upon the decision to save, it is in-
deed true, at that first turn of the wheel, that demand for productive services
— and let us grant their reduction to labor services only — is immediately in-
creased to the full amount of the new addition to savings. That is, the wage
fund is increased so as to give, to this amount, 'to labour either additional
employment, or [an increase in wage rates, amounting to] additional remuner-
ation/ 43 which means either a larger aggregate produce, if the laborers in
question have been unemployed before, or a larger share of labor in the same
‘aggregate produce/ if they have to be drawn from other employments. But,
so far as new technological capital results from this employment, things may
obviously look very different when all the adjustments have taken place. We
may be faced by a different 'organic composition of capital/ possibly even an
absolute decrease in the variable capital or wage fund. Again, neglecting the
possibility that Mill was thinking of short-run effects only, we once more fall
back upon the explanation offered before: like all the ‘classical’ leaders, he
took the relation between technological and wage capital as a datum, so that
in the final result saving would increase both of them in the same proportion.
If this were so , 44 then and only then could we speak of a wage fund in any
sense other than that the sum total of wage incomes is uniquely determined
under the same conditions as is any other economic quantity, for example,
the sum total ‘destined’ for the purchase of motor cars. Replacement of work-
ers by machinery was, of course, not overlooked. But it was treated, except

42 This must, however, be taken cum gratio salis. Mill admits freely (§ 2) that many
persons are maintained from capital ( not from the return to capital) who produce
nothing and that there is such a thing as unproductive consumption by productive
workers. If saving provides capital that goes into unproductive consumption, it cannot
be held, without qualification, that it ‘enriches’ society or, for that matter, that it is all
but synonymous with expenditure on maintaining and aiding productive labor.

43 Which on Mill’s own showing would in general mean unproductive employment
of part of the new savings; see preceding footnote.

44 Strictly it can never be so. For savings, other things being equal, must affect the
rate of interest and the rate of interest must affect the rate of turnover of capital, i.e.,
the relation of technological capital and wage fund, as well as the structure of the
former, rare cases excepted in which rates of turnover are actually uniquely determined
by technological necessity such as that of the period that must elapse between sowing
and harvesting.

GENERAL ECONOMICS: PURE THEORY

643

by Marx, as a special case that belonged in a separate compartment and was
never organically assimilated by the body of theory. And then and only then —
that is, by virtue of a hypothesis forced upon the 'classics’ by the primitivity
of their technique — it does become true that 'demand for labor,’ meaning
demand for 'productive’ labor as distinguished from labor paid out of revenue,
or the means destined for the maintenance of such labor, given a certain
level of social productivity, can increase and decrease only through saving and
dissaving, 45 which in fact become synonymous with 'destining’ more or less
means for this purpose. Or, to put it differently, the wage fund is a fund or
aggregate sui generis because its size and variations are determined by a proxi-
mate cause sui generis, namely, past and present savings; everything else acts
upon it only through the rate of saving. .

Of course, the ‘classics’ would not have denied that the rate of savings itself and
therefore total wage payments are determined by many factors, some of which are in
turn reacted upon by the rate of savings. In addition, they would not have denied
that the kinds and quantities of wage goods the workmen actually get depend upon
many other circumstances that are not uniquely determined by the rate of savings.
But they would have replied that those factors, such as the rate of profit, act upon
the wage fund only at one remove, so that their doctrine was formally still valid; and
that the circumstances that do directly affect what goods the workmen get, such as
the level of social productivity, were simply taken as given. The reader will observe,
however, that this means little more than teasing the opponent. It is, of course, al-
ways possible to say: 'given A, B, C . . . , then Y depends upon X’ — the practice
revived by Keynesian economics and dubbed 'implicit reasoning’ by Professor Leontief.
Simplification may amount to caricature. Caricature may be ideologically biased, though
there is no reason to suspect this in Mill’s case.

Mill’s third proposition need not detain us. It is to the effect that saving
does not decrease consumption. Here again Mill upholds the Turgot-Smith
tradition; in fact he does so with increased emphasis: the saver saves and
hands over what he would have consumed or its equivalent to some productive
worker so that what is saved is spent on consumers’ goods 'quite as rapidly’
[my italics; Smith went slightly less far. J. A. S.] as what is not saved. 46 But
Mill’s 'fourth fundamental theorem respecting Capital’ does call for comment.
It runs: 'Demand for commodities is not demand for labour’ (§9). Let us
first discard a surface meaning that might be attributed to this proposition.
Of course, the derived demand for labor that may be said to be implied in
the demand for a commodity is never demand for labor alone, whereas the
demand for personal services is. But this is not what Mill meant. What he did
mean is enshrined in a confused and embarrassed discussion that has puzzled

45 I do not again repeat the other assumptions that have to be made which have
been indicated already.

46 It cannot be emphasized too often that unrealistic neglect of intermediate steps is
all that can be charged against this theory. At worst, it may be wrong. But it does not
involve any logical mistake as. some, Bohm-Bawerkians seem to have believed. Of course,
not every act of saving needs to issue in a net increase of technological capital.

644 III: FROM 1790 TO 1870

followers not less than opponents. For brevity I shall simply state what I
conceive to be the core of the matter.

The industrial employer's demand for labor no doubt derives from the ex-
pected demand of consumers for the commodities that are being produced.
On a high level of abstraction, on which only fundamental meanings count,
it is perfectly proper to emphasize this nexus before any other. This con-
forms not only to the view that was naturally taken by the theorists of the
last decades of the nineteenth century — particularly by those who emphasized
'imputation' — but also to the view of the economists of that period, such as
Say, who taught the doctrine that, ultimately, production and distribution
reduce to an exchange of services. There is no great harm, from this stand-
point, in using such turns of phrase as that demand for commodities is de-
mand for labor (and other productive services) or, as Hermann put it, that
the true wage fund or source of wage payments is consumers’ income. But
the reasoning should never have been used — as it has been— for an attack upon
Mill’s position.

For on a lower level of abstraction, the fact should be taken into account
that the consumer’s payment for a commodity does not in general pay for the
labor that entered into the latter’s production. At most, the consumer’s pay-
ment enables the manufacturer to replenish his capital, normally with an ad-
dition. For this actually to come about, a distinct decision must intervene in
the process, namely, the manufacturer’s decision to save or at least not to
dissave. It is this decision — and it should not be taken for granted — which
may be said to 'benefit' labor at the next turn of the wheel and not simply
the consumer’s decision to buy. So far, then, we have before us a piece of
sequence analysis, that is, an analysis of successive steps in a process that is
kept continuously running, at an increasing, decreasing, or constant rate, only
by a sequence of appropriate decisions.

There is something else, however. If we do assume that consumers’ savings
are being turned into labor-employing capital promptly, it follows, as we
know, that the labor interest would be further benefited, and demand for labor
increased, if income receivers also saved, instead of buying consumers’ goods.
For, barring the disturbances that result from the necessity of industry’s chang-
ing over from the production of goods consumed by capitalists and landlords
to the production of wage goods, this would, on the one hand, increase the
amount 'destined’ for the maintenance of productive labor and, on the other
hand, cause no deficiency of demand for products. We may, then, imagine
the saving to take place by the income receiver’s handing over to productive
workers goods instead of money: the goods will then be produced and find
purchasers as before, and the working class would, in addition, receive part
of the saver’s income goods. If instead of saving, the income receiver had
merely shifted his consumer’s demand from commodities to personal services,
this addition would last so long as he continues this practice. But if the in-
come receiver saves, this addition will last until he decides to dissave to a
corresponding amount. There is nothing un understandable or illogical in all
this. The usefulness or realism of this model is, of course, another question,

GENERAL ECONOMICS: PURE THEORY

645

but it should not be forgotten that, even if we vote that the argument of this
paragraph is inadmissible, the argument of the preceding paragraph still stands.

6. The Distributive Shares

From Section 5, Chapter 5, we know that there was indeed a large group
of writers who, partly anticipating the dominant tendency of the next period,
conceived the problems of income formation as problems in the evaluation
or pricing of productive services — thus unifying the phenomena of value, cost
(production), and distribution. But we also know that this view, though to
some extent sponsored by A. Smith and reasserted by J. S. Mill, was not gen-
erally accepted and that even those French, German, and Italian economists
who did more or less accept it — and even Say himself or Ferrara — did not go
through with the program that this view implied. For the rest. Professor
Cannan 1 was right in stating that distribution remained a semi-independent
department of economic analysis; and that what people meant by Theory of
Distribution, especially in England, was a compound of separate theories of
profits, rent, and wages, each of which was based on a distinct principle of
its own. 2 We adopt the same schema for the following survey.

(a) Profits. By this term, the 'classics’ simply meant the sum total of the
gains of the business class, the theoretical type of which, with the Ricardians,
was the farmer. 3 The analytic work on these profits during the stretch of time
that was bounded by the books of A. Smith and J. S. Mill did much to clarify
issues and to lay the bases of later analysis, though it can hardly be described
as either brilliant or profound. We shall look at it from two points of view,
which we respectively denote as the entrepreneurial and the interest point of
view.

We have seen in the preceding chapter both that some progress was made
in the analysis of the entrepreneur’s function in the capitalist process — prog-
ress chiefly due to Say — and that, for the time being, this progress did not
go very far. One thing, however, did come of it: economic theory acquired at
least a fourth agent, the agent that hires or 'combines’ the others and this
could have led — more than it actually did lead — to a clearer perception of the
role of the 'capitalist,' who might have been ousted from his position in the
center of capitalist industry and put into a more appropriate place among the

1 Theories of Production and Distribution , 3rd ed., p. 188. Cannan’s detailed discus-
sion of the leading English writers’ analyses of distribution is again recommended, both
for study on its own account and for comparison with the argument of this book.

2 Such statements are never quite true and must be taken cum grano salis. Neverthe-
less, in this statement, truth greatly prevails over error, so far as England is concerned.

3 This may seem surprising. But it is really natural enough since the farmer’s case dis-
plays the three divisions of national income and the 'rentless margin’ better than does
any other. Also it must be borne in mind that for West and Ricardo the farm held a
key position, owing to the relation of marginal cost of food to wages and hence to
profit.

646 III: FROM 1790 TO 1870

owners of factors that are being hired . 4 Though neither Ricardo nor Senior
followed suit, we have in J. S. Mill’s Principles a fair presentation of the point
of view that the profession at large actually reached in the period. His anal-
ysis of business incomes in particular became the standard, in all countries,
for more than half a century to come. The businessman received, first, what
Marshall was to call Wages of Management, the importance of which was
underlined by von Mangoldt’s notion of Rent of Ability, the germ of which
is already to be found in Mill. He further received a premium for risk-bearing;
nobody that I know of took the trouble to investigate why this item should be
necessarily positive. Cantillon’s 'buying productive services at certain prices
in order to produce a product whose price is not certain’ did not, however,
come quite into its own until the publication of Professor Knight’s work , 5
that is, not within the period. Third, the businessman received interest on
the owned part of the capital he employed. But it should be observed that, oc-
casionally, both Ricardo and Marx recognized a fourth type of return, of an
essentially temporary nature, that accrues to the businessman, namely, the
return he derives for a time from the first introduction into the economic
process of a novel improvement such as a new machine . 6 They thus discovered
a special case of what is really the most typical of all entrepreneurial gains.

Mill made nothing of the latter item. His analysis strongly suggests that,
like everybody else and in spite of his emphasis upon the wages of manage-
ment, he looked upon interest as the most important element in the total net
receipts of the business class. Now, this interest was not a monetary phe-
nomenon. So far as the 'classics,’ within the precincts of fundamental anal-
ysis,, spoke of monetary interest at all, they did not mean a return on money
loans per se, as did the scholastic writers and as do some of us, but only a
monetary expression for a return on physical capital that, moreover, was ex-
pressed in terms of money solely for the sake of convenience . 7 Actually, as we

4 I must, however^ not be understood to mean th.at I consider this place as the ideally
correct one.

5 F. H. Knight, Risk , Uncertainty and Profit (1921). But von Thiinen was in full
possession of the principle involved.

6 See, e.g., Ricardo’s Chapter 31 On Machinery (first page). Both he and Marx not
only recognized the existence of this gain but made it an essential part of their analytic
structure. With Marx it is particularly clear that it was indispensable for him because
it motivated the process of mechanization which, as he saw, does not benefit the
'capitalist’ class permanently.

7 I use this opportunity to clarify a point that has given rise to a criticism of 'classic’
theory that is only in part justified. Many writers of that and even a later time spoke
glibly of wages per hour, rent per acre, and profit per cent as if these were comparable
magnitudes. It is quite true that, in very many cases, this practice indicates haziness of
thinking, to say the least. But it is not always true. Ricardo in particular expressed his
real (or absolute labor-quantity) values in terms of a money that also embodied a con-
stant quantity of labor and was invariant in this Ricardian value. Capital goods embody-
ing 100 labor days were therefore capable of yielding, say, '5 per cent’ — since this only
means that they were capable of yielding a net product embodying 5 labor days — without
reference to any discounting process. That is to say, this phrase was really quite

GENERAL ECONOMICS: PURE THEORY

know, their capital was goods. The businessman’s profits were, iri substance,
‘profits of stock/ net returns on a stock of capital goods, all of them or some
of them. And interest, being simply that part of a business’s net receipts which
its owner-manager hands over to a lender whom he saves the trouble and risk
of doing business, also remained a (pure) ‘profit of stock.’ This is so with
all the economists of that period — Marx not less than Say — and with nearly
all of the next period. The point of view is important. A great part of our
picture of the capitalist process hinges upon it. Let us therefore make sure
of- its implications.

In the first place, since pure interest, if we neglect the interest on con-
sumers' loans, was nothing but the bulk of business profits, the fundamental
problem was the explanation of those business profits: there was no separate
problem of interest at all. With the possible exception of Senior's abstinence
theory — to be discussed presently — all the theories of interest throughout the
nineteenth century are based upon acceptance of this view, including Ri-
cardo’s, Marx’s, and later on, Bohm-Bawerk's. This was one of the results of
the habit of identifying the roles of the industrialist and the capitalist, which
subtly influenced the thought even of those who occasionally recognized the
essential difference between them, and is the cornerstone of that period’s
theory of distribution.

In the second place, since business profit itself was conceived as being, es-
sentially, a return on capital goods, it followed that interest was identical with
(not determined by) the net yield of capital goods. The first to state this
theory explicitly, so far as I know, was Nicholas Barbon. Sanctioned by A.
Smith, it prevailed throughout the nineteenth century. Of course, it was par-
ticularly agreeable to the adherents of the triad schema — though, in a particu-
lar form, we also find it in Marx. Barbon had already attempted to explain
interest by analogy with the rent of land . 8 Adherents of the triad schema
would have had no difficulty in going a step farther and in extending the anal-
ogy to wages, thus rounding off their triad of factors by a triad of incomes. The
first to show definitively that the yield of capital goods, whatever else it may
be, is not interest was Irving Fisher . 9

(b) Marx’s Exploitation Theory of Interest. Having removed any danger of
confusion, we shall henceforth use the term interest for (the bulk of) what
Smith, Ricardo, Senior, and Marx called profit. And having put the problem

analogous to the wages per hour or the rent per acre and no circular reasoning was
involved in it: the 100 labor days were an 'objective' quantity like the land; and it is
only because 'interest per cent' with us refers to a capital value of a different kind —
namely, to a capital value that is derived from the returns — that critics objected to
Ricardo’s language.

8 This line of thought, later on, bore interesting fruit in Marshall’s quasi-rent. But
the latter concept really points in the opposite direction: its emergence was one of the
earliest signs of dawning recognition of the fact that yield of capital goods per se is
not interest and should be distinguished from it.

9 Rate of Interest (1907); see below. Part iv, chs. 5 and 6, where this argument will
be taken up again. For the moment the pointer above must suffice.

648 III: FROM 1790 TO 1870

of interest in its proper setting within the analytic thought of that period,
we can now make short work of the solutions offered and of the related
‘proofs’ of the secular tendency of the rate of interest to fall.

The reader will realize, of course, that the doctrinal tendency we have
traced to Barbon — that is, the tendency to identify interest with the net
yield of capital goods — does not in itself furnish a solution of the problem
of the nature of interest or a definite answer to the question what it is that
interest is paid for. For that net yield itself needs explanation. But the econo-
mists of the period under survey were slow to realize this. Having lost contact
with the thought of the scholastic doctors, they were at first inclined to take
the solution of this problem for granted and to be content with the vaguest
ideas about it. Thus, A. Smith may be credited with two different ‘theories’
of interest, and Ricardo, as we shall see, with three or even four. But it is
more realistic to say that they had no definite theoiy at all. They simply did
not worry about the matter. After all, one of the methods of dealing with a
problem — and not always the worst one — is to ignore it. The first to recognize
its existence — if we except Turgot — was Lauderdale; and the second was
James Mill. The elements of a genuine theory of interest — true or false — were
then contributed by Longfield, Rae, Scrope, and Thiinen, none of whom made
much of a hit at the time. The man who did was Senior. But before follow-
ing up developments on the Barbon line, we shall deal with the Exploitation
Theory.

The essential thing to understand about the exploitation theory of interest
is that it is a rationalization of the age-old slogan that expresses the feeling of
manual laborers and philosophers about the upper strata’s living on the fruits
of manual labor. The social psychology of this and the question when and
why this became synonymous with exploiting manual labor cannot be ana-
lyzed here: it must be enough for us to realize the presence of this problem
and to recall that this idea entered the Wealth of Nations through the phi-
losophy of natural law. There it took the form of the proposition that rent and
interest are deductions from a total produce that, in its entirety, should be
considered as the produce of manual labor. In this sense, A. Smith gave a
lead for the numerous writers who were to work out exploitation theories of
one kind or another. More important for us, however, is the fact , that turns
of phrase, suggestive of the idea that the relation between industrial employ-
ers and their workmen necessarily involved 10 exploitation, occur quite fre-
quently in the literature of that time even outside of its specifically laborist or
socialist branch. These turns of phrase derived quite naturally from the view

10 It is essential to keep this notion strictly separate from the general observation or
impression that labor very often got a raw deal that shocked moral feelings, or from
the still more obvious observation that the masses lived in misery' whereas other people
rolled in wealth that shocked humanitarian sentiment. All this, of course, created an
atmosphere favorable to the reception of exploitation theories but forms no part of
these theories: for these it is essential that the wage contract implies exploitation; it is
not enough that it is — often or always — associated with exploitation or, simply, with a
low standard of living of the wage earner.

GENERAL ECONOMICS: PURE THEORY

of the function of the industrial employer as described by A. Smith. The in-
dustrial employer, being simply a capitalist who furnished the workers with
tools, materials, and means of subsistence and for the rest did very little,
received these ‘advances’ back with a profit that was evidently part of the
result of the workers’ ‘industry.’ This highly unrealistic picture of the role of
labor we find, for example, in Mrs. Jane Marcet’s Conversations on Political
Economy (1816), and it is conveyed by Ricardo’s naive sentence: ‘. . . the
capitalist begins his operations by having food and necessaries in his posses-
sion of the value of £13,000 . . . : at the end of the year’ the workmen
‘replace in his possession food and necessaries of the value of £15,000' (ch.
31). Not more than this was necessary for the Ricardian socialists to take the
hint; and not more than this is necessary for us to trace Marx’s exploitation
theory — the particular form, that is, which Marx gave to the exploitation idea
— to his study of Ricardo. 11 This is not to deny the possibility that he may
also have derived inspiration from the Ricardian socialists, especially from W.
Thompson. Besides, there were plenty of other forerunners, for example, Sis-
mondi. But Ricardo’s suggestion, together with his theory of value, would
have sufficed.

Marx’s exploitation theory may be put like this. Labor (the ‘labor power’
of the workman, not his services) is in capitalist society a commodity. There-
fore, its value 12 is equal to the number of labor hours which are embodied
in it. How many labor hours are embodied in the laborer? Well, the ‘socially
necessary’ amount of labor hours it takes to rear, train, feed, house him, and
so on. Suppose that this labor quantity, referred to the labor days of his active
span of life, figures out at four hours per day. But the ‘capitalist’ who bought
his ‘labor power’ — Marx did not go quite so far as to say that the ‘capitalist’
buys laborers as he could buy shares, though this is the implication — makes
him work six hours a day. Four of these six being enough to replace the value
of all the goods that went to the laborer, or the variable capital advanced to
him (v), the two additional hours produce Surplus Value (s), the Mehrwert.
For these two hours the ‘capitalist’ has not given any compensation. They
constitute ‘unpaid labor.’ To die extent that the laborer works hours that are
unpaid in this sense, he is exploited at the rate s/v. This rate of surplus value is
not, of course, the rate of interest. The latter equals the ratio between surplus

value and total (constant plus variable) capital, that is.

If we suppose

that s/v is equal for all sectors of the economy and all firms — that is to say,

11 This defines the sense in which an exploitation theory of interest may be attributed
to Ricardo. Let me recall the three other interest theories that may be attributed to
him, which have been mentioned already and will be mentioned again (subsec. c. below);
the abstinence theory; the residual theory; and, possibly, even a productivity theory;
V. Edelberg (‘The Ricardian Theory of Profits,’ Economica, 1933), makes Ricardo a
productivity theorist, who would have had nothing to learn from Wicksell. Perhaps
he is right. In a sense, Newton had nothing to learn from Einstein. But to say so
would not make for a realistic history of mechanics.

12 Strictly we ought to say: its equilibrium value under perfect competition.

650 III: FROM 179O TO 1870

that all workmen are equally exploited — and further suppose that the rate of
s

interest, — - — , must also he equal for all concerns, we run up against the
c -+- v

difficulty that has been mentioned already, namely, the necessity of redistrib-
uting the total surplus among firms in such a way as to make — - — equal

c - f v

for all. But in order to avoid going over this ground again, we merely note
here that this difficulty constitutes a possible objection to .the Marxist type
of exploitation theory . 13 For the rest we assume that this difficulty does not

prevent us from accepting the ratio - as the expression of the Marxist

rate of interest when we interpret s, c, and v simply as national aggregates,
the values of which are proportional to their 'prices/ though we know that
this does not hold for the individual commodities.

We may then interpret Marx’s exploitation theory as an application of his
theory of value to labor: according to it, labor receives not less than its full
value and consumers do not pay more for the products than their full value . 14
Therefore, it is exposed not only to all the general objections that may be
raised against Marx’s labor-quantity theory of value but also to the special
objection that may be raised to its application to 'labor power.’ For so far
as the labor-quantity theory of value is valid at all, it is valid only by virtue
of rational cost calculation: only economically applied (socially necessary)
labor quantities create value. But evidently human beings are not produced,
according to the rules of capitalist rationality, with a view to cost-covering
returns. The situation of the exploitation theory could be improved somewhat
by inserting into it the Malthusian law in a very ..strict form or by some other
contrivance that would keep wages on a level of the cost of bare subsistence.
This was done by Lassalle (iron law of wages, loi d’airain, ehernes Lohn-
gesetz). But Marx, wisely perhaps, refused to do this. Mai thus’ law of popu-
lation was anathema to him; moreover he recognized both cyclical increases
of wage rates beyond the value of labor and a tendency, of longer span, for
the degree of exploitation to fall through reduction in daily hours brought
about by trade-union action, legislation, and so on. Thus he reduced his
exploitation to the rank of an 'absolute law’ — an abstract tendency — that need

13 The nature of this objection will become clear when we consider Marx’s relation
to the abstinence theory. ■

14 This feature constitutes a claim to superiority of Marxist exploitation as against
all other attempts to rationalize this meaningless phrase. All the others (this does not
apply to the meanings attached to that phrase in our own time by Professor Pigou and
Mrs. Robinson) must rely on laborers’ being somehow cheated or robbed, either as
participants in production or as consumers, and then they have a hard time trying to
prove why this should be so always and necessarily. But there is no cheating or robbing
involved in Marx’s theory. The exploitation there results, irrespective of anyone’s mis-
behavior, from the very logic of the capitalist law of value, and therefore is ingrained
in the system much more irradicably than any other exploitation theory can show it
to be.

GENERAL ECONOMICS: PURE THEORY

651

not prevail in real life. Another objectipn, however, is less serious than it
seems. According to Marx, surplus value is a costless gain of the capitalist.
Moreover it is not defined as an intramarginal gain, like Ricardian rent. It
might be thought that such a gain would induce individual capitalists —
whose individual contributions to the total output of their industries is too
small to influence prices — to expand output until the surplus falls to zero.
This conclusion is indeed inescapable so long as we keep to the schema of
a stationary process; such a process could not be in equilibrium until the
surplus is eliminated. But we may save the situation by taking account of
the fact that Marx thought primarily of an evolutionary process in which the
surplus, though it has a tendency to vanish at any given time, is being in-
cessantly recreated. 15 Or else we might drop the assumption of perfect compe-
tition though the surplus we may salvage in this way will be quite different
from Marx’s. Without going further into the matter, 16 we turn to Marx’s
explanation of the Tendency of the Rate of Profit to Fall, in which both
Marx himself and some of his followers took great pride.

If we do grant, first, that there is such a tendency and, second, that Marx’s
theory of surplus value is all right, then this pride was not unjustified. Few,
if any, experiences of an analyst are more gratifying than is the discovery
that a theory (say, gravitation) will explain a fact (say, the tides) which the
author of the theory had not had in mind in constructing this theory.

(c) Marx, West, and Ricardo on the Falling Rate of Profit. The first re-
mark to be made applies not only to Marx, West, and Ricardo but to all
the economists who busied themselves in finding an explanation for the secu-
lar fall in the rate of interest: it never occurred to any of them to ask whether
there was such a secular fall. They simply took it for granted and, in doing so,
displayed an almost unbelievable degree of scientific carelessness. For the
only thing that is so obvious is that medieval princes promised their creditors
80 per cent and more, whereas in 1800 governments were thought to be pay-
ing a high rate if they paid about 5 per cent and in 1900 when they paid
3 per cent — and similarly, of course, businessmen. But this was due, obviously,
to the very high premium of risk that attached to loans to princes who,
mostly, did not even repay the capital; to the primitive organization of money
markets; and to the anticipation of inflation. Where none of these factors
was present — for example, in the Netherlands in the second half of the seven-
teenth century — interest was not obviously higher than it was under similar
conditions two hundred years later. Since it was the rate of pure interest, the

15 An analogous argument from the incessant displacement of labor in the process
of accumulation may serve, instead of the Malthusian law of population, to motivate a
tendency in wages to seek the level indicated by the Marxist Value of labor/ This, too,
would not work in the process of simple reproduction, but it could be inserted on the
consideration mentioned above.

16 Marx’s economic theory did not attract attention and come in for professional
criticism before the next period, when a critical Marx literature developed. The most
important performances, especially Bohm-Bawerk’s criticism, are mentioned by P. M.
Sweezy, op. cit.

652 III: FROM 1790 TO 1870

fall of which was to be explained, ; and not the conditions that produced
greater or smaller premia of risk or other costs of borrowing, those economists
would have been better advised if they had bestowed some trouble on finding
out what there really was to explain.

Second, Marx’s explanation rested on two propositions. The one was that,
in the course of economic development, the Marxist value of constant capital
increases faster than does the Marxist value of variable capital because pro-
duction becomes increasingly mechanized. The other was that only variable
capital (wage capital) produces surplus value whereas constant capital, as we
have said before, only transmits its own value 17 to the product. Accepting,
for the sake of argument, both these propositions and further assuming that
the rate of surplus value remains constant and that the Marxist value of capi-
tal goods does not fall, we have no difficulty in reaching the conclusion that

— must fall ( Das Kapital, vol. m, ch. 13). Objections that were raised

against this conclusion by Marxists either arose from failure to take account
of all these restrictions or else from unwillingness to admit their realism. In
fact, we have here another ‘absolute law’ and, if we look at all that these re-
strictions exclude, 18 we may well sympathize with those disciples of Marx who
feel that, even from the standpoint of the Marxist theories of value and ex-
ploitation, no great confidence can be placed in this abstract tendency. But,
within the general framework of Marx’s theoretical system and the additional
assumptions indicated above, it is not logically wrong.

Third, though emphasizing the abstractness of his law, Marx trusted it suf-
ficiently to make it the ‘barrier,’ inherent in capitalist production, that will
eventually prevent the capitalist process from going on beyond a certain limit
— which is not indeed the whole of the Breakdown Theory but an important
element of it.

By way of contrast I shall now present the West-Ricardian explanation of
the historical fall in the rate of interest that, like everyone else, they took to
be an indisputable fact. It links' up with what may be described as Ricardo’s
second theory of interest. We have seen above that Ricardo’s theoretical set-up
really makes ‘profit’ a residual and simply equates it to what remains to the
farmer on rentless land when he has paid his laborers. The origin of this way
of viewing ‘profit’ is obviously in the practical businessman’s mode of think-

17 It should not be forgotten, however, that the value of constant capital includes
surplus value.

18 Marx spoke of ‘counteracting forces’ that ‘inhibit and annul’ the operation of his
absolute law. The list of these could have been copied from J. S. Mill (counteracting
circumstances, Book iv, ch. 4, J 5), whose Tendency of profits to a minimum’ was in
similar case. It should be observed, however, that the latter phrase permits an inter-
pretation that brings the falling rate of profits more, definitely within the range of the
theorist than, in the nature of things, it is possible to bring any historical tendency:
within a given setting (including a given technological horizon), it can in fact be proved
that the rate of interest tends to the minimum — and the wage rate to the maximum —
that is compatible with that setting and its given investment opportunities.

GENERAL ECONOMICS: PURE THEORY

6 53

ing as reflected in his profit-and-loss account (income statement): his profit
is ‘what is left’ — the item that balances his account. Since, on the rentless
margin of production, the whole of the net product, measured in ‘labor em-
bodied,’ is divided between labor and capital, both shares also measured in
‘labor embodied ,’ 19 and since labor’s share is explained separately, we easily get
the two propositions which are, when this point has been reached, really not
more than trivial . 20 The one is that ‘profits depend upon wages’ — what else
could they depend upon in this schema? The other is that, under the in-
fluence of increase in population and of the law of decreasing returns on
land, more and more labor has to be embodied in each additional unit of
food and that the value of labor’s share must rise — though the per capita
amount of wage goods need not rise or may even decrease somewhat — leaving
less and less value for capital. This and nothing else, as West and after him
Ricardo laboriously explained, accounts for the phenomenon that we are sup-
posed to observe in the guise of the falling rate of interest. But there was no
need for elaboration. For according to this wonderful theory, it is logically

19 Observe how neatly this fits the Marxist schema: all that we need to obtain the
latter is to measure, in addition to labor’s share, also labor itself (the labor power, that
is) in ‘labor embodied.’ There is in fact no incompatibility between what we call
Ricardo’s first and second theories of interest: in both, the amount and rate of profit
are determined by (the ‘real’ value of) wages. This follows from the set-up discussed
above, after elimination of total output a%l of rent. The notion of exploitation (no
matter whether we call it so or not) simply adds a particular interpretation. But this
seems no longer to be so if we attribute to Ricardo an abstinence theory (the same
would hold for a productivity theory, which we do not attribute to him, however). In
order not to have to return to this point, which is not without theoretical interest, I
shall settle the matter in this footnote. We have then ‘profit’ determined by ‘wages'
(in general, uniquely). If thereupon we declare, as Ricardo did, that the same profits
are a ‘just compensation’ (i.e., obviously, a price) of waiting, his system seems to become
over determined: a quantity that is determined already is being subject to an additional
condition. This, however, is so only in this system and need not be so in a wider system
that may be behind the former. The reader should always be careful to scrutinize argu-
ments from overdeterminateness of a system (which are today so popular) before he
accepts them. Suppose ‘wages’ have determined ‘profit’ at a certain figure. Further sup-
pose that this figure does not ‘justly compensate’ the ‘capitalists’ for their waiting. If
this state of things is not expected to mend, the ‘capitalists’ will reduce their invest-
ment (within that schema, they have no opportunity of doing anything else). Capital or
at least variable capital, the wage fund, will accordingly be reduced. And, through a
series of rearrangements throughout the system that play ‘at one remove’ or ‘behind the
scenes’ — I leave it -to the reader to carry this out — we arrive eventually at a situation
in which wages still ‘determine’ profit but at a level that will satisfy the ‘capitalist.’
From this, the reader may also learn an important lesson as regards the meaning of
the phrase ‘determined by' — a lesson which it is indispensable to learn if he is ever to
understand economic theory and its tricks and some of its critics and their tricks.

20 And an excellent example they are of that Art of Triviality that, intimately con-
nected with the Ricardian Vice, leads the victim, step by step, into a situation where
he has got either to surrender or allow himself to be laughed at for denying what, by
the time that situation is reached, is really a triviality.

654 III: FROM 1790 TO 1870

impossible that the rate of interest (excepting short-run ‘market' fluctuations)
should ever fall for any other reason. In fact, Ricardo (ch. 21) asserted that
unless wages rise (in his sense) no amount of accumulation can possibly re-
duce the rate of profit; and he not only took to task A. Smith for explaining
the falling rate of profit by accumulation but also boldly charged J. B. Say
with having forgotten his own Law of Markets when he stated that ‘the more
disposable capitals are abundant' in relation to the extent of investment op-
portunity, the more will the rate of interest fall. 21 Two things are clear: first
that, in the sense meant and within Say's conceptual arrangement. Say's
proposition is correct, also that it does not conflict in the least with his Law
of Markets; but second that, in the sense meant and within Ricardo's con-
ceptual arrangement, Ricardo's proposition is not wrong either.

J. S. Mill's position is nothing short of pathetic to behold. He had a wide
understanding of all the phenomena relevant to interest. In particular, he
understood the theoretical problems of monetary interest and of the capitali-
zation of returns more deeply than any other theorist of his time: in Chap-
ter 23 of Book in ( Principles ) he anticipated some of the developments in
this field that were forty or fifty years ahead. In addition, he had learned
from Say, Rae, and Senior. He was fairly in possession of a value theory that
was greatly superior to Ricardo's. Thus he was, as he proved himself to be in
Chapter 4 of Book iv, in a position to build up an analysis that would have
fitted all known facts. But, God knows why, he had to uphold Ricardian
doctrine. And so, from Chapter 1 5 of Book 11 on, he dealt with these matters
in an unnatural and cramped manner so as to force them in a surface con-
formity with Ricardian doctrine. It would be extremely interesting to analyze
this and, by so doing, to arrive at a fuller understanding of how economic
analysis moves along, over self-built barriers. But I am afraid that, even as
it is, readers will not share my regret at my inability to do so in the available
space. 22

21 On A. Smith’s argument, see below, subsec. e. He went exactly as far in stating
the antagonistic tendency of wages and rate of profit as facts and common sense (but
not the Ricardian conceptualization) will warrant: accumulation, so far as it means
additional demand for labor (and services of land), will ceteris paribus depress the rate
of. interest and raise wages (and rents). But Ricardo, entirely neglecting the' inapplica-
bility of his conceptual apparatus to this mechanism, would not hear of it.

22 Nevertheless, I shall in this footnote give an example of the methods by which
conformity was in part secured and offer a comment that applies to many theories,
some of today or yesterday included. The example: even if rent be excluded, the capi-
talists’ advances, for an adherent of the abstinence theory like Mill, cannot possibly
consist of wages alone; yet this is precisely what Mill averred in § 6 (Book 11, ch. 15).
How was this possible? Nothing simpler: ‘profits’ too are being advanced, of course, but
these advances are no advances but a sort of payment on account of the profits that
are expected to be earned.

The comment: under appropriate assumptions, in particular if frictions, rigidities,
and sequences be neglected, all economic quantities, and especially the usual social
aggregates, hang together in a definite way; and any process of change that runs
through them will affect them all. No proposition to the effect that one of them has

GENERAL ECONOMICS: PURE THEORY

6 5S

(d) The Productivity Theories of Interest. For the votaries of the triad
schema and of the theory that incomes are essentially prices (times quantities)
of productive services, the natural thing to do was to interpret the yield of
capital goods — which they, like all the writers of that period, identified with
the rate of interest — as a price for the productive services of those capital
goods. 23 This again may be done in several ways, though, unfortunately, all
of them meet with this fatal objection: nothing is easier than to show that
capital goods or their services, being both requisite and scarce, will have value
and fetch prices; nor is it difficult to show that their ownership will often
yield temporary net returns; but all the more difficult is it to show that — and,
if so, why — these values and prices are normally higher than is necessary in
order to enable their owners to replace them, in other words, why there
should be a permanent net return attached to their ownership. This point
was not fully brought home to the profession at large until the publication
of Bohm-Bawerk’s history of interest theories in the first volume of his Kapital
und Kapitalzins (1884). Until that time (perhaps in some cases even now)

particular causal importance and that others depend upon it, however absurd it may
be, is ever likely to be contradicted by facts. Thus, in Book iv, ch. 4 of the Principles,
Mill discussed the tendency of profits to a minimum and the ‘counter-agencies’ such as
capital export, technological improvement, and so on in a perfectly reasonable manner
on the lines of Say. But home investment, foreign investment, and technological change
all have their effects — though in different degree and direction— on the national wage
bill. And so there was no difficulty in making that theory conform to the Ricardian
schema. All Mill had to do was to single out the wage link in the chain and to allocate
to it the role of ultimate cause: the misuse of the word ‘cause’ (or of equivalents) is
really the only exception we have a logical right to take. Yet a theory that has no other
logical fault than this may still be a rotten theory, which is good for nothing except
for lending sham support to some pet tenet of its author. For instance, what if high
rates of profit and high cost of labor go together, as they undoubtedly did in the
United States? Mill worried about this, as we know from his letters to Cairnes that have
been published by G. O’Brien (‘J. S. Mill and J. E. Cairnes,’ Economica, November
i943, pp. 279-82). Either the fact had to be challenged or else it had to be explained
away. To be sure, this can always be done: for any theory can be made to fit any
facts by means of appropriate additional assumptions. But it would have been much
more simple and straightforward to adopt another analytic schema that recognizes the
important fact that high rates of profit and high wages normally go together, without
making a difficult problem of it, the more so because such a simple schema had been
clearly outlined by A. Smith.

23 This applies to technological capital only, though the exponents of the productivity
theory of interest did not in general restrict their capital concept correspondingly. In
fact, as we know, there was a tendency to resolve the stock of technological capital
goods into the subsistence fund. But this spells a move away from what we call pure
productivity theories, i.e. theories that invoke nothing but the productive service of
plant and equipment. Since the total non-wage capital, which according to these
theories is the source of interest, is Marx’s constant capital that does not generate any
surplus at all, we may consider the pure productivity theories as the antipodes of the
exploitation theories.

656 III: FROM 1790 TO 1870

people thought (or think) that the easy proof of the proposition that capital
goods must yield a return establishes ipso facto that they must yield an in-
come to their owners. This confusion of two different things vitiates all the
pure productivity theories of interest (as Bohm-Bawerk called them), both the
primitive ones (Bohm-Bawerk 7 s na'ive productivity theories) and the more
elaborate ones (Bohm-Bawerk’s motivated productivity theories). The same
confusion vitiates also what Bohm-Bawerk called the use theories, which do
not essentially differ from the productivity theories. 24

Lauderdale, the first exponent of an explicit productivity theory, was also
the first to set the example of explicit commission of the logical error pointed
out above. But this error was veiled if not mended by his peculiar definition
of the productive role of capital, which according to him consists not in ‘as-
sisting 7 but in ‘supplanting 7 labor. The owner of capital receives what the
supplanted labor would have received ( Inquiry into the Nature and Origin
of Public Wealth, 1804, p. 165). This is interesting as a pointer toward the
relation of substitutability that exists between technological capital and labor,
and as a first step in the analysis of the true relation between wages and in-
terest. But it would solve the problem of the net yield of capital goods, as
Bohm-Bawerk was to observe, only if machines did not wear out: if they do,
Lauderdale’s theory explains why they earn their depreciation quota, but it
does not explain why they earn more — if indeed they do 25 — which is not so
certain after all.

This example suffices. We should not get more light by discussing, for
example, Malthus 7 version, which issues into the statement that ‘profits 7 are
‘a fair remuneration for that part of the production contributed by the capi-
talist 7 ( Principles , 1st ed., p. 81). The reader finds in Bohm-Bawerk’s pages
a list of writers who adhered to the productivity theory of interest throughout

24 The self-explanatory term Use Theory is not without suggestiveness. The return
on durable goods, monetary or imputed, has certainly something to do with the pre-
vailing rate of interest, and it is, in some respects, an improvement if this notion be
extended to durable consumers 7 goods. But ‘use 7 evidently reduces to ‘service. 7 The use
theory is usually associated with the name of Hermann (1832) and continued to enjoy
for a long time considerable popularity in Germany. Knies and Menger were among
its adherents.

25 Longfield and von Thiinen had indeed the great merit of introducing marginal
analysis into the productivity theory of interest and of carrying on the investigation into
the relations between interest and wages. But on the fundamental point, they are in
no better case than other productivity theorists. Longfield, however, improved his situ-
ation by calling to his aid the proposition that capital formation requires saving, hence
the willingness of savers to ‘sacrifice the present to the future 7 — that is, abstinence.
But von Thiinen, who was immeasurably superior to him in technique, did not get
beyond the formula that interest is determined by the use (or productive effect) of the
last element of capital applied.’ This must not, of course, be understood in the West-
Ricardo sense. It must be understood in the sense in which, in our own day. Professor
D. H. Robertson seems to wish to uphold it (see his article in the Economic Journal,
September 1937, one of three rejoinders to an article by Keynes entitled ‘Alternative
Theories of the Rate of Interest 7 ).

GENERAL ECONOMICS: PURE THEORY

657

the nineteenth century. They were much more numerous on the Continent
than in England. Since they made no serious effort to establish the existence
of a permanent positive yield of physical capital goods, they a fortiori never
asked the question whether this yield was interest.

Another type of interest theory will be mentioned here, though our right to
range it under the heading of productivity theories may perhaps seem doubt-
ful. It is associated with the names of James Mill and McCulloch and was,
to some extent, their joint product 26 and may be rendered by the latter’s state-
ment that 'the profits of stock are only another name for the wages of ac-
cumulated labour’: capital goods themselves are accumulated or hoarded
labor; the labor they embody simply goes on to earn wages; if wine, as de-
posited in the cellar, embodies a certain amount of labor, then, this labor or
else 'nature’ goes on working while this wine matures; payment for this ad-
ditional work is interest. The obvious interpretation is that James Mill and
McCulloch were grimly resolved to extend their master’s theory of value to
the cases, which Ricardo himself recognized as being beyond the range of
his labor-quantity law, in order to make the latter perfectly general — as Marx
tried to do by means of another construction. Critic after critic has held that
they achieved this generality by what was nothing but a verbal trick and a
very silly one to boot. 27 Also, it may be urged against this theory of interest,
that in addition to being a failure as an attempt to peg the labor-quantity
theory of value, it is exposed to the same objection that is fatal to pure pro-
ductivity theories: even if we grant that capital goods are hoarded labor and
that the ‘capitalist’ reimburses himself for the wages of this hoarded labor
from his receipts, the theory is, without an appeal to other circumstances,
powerless to show why he should get something for that imaginary labor. But
precisely this consideration, though it certainly prevents us from accepting
this theory of permanent net yield, permits us to put a slightly more favorable
construction on it, especially in the version of the unfortunate McCulloch.
That is, it permits us to see, in his version, at least a clumsy and roundabout

26 We must confine ourselves to the essential point. But there are several things of
interest in the details that we have no choice but to neglect. Among them is the role
played by Torrens (Essay on the Production of Wealth, 1821) in the discussion that
issued in the theory to be mentioned. Torrens held what we shall later describe as a
mark-up theory of interest, according to which 'profits' do not enter into what he
called the natural price of commodities. This natural price he equated to costs. Profits
enter only into a market price that therefore means something quite different from
A. Smith’s and Ricardo’s market price. In the first edition of his Elements (1821),
James Mill argued mainly against this, and betrayed hardly any sign of wishing to
adopt the theory, which he did adopt in the second edition (1824) after McCulloch's
Encyclopaedia Britannica article (Supplement, 1823) had been published. This article
contains the statement quoted in the text that he elaborated in his Principles (1825).

27 Many critics, including Cannan (op. cit. p. 206), charged in addition that the
trick was perpetrated in the service of apologetics. What a lovely justification of
'profits' — to call them wages! Ideology no doubt entered into McCulloch’s argument as
much as it did into Marx’s; and McCulloch may have wished to defend profits as
much as Marx may have wished to attack them. But this is beside the point.

658 III: FROM 1790 TO 1870

way of recognizing, from the standpoint of the labor-quantity theory of value,
the requisiteness of physical capital. His verbal trick, thus interpreted, amounts
to using ‘labor’ as a term for what is more properly called ‘productive serv-
ice’ and wages as a term for what is more properly called price of productive
service. Or, to put it differently, his trick amounts to recognizing that hoarded
labor is a peculiar kind of labor that may render services that are also of a
peculiar kind as compared with the services of ‘live’ or ‘liquid’ labor. This is
why — certainly not in the intention to defend it — I have subsumed this theory
with the pure productivity theories: it is the pure productivity theory of the
labor-quantity men.

The pure productivity theories have an easy explanation to offer for the
secular fall of the rate of interest. They need only postulate that technolog-
ical capital increases more rapidly than does the population available for in-
dustrial employment, and a fall of its yield per unit — not necessarily its rela-
tive, let alone, absolute share — would in general follow ceteris paribus. Since
these cetera include a given technological horizon (production function), the
reader may think that this explanation is not much good. Certainly it is not.
Yet there is an advantage in this: whenever correctly formulated , 28 this ex-
planation should have brought out automatically the most important qualifi-
cations that are inherent in any proposition about the secular behavior of the
rate of pure interest and, in doing so, should have raised doubt about the
validity of the ‘law’ of secular fall.

A. Smith had no productivity theory of ‘profit.’ But all the same he offered
an explanation of what he, like everybody else, took to be the indubitable
tendency of interest to fall that most naturally follows from a productivity
theory, namely, that the rate of profits tends to fall as increasing capitals
enter into competition with one another. From the standpoint of West and
Ricardo, this was bound to appear as a logical error, for the relative values
from which they derived the rate of interest could not possibly be affected
by an increase per se of the quantities of goods that form capital . 29

28 It can be formulated in different ways. Longfield, e.g., made, ‘profits' fall because
the most profitable investment opportunities are operated first so that, as time goes on,
only less and less profitable ones remain available. This meets with the objection that
investment opportunity is incessantly widened by technological progress and that there
is no reason why opportunities that turn up later should be less profitable than those
that turned up before (see last but one sentence in the text). Longfield’s, formulation is
simply a consequence of his marginal-productivity theory of interest: the rate of profit,
which ‘is equal to the assistance which is given to labour by that portion of capital
which is employed with the least efficiency, which I shall call the last portion of capital
brought into operation’ (Lectures on Political Economy , p. 194), will in general de-
crease when capital increases more than does labor, but this decrease must be distin-
guished from the secular decrease to be explained, of which the former is only a
component.

29 Sir Edward West’s ingenious argument to that effect merits perusal. It affords an
excellent instance of the way in which a theoretical structure, once accepted, may hide
from the analyst the most obvious truths. This argument is mainly responsible for
Ricardo’s view that no increase in capital, unless accompanied by an increase in- (the

GENERAL ECONOMICS: PURE THEORY 659

(e) The Abstinence Theory of Interest. So long as physical capital is recog-
nized as a requisite of production or even of exploitation only , it must be a
service, within the meaning this term carries in economic analysis, to provide
it, though, if we do accept the exploitation theory, this service is rendered
only to the exploiter and not to society at large. Instead of emphasizing the
productive or exploitative service of capital itself, we may therefore just as
well emphasize the service of providing it. And so long as we keep to tne
Smithian theory that capital goods are the result of saving — as J. S. Mill put it
— we may further say that any net yield of these capital goods is in the na-
ture of a payment for the service rendered by saving either to the producing
organism or to the exploiter alone. If we do say this, we are adopting the
Scrope-Senior Abstinence Theory of Interest. I have introduced the subject
in this way to bring into relief the following historically important facts.

First, it will be seen that there is no essential difference, let alone incom-
patibility, between the productivity and the abstinence theories. Senior, wit-
ness his Third Postulate (see above, subsec. 5c) was evidently aware of this.
But he did not clearly explain — this was to be done later by A. Marshall and
T. N. Carver — precisely what it is that the abstinence theory adds to the
productivity theory and what its relation is to the latter. This something is
the brake that will prevent the process of creating additional capital goods
right up to the limit at which their net yield would fall to zero. 30 But be-
cause he failed to make this sufficiently clear, both adherents (such as J. S.
Mill, who was content with the formula that interest is the price of saving)
and opponents (Bohm-Bawerk in particular) consider it in the light of an ex-
planation of the interest phenomenon that is alternative to the productivity
explanation and has to stand on the element of sacrifice alone, which is or
may be associated with saving.

Second, it will be seen that attacks upon the abstinence theory should
not be directed against its logic. For instance, Bohm-Bawerk’ s attack was
based upon a charge of double counting. The saver who lends chooses between
the fund he is to give away 31 and the stream of returns he is to receive. There
is no room for counting in addition any sacrifice he may be making. Even

Ricardian value of) wages, can ever decrease the rate of profit or cause any hitches in
the economic process.

30 As perhaps some readers know, I am not an exponent of the abstinence theory
myself. I am merely trying to expound its rationale, as it appears from the standpoint
of abstinence theorists, in a manner which I hope will make the reader understand its
emergence as well as the fact that it proved so hardy a plant.

31 Even if lent for short periods only and periodically reinvested, the fund is normally
withdrawn from the saver’s consumption for good. There is normally no question of
putting off the enjoyment of the fund: normally this enjoyment is surrendered defini-
tively in consideration of the quite different enjoyments expected from the flow of tKe
interest payments. This is why the term Abstinence should be retained and why the
term Waiting should not, indeed, be discarded but reserved for a different phenomenon
or, at least, for a different aspect of the same phenomenon, which it is worth while to
distinguish from the one denoted by abstinence as has been explained above.

660 III: FROM 1790 TO 1870

granting that there would be something in this argument if the phrase ‘com-
pensation for sacrifice' exhausted the contents of the abstinence theory , 32 this
would not imply that this theory is inconsistent when properly developed and
put into its proper setting. There is no paradox at all in holding that a theory
is logically unimpeachable and at the same time that it is wrong or at least
inadequate. For a cause that may be invoked without logical error for the
purpose of explaining a phenomenon need not be the one that actually pro-
duces this phenomenon.

Third, in addition to its sound logic, it was its common-sense appeal, which
recommended the abstinence theory to a long line of authorities, mainly Eng-
lish, headed by J. S. Mill. He handed to Marshall ready-made the doctrine
of the two factors of ‘real cost’ — the disutility (irksomeness) experienced by the
laborer and abstinence experienced by the saver . 33 But we have little choice
but to attribute a less explicit form of the same doctrine to both A. Smith
and Ricardo. However ready the former was to offer pointers toward an ex-
ploitation theory, parsimony is what remains if we look in the Wealth of
Nations for an attempt at a real explanation of pure interest. And however
lightly the latter took the problem, the observation that turnover periods of
different lengths cannot coexist unless there is a rate of interest to equalize
the yields of capitals that turn over in periods of different length, points clearly
toward recognition of an element of abstinence or rather of ‘waiting.’ This
interpretation is, on the one hand, reinforced by Ricardo’s turn of phrase that
interest is a ‘just compensation ’ 34 for this waiting; but it is, on the other
hand, weakened by Ricardo’s refusal to adopt the explanation of the falling
rate of interest which would logically follow from it.

Fourth, with competent economists the case for the abstinence theory was
only strengthened by the weakness, both logical and factual, of the attacks
upon it, which contrasted so strangely with their vehemence. Here was a
piece of apologetics which sent socialists ranting. In their wrath they entirely
neglected to work out serious arguments against it, which are indeed not lack-
ing, but instead resorted to insipid gibes about the millionaires who are be-
ing paid for their abstemiousness (Lassalle) or about the capitalists who are
being paid for abstaining from devouring manure (Marx). Even the ‘classics’
had enough inkling of marginal analysis to remain unimpressed by the former
and it would hardly have occurred to them to take the trouble of rebutting
the latter.

32 The chief difficulty in admitting this is that Jevons and Bohm-Bawerk in intro-
ducing their ‘psychological discount of future satisfactions’ went pretty far toward
offering a substitute for abstinence. Bohm-Bawerk’s argument against the latter was,
however, reinforced by Irving Fisher ( Theory of Interest , 1930, ch. 20, J 7, especially
pp. 486-7, and appendix thereto), who made an effective case against considering wait-
ing or abstinence as independent items of real cost.

33 I have difficulty in understanding how Caimes could have claimed this merit for
himself. But he did.

34 This phrase can, of course, be easily divested of the value judgment it conveys,
and then reads simply: price of waiting.

GENERAL ECONOMICS: PURE THEORY

66l

However, since Marx’s ineptitude was repeated not long ago by an eminent
economist of our time, and also because many economists of that epoch have
in fact used phrases that lend themselves to misinterpretation (see, e.g., Marx’s
quotation from de Molinari and Courcelle-Seneuil in Das Kapital, vol. i, eh.
24, sec. 3), explanation may be indicated. The capitalist, as we have said
above, exchanges a fund against a flow. The ‘abstinence’ for which, according .
to the theory under discussion, he is being paid enters info the accumulation
of the fund. There is no additional payment for refraining from consuming
it even in the cases in which this would be physically possible. But since he
receives his compensation in the form of a flow of payments, it may seem
as if he were being paid over and over again for abstaining from ‘devouring’
the capital goods that are emerging and being used up in the course of the
employment of his capital. This impression is strengthened by the fact that
the promised or, in the case of the employment of capital by its owner, the
expected compensation must be actually delivered, in the normal case, if
people are to enter into such bargains at all. If the lender or employing owner
of the capital be disappointed in this expectation, he will indeed try to recover
his loan or to go out of business — which then looks as if he had to be paid
again and again in order to leave his capital where it is. But the sophomore
who is unable to interpret these facts correctly or, let us add, to understand
w^at these authors meant when they spoke of capitalists who ‘lend their in-
struments of production to laborers,’ must indeed be a very unpromising
sophomore. This sort of thing in part accounts for, and to some extent^ excuses,
the inability of many good economists to see the deeper things in Marx: they
see at first sight so many pieces of nonsense that they cannot get themselves
to believe that the man responsible for them could occasionally rise far above
the level of his judges.

But the student who is prepared to salute Marx at his best will inevitably
ask himself: how is it possible for a man to fall to a level so low as that of
Section 3 — a man who was capable of rising to heights that are trodden by
few and who, occasionally, proved himself an extremely competent analyst
also in many minor matters? The needs of the agitator will not suffice by
themselves to account for this, especially as most of the rhetoric could have
been wound around a sounder support. Hence the suspicion suggests itself
that this rhetoric covers something. And it is in fact not difficult to see what
it is: it is the presence in the logic of his structure both of the element of
abstinence in the strict sense and of the element of waiting. We have al-
ready seen that Marx’s theory belongs to the family we have called Advance
f Economics and this implies the recognition of a distinct element — no matter

1 whether you call it a distinct service or a distinct crime — in the economic

process which may be the vehicle of exploitation but in itself is not exploita-
tion. We have also seen that the dangerous iceberg of abstinence may be seen
i’' in uncomfortable proximity to his argument on accumulation, which may just

#?• as well be called an argument on saving. 35 We now add that waiting is no

f| 35 Compare the famous, if slightly vulgar, passage that also occurs in the unfortunate

sec. 3 of ch. 24: ‘Accumulate, accumulate! That is Moses and the prophets . . . save,

662

III: FROM 1790 TO 1870

more absent from Marx’s structure than is abstinence in the strict sense. This
may be shown in the following way. Marx’s constant capital merely transmits
its value to the products without adding anything beyond its own value. But,
being itself the product of exploited labor, it embodies not only the value of
the wage goods consumed by the labor that produced it but in addition sur-
plus value at the prevailing rate. Now, there should be no difficulty in adding
this surplus value that is embodied in constant capital to the surplus value
that results from the employment of the labor in producing the final product
with the help of constant capital. If this could be done, there would be no
reason why actual prices should not be proportional to the total labor em-
bodied in them, that is, the labor embodied in the constant capital plus the
labor added until the final product emerges, and there would be no problem
of turning values into prices. Nevertheless, Marx did not do this but preferred
to struggle through hundreds of pages with this very problem. Why? Ob-
viously because he thought that time distance was not a matter of indiffer-
ence. But this amounts to recognizing — though not to admitting- — that wait-
ing is after all an element of Marx’s structure (value theory), which is what we
wished to show.

The abstinence theory of interest is in a particularly favorable position for
dealing with any secular decline of the rate of interest. If we look upon
abstinence as one of several requisites of production, we have no difficulty at
all in stating the conditions under which its relative increase will produce that
phenomenon. Tools that were unknown to the period under survey are neces-
sary to do this satisfactorily. But the main propositions could have been de-
rived, semi-intuitively as it were, even on the level of that period’s technique.
It is but an additional advantage that the historical interpretation and, espe-
cially, any prediction of a falling interest rate would follow from this analysis
only conditionally and not absolutely. Of course, the same conditions that
will cause a fall in the relative price of abstinence will (in general) cause a
rise in the relative price of labor. Thus, there is no paradox in saying that
J. S. Mill should in good logic have adopted this explanation of the 'tendency
of profit to a minimum’ or even that he actually did adopt it (Book rv, ch. 3,
^ 2) but that he easily reconciled it with his lingering Ricardianism, though
the 'effective desire of accumulation’ which he analyzed so carefully has much
more title to being considered as a 'cause’ than has the rise in wages.

(f) The Wage-Fund Doctrine , Precursor of Modern Aggregative Analysis.
Our report on the wage analysis of the period is presented under this heading
because everything else, that pertains to the subject has been noticed already
on various turns of our way. 36 In particular, we know that A. Smith — under
the influence of natural-law philosophy — gave a lead toward a residual theory

save, i.e., reconvert the greatest possible portion ..of surplus-value . . . into capital!’
We need not trouble either Moses or the prophets in order to see that capitalists
'abstain’ with Marx quite as much as they do with Senior.

* 36 Among other things, I have adverted to the misunderstandings that were caused

by the special meanings which the phrases 'rising’ .and 'falling’ wages carry within
Ricardo’s theory of value.

GENERAL ECONOMICS: PURE THEORY

663

of wages: laborers produce the whole produce; the wage problem is to show
why they do not get the whole produce but have to submit to certain "deduc-
tions’; hence the wage problem is automatically solved as soon as these deduc-
tions have found their explanations. But even for A. Smith himself, and also
for James Mill, Sismondi, and Marx, who went further in the direction of
Smith’s lead than did any other leading economist, analysis of the upper and
lower limits of what "can’ or "must’ go to labor is so much more important
for their treatment of wage problems than is their general philosophy that it is
more instructive to deal with them without further reference to the latter.
This agrees with what I believe to be the common opinion of a majority of
historians. But I cannot agree with the classification of wage theories, which
many of them have adopted, into minimum-of-existence theories, supply and
demand theories, and productivity theories. For these are not distinct, let
alone incompatible, explanations of wage incomes.

The first is no theory of wages at all but simply a theorem on the long-run
equilibrium level of wages . 37 The supply and demand apparatus is necessary
for any wage theory whatsoever and does not identify any particular one . 35
Ricardians (including Marx) failed indeed to recognize this, in the case of
wages as in all other cases, for the determination of long-run normals, but
even they allowed wages like other prices to be determined by supply and
demand in a short run. But with wages, this meant something very different
from what it meant with other prices. For if the long-run normal be made
dependent upon adjustments of the population, the short run extends over at
least fifteen years . 39 For short runs of this and even greater length — indeed
for spells of "indefinite’ length — the Ricardians relied on the particular form
that the supply and demand apparatus takes in the wage-fund doctrine. But
in a different (the normal) form, the supply and demand apparatus was also
used, for long-run and short-run problems, by all the other leaders. Say and
Malthus in particular. Here the demand for labor may be represented by a

37 On the concept of average rate of wages and the objection that has been raised
.against it, see below, this subsection. As regards the difference between a theory of
wages in the sense of fundamental analysis of the phenomenon and an equilibrium
theorem about it, note the analogies with the so-called quantity theory of money and
with Ricardo’s law of value.

38 There was indeed some opposition to applying the supply and demand apparatus
to labor on the ground *that it involved treating human beings like commodities — on
the Continent, especially, the English ‘classics’ were sometimes indicted for this outrage
to human dignity. Nothing of the sort is, of course, involved in this application of the
concepts of supply and demand. It should be observed, however, that there was occa-
sionally more in this than a rather cheap emotionalism: the ‘commodity labor’ does
present peculiarities that are relevant even for the most matter-of-fact analysis.

39 This was pointed out by Barton (see below, subsec. h). Since an increase in real
(in our sense) per capita wage incomes does not increase the birth rate immediately;
since it takes a prolonged spell of high per capita wage income to produce a quantita-
tively significant effect; and, finally, since during so long a time new standards of life
develop, the case for the ‘classic’ long-run theory of wages is really much worse than
indicated in the text.

664 in: FROM 1790 TO 1870

schedule that simply describes the quantity of labor taken by employers at
varying wage rates. Say's notion of demand for and supply of services of labor
implies this. But a demand schedule of this kind was made explicit and was
actually drawn by Fleeming Jenkin. 40 And such a demand schedule, in turn,
implies an embryonic marginal productivity theory. The latter, though worked
out by Longfield and von Thiinen within the period, remained in abeyance,
however, so far as the profession at large is concerned. Hence no more need
be said about these beginnings of later wage analysis except that the element
of productivity, also, must enter into any complete wage theory (in some shape
or other) and therefore should not, per se, be identified with any partic-
ular one.

We have, then, this situation before us: in some form, practically all the
economists of the period attacked the wage problem by means of a more or
less well-understood supply and demand analysis. 41 The element of productiv-
ity, not adequately worked out by those who got a hearing, is visible in the
picture but only dimly. The foreground is dominated by two particular results
that may be derived from a supply and demand analysis on the insertion of
certain additional factual hypotheses ('restrictions'): the minimum-of-existence
theorem as regards longest-run normals and the wage-fund doctrine as regards
shorter-run deviations.

The minimum-of-existence theorem, as we know, was an essential part of
the teaching of Quesnay and of Turgot. It was, as we also know, handled
with care by A. Smith — with so much care in fact that there was not a great
deal left of it. Malthus' Essay in its original form put, however, a different
face upon the matter, though in the later editions of the Essay and in the
Principles we find qualifications that should have produced, but did not pro-
duce, recantation. But for Ricardo a strict formulation of the tendency of
wages toward 'that price which is necessary to enable the labourers ... to
subsist and to perpetuate their race, without either increase or diminution'
(Principles, ch. 5), enforced by an equally strict acceptance of Malthus' law
of population, is really required or else the long-run level of wages becomes
indeterminate. The quotation shows that, at least by 1817, 42 Ricardo was'

40 Fleeming Jenkin's papers on ‘Trade Unions' and ‘The Graphic Representation of
the Laws of Supply and Demand and their Application to Labour' appeared in 1868
and 1870, London School Reprint, 1931. His demand function (x being price, D the

quantity bought at that price, and A a constant, takes the form: D = f ( A 4-^).

41 This also holds for Marx, for the proposition that wages tend to equal the value
of labor power, which in turn is identical with the labor embodied in it, implies the
play of supply and demand. Of course, Marx’s theory of wages does not consist in this
proposition only. On the contrary, it forms an extremely complex whole which covers
practically all the aspects of the wage phenomenon and includes careful investigations
into the deviation of wages from the level determined by the ‘value’ of labor, especially
into the cyclical deviations. This whole must be pieced together from many parts of
his writings and cannot be reconstructed here.

42 There is nothing to correspond to the sentence quoted in the Essay on the
Influence of a Low Price of Com on the Profits of Stock (1815).

GENERAL ECONOMICS: PURE THEORY

665

aware of this, but the subsequent argument of his chapter on wages also shows
that he knew the necessary theorem to be untenable. Following Torrens , 43
he substituted for the 'physical minimum’ what it became usual, later on, to
call the 'social minimum of existence,’ which in Torrens’ words means 'such
a quantity of the necessaries and comforts of life, as, from the nature of the
climate and the habits of the country, are necessary to support the la-
bourer. . .’ A little reflection will show that this amounts to accepting cus-
tomary wages as an institutional datum. This is always possible: anything can
be labeled as a datum, which simply means that we give up the hunt for
a purely economic explanation of whatever it is we so describe . 44 And it seems
more realistic to look upon the 'classic' long-run wage 'theory’ in this light
rather than in the light of the physical-minimum theorem, which they dis-
avowed themselves and which is of little importance anyhow, owing to the
fact that in the matter of wages a huge 'short run’ practically replaced the
long run.

As stated, the supply and demand apparatus actually used by the English
‘classics’ for the treatment of wage problems was of a peculiar kind, tradition-
ally described as the wage-fund doctrine . 45 For the sake of simplicity, we shall
neglect the supply of and the demand for labor that play in the income sphere
— the supply of and demand for directly consumed services of servants, teach-
ers, and so on — and confine ourselves to the supply of and demand for indus-
trial labor (this, of course, in the widest sense: all labor from the employment
of which 'profit is expected’ as A. Smith put it) as if there were no other em-
ployments. Further, we follow 'classic’ practice in assuming that, at any given
point of time, there is always the given supply of labor represented by a
given number of laborers: there is no shifting between laborers and self-
employed, no variation in the age at which laborers enter or leave the labor
market, no change in hours per day or week, and, except for a qualification
to be inserted later, no reserve price below which laborers refuse to accept
employment. Without doubt, these simplifications, even though not always
strictly adhered to, helped to discredit the wage-fund doctrine. But all that
matters to us is that they are not more than simplifications that could be
dropped without great difficulty. We then have not a supply schedule of
labor, but only a given quantity supplied and, so we have assumed, supplied
unconditionally for a 'short run’ of at least fifteen years. Demand is repre-
sented in the wage-fund theory in a somewhat unusual manner, namely, by in-

43 Essay on the External Com Trade . . . (1815; pp. 58-63).

44 There are limitations to this, of course: if we have an economically determined
system and then decide to make a datum of some of its variables, we must drop an
equal number of equilibrium conditions or else the system becomes overdetermined.

45 Note, however, (1) that, as we have seen in our discussion of Say’s law, the supply
and demand apparatus does not admit of unqualified application to a commodity as
important as labor, whose variations in price influence all social aggregates; and (2)
that the wage-fund doctrine may be considered as a clumsy attempt to take account
of this.

666

III: FROM 1790 TO 1870

dicating a ‘sum in real terms’ 46 — wage goods, means of subsistence, variable
capital 47 — that capitalists have decided to spend on labor. This ‘demand,’
also, is no schedule, at any given moment, but a given quantity . And again —
as with workers on the supply side who have no reserve price below which
they refuse to go — there is no price of labor beyond which ‘capitalists’ will
refuse to go: having decided what to reserve for their own consumption, they
cannot, given this decision , spend more than that sum (the wage fund); and,
never allowing capital to be idle, they (normally) will not spend less . 48

Since the quantity of labor supplied is given at each moment, since the
‘sum’ to be spent on it is also given — from considerations that are, as it were,
behind the scene — at each moment, and since in equilibrium the quantity of
labor demanded must be equal to quantity of labor supplied, we have an
equation that will uniquely determine a magnitude that is called the average
wage rate . 49 If actual wages are fixed above this rate, there is unemployment;
if below it, unsatisfied demand for labor. We shall refer to this as the short-
run wage-fund theory. But nobody held, of course, that the supply of labor
and the wage fund were actually given constants. On the contrary, proposi-
tions about their variation over time were not only a part, but the most im-
portant part, of the doctrine. The factor that governed the labor supply was
either the Malthusian law or else simply the ‘habits’ of the working class. The
factor that governed the variation of the wage fund, hence of demand, was

46 This may be understood either in our own sense, namely in the sense of a
monetary magnitude corrected by a cost of living index, or in the Ricardian sense of
labor embodied in the wage goods. The ‘classics’ meant sometimes the one and some-
times the other. This has given rise to misunderstandings. Stuart Wood (‘A Critique
of Wages Theories/ Annals of the American Academy of Political and Social Science,
1890) accused the ‘classics’ of having held that ‘no assiduity on the part of the laborers,
no improvement in production could raise wages/ i.e. increase the wage fund. Some-
times they did hold this (except that improvements in the production of wage goods
will raise profits, hence increase savings and in consequence also the wage fund) but
only in the Ricardian sense and not in any sense in which it would be wrong to do so.

47 Always keep in mind that Marx’s variable capital is exactly the same as the ‘bour-
geois’ wage fund.

48 Observe: this is an equilibrium proposition, for ‘capitalists’ could spend more or
less; only if they did they would not be satisfied with the result, hence not be in
equilibrium. But it is easy to understand that, with the ‘classics’ ’ sloppiness of both
thought and exposition, this did not stand out as it should have, even to themselves,
let alone to opponents. Note the analogy of this situation with the situation of the
quantity theory of money, the more imperfect formulations of which also read as if it
were assumed that people must spend, on consumers’ goods or investment, every penny
they get hold of.

49 The ‘classics’ were not blind to the problems involved in speaking of an average
wage rate; witness their concern with the differences of wage rates in different employ-
ments. Nevertheless, in fundamental wage theory they used the concept of average
wage rate quite uncritically. In order not to increase our difficulties, we shall do the
same, assuming that there is one kind and quality of labor only, equally remunerated in
all occupations. It is important to note in defense of this ‘classic’ practice that it does
not involve anything that could be called an error.

GENERAL ECONOMICS: PURE THEORY

667

saving. Therefore, given the productive efficiency of the economic process, the
course over time of real wage rates (in our sense) and of the per capita real
income of the working class depends upon the latter’s rate of propagation
and upon the community’s rate of saving . 50 We shall refer to this as the
long-run wage-fund theory.

We may now combine the argument above with what we have found out
in previous sections about the notion of the wage fund. In doing so we shall
add or recall the necessary minimum of historical references. The basis of the
wage-fund doctrine is the proposition that (industrial) wages aTe "advanced’
from capital. This fundamental proposition goes far back, at least to Cantillon
and Quesnay. He who accepts it cannot oppose the wage-fund doctrine, root
and branch, however much fault he may find with details, simplifications, or
applications. For the long-run wage-fund theory it is equally important that
these advances should depend upon saving as their source: this point was
driven home by Turgot and A. Smith . 51 We still 'naturally credit Malthus
with contributing to the long-run wage-fund theory "his’ law of population,
but it is only haziness about what this theory really says that has induced
some historians to list him as a wage-fund theorist in any other respect . 52

50 The short-run wage-fund theory, so we have seen, is really no supply and demand
theory at all in the usual sense in which this means operating with supply and demand
schedules. But the long-run analysis above might be couched in terms of such schedules.
I shall only indicate how this could be done: labor supply, by virtue of the Malthusian
law, could be represented as a function of real (in our sense) wage rates; the problem
is to represent the quantities of labor that ‘capitalists’ demand, also as a function of
real wage rates. Since, at any moment, these wage rates depend on the size of the-
wage fund, since this wage fund’s variations are governed by the rate of saving, since,,
given everybody’s propensity to save (Mill’s ‘effectual desire of accumulation’), savings
depend (mainly) on ‘capitalists’ ’ incomes, hence on ‘profits’; and since according to
Ricardo, profits depend upon wages . . . and so on. Not that I think much of this
construction. But it has two virtues. First, it brings out an aspect of the wage-fund
theory — the dependence of future wages on present profits — which is as important as
it is apt to be unpopular and which was no doubt very much in the minds of the wage-
fund theorists. Second, it clears up a matter that might bother the careful student.
The wage-fund theory has sometimes been rendered by saying that, according to it, the
elasticity of expenditure on labor with respect to wage rates is zero (elasticity of demand
for labor equal to one). This statement is not felicitous. In the long run it is not true,
and in the short run it is misleading.

51 A. Smith was the first, I think, to speak of ‘funds destined for the maintenance
of labour.’ This phrase was copied by many sponsors of the wage-fund doctrine and
gave much offense to its opponents, since it seems to beg the question. J. S. Mill’s
recantation (described below) issued in the statement that there is no such fund that
is ‘destined’ once for all for the maintenance of labor. But if the objection was that
the ‘classics’ simply postulated the existence of this fund without investigating how it
was determined, then there was no point to the objection. For funds are, in the
‘classic’ theory, ‘destined’ for the maintenance of productive labor by the decision of
the saver and thus are determined if annual savings are.

52 Thus, Malthus’ statement in the Essay on Population, that a poor man, if he
receive an additional sum of money, while total output of the country remains the

668 hi: from 1790 to 1870

Ricardo, in his chapter on wages, emphasized strongly enough that it is in-
crease in capital that carries the market rate of wages above the natural rate
'for an indefinite period/ In as much as in this chapter he defined capital
so as to include 'food, clothing, raw materials, etc/ he may be credited with
having introduced another element that is, according to our interpretation,
characteristic of both the short-run and the long-run wage-fund doctrine,
namely, the assumption that we can treat the ratio between wage and non-
wage capital as constant on the understanding that its variation is to be
treated apart. 53

Thus, though adding edge here and there, he did not in this respect really
go beyond A. Smith. But he did something else. He infected his followers
with the Ricardian Vice, that is, with the habit of establishing simple rela-
tions between aggregates that then acquire a spurious halo of causal impor-
tance, whereas all the really important (and, unfortunately, complicated) things
are being bundled away in or behind these aggregates. Thus, James Mill de-
clared, as Mrs. Marcet had done before both him and Ricardo: 'Universally,
then, we may affirm, other things remaining the same, that if the ratio which
capital and population bear to one another remains the same, wages will re-
main the same’ ( Elements , ch. 2, § 2). 54 Had somebody objected that the
quantity of labor demanded, hence the wage, may obviously vary even if the
sum available for paying wages remain constant — or something of the kind —
he would have replied: 'Oh yes, but we have settled all that behind the
scenes just as we have determined that sum previously. As we have shaped
our model, there are no other Proximate Causes of the wage rate but that
ratio. Everything else acts through them only. For instance, fertility of the
soil has nothing to do with the real wages at which labor can be employed.
Of course, it affords the means of rapidly accumulating capital and this will

same, cannot acquire a larger share in this output without diminishing the share of
others, has been held to imply the wage-fund doctrine! That, from first to last, he
used the Smithian phrase — funds specifically destined for the maintenance of labor — -
evidently proves nothing.

53 Of course, we may also interpret him to the effect that he resolved all advances
into advances to labor or, which is the same thing, that he resolved the whole of
capital into wage capital. J. S. Mill ( Principles , Book 11, ch. 15, jj 6) elaborated this
explicitly. According to this interpretation, Ricardo would be still more definitely a
forerunner of Jevons, Bohm-Bawerk, Taussig, and Wicksell than he is according to our
own. But I feel unable to reconcile this with the text of his chapter on wages. In any
case, we should have to say — and this is in fact an acceptable compromise — that the
larger conception involved in a resolution of non-wage capital into wage capital, while
present at the back of his mind, did not influence his analysis of wages but that, even
so, Bohm-Bawerk’ s aversion to having the 'classic' wage-fund theory confused with his
own was justified. That Ricardo never co-ordinated the capital theory of his first
chapter, Section 4, with the wage-fund theory of his chapter on wages is abundantly
clear from the fact that neither he nor his followers ever referred their wage fund to a
variable period of time.

54 And this though he had defined capital so as to exclude the 'subsistence, or con-
sumption of the labourer/

GENERAL ECONOMICS: PURE THEORY

66 9

of course raise wages in the future. But, formally, this does not constitute
any objection to my theory — going a step further and keeping population' con-
stant, we even can say that wages depend upon capital . 7

McCulloch then established himself as the leading exponent of the wage-
fund doctrine . 55 But he added nothing. Torrens 56 did add something, though
this should have been obvious from the first, namely, that the wage-fund
theories offer no reason for denying that a combination of the whole working
force can raise wages so as to swallow up not only profits but also deprecia-
tion allowances . 57 J. S. Mill’s case is quite different. By emphasizing the se-
quence-analysis aspect of the wage-fund doctrine, he in fact made a point
for it and, considering the general level of his technique, there is little to
object to in his use of this aggregate that stands, as a sort of intermediate
datum, for processes that his technique did not enable him to analyze more
satisfactorily. For we must never forget: not only was the wage-fund doctrine,
properly stated, not ‘wrong 7 logically; not only did it emphasize, though too
narrowly, certain important aspects of the wage problem; but, in addition
to this, it was an analytic tool that, within the analytic structure of its time,
was distinctly useful, and there is no sense in criticizing it in abstracto, that is,
without reference to the general-value theory of its time. Nor was there any
need for fighting it except in one way: by proffering better tools and letting
this one peacefully rust away.

All the more surprising must seem J. S. Mill’s ‘recantation . 7 He paid no at-
tention to the attacks, if he knew of them, by Jones and Longe . 58 But in re-
sponse to the elaborate restatement of the latter’s arguments by William
Thornton, he wrote a review article that did not indeed spell complete sur-
render 59 and, in particular, did not induce him to change any of those pas-

55 His first statement of it, never substantially altered, occurs in his Encyclopaedia
Britannica article 'Political Economy 7 (1823), his second in the Principles (1825). His
Essay on . . . Wages was published in 1826, and an enlarged edition under the title of
Treatise on Wages in 1854.

56 On Wages and Combinations (1834). I do not stay to notice Senior’s insignificant
contribution.

57 Observe, however, that James Mill could have replied: 'Oh no. It is. not the
combination that effects this but the temporary increase it enforces in the funds
destined for the maintenance of labor: it is only by influencing these that the com-
bination has any effect at all. 7 It is perhaps unnecessary to point to modern argument
of the same nature.

58 Richard Jones ( Literary Remains, publ. 1859) accepted the wage-fund doctrine
fully for wages that are being paid out by modern business, but he denied, even then,
that this was the only important case. This ‘historical 7 objection received little credit
at the time but all the more later on when opposition to the English ‘classics’ came to
be in itself a title to praise. F. D. Longe, A Refutation of the Wage-Fund Theory . . .
(1866; reprint in Professor Hollander's series, 1904). Other contemporaneous attacks do
not present any additional points of interest.

69 William T. Thornton, On Labour , . . (1869). The word Restatement is to
denote a fact but is not to insinuate a charge of plagiarism, though Longe did complain
that neither Thornton nor Mill mentioned him — inferring (the optimist!) from his

670 III: FROM 1790 TO 1870

sages — for example, the Fourth Proposition on Capital — that ought to go out
if the wage fund does. But it surrendered a phrase, which was all the public
took in. The Longe-Thornton argument, as accepted by J. S. Mill, did not
amount to more 60 than denying that there exists any definite quantity of wage
goods 61 that 'must’ under any circumstances go to labor. If, after all that
has been explained above, we are not to dismiss this argument as a childish
misunderstanding — which is how it appeared to Cairnes 62 — we must interpret
it to mean that there is little point in inserting aggregate wages as a ‘proxi-
mate cause' that, as such, plays a role of its own. But if that was all, why
all the fuss about this point of theoretical detail and all the excitement about
Mill’s alleged recantation?

Well, it was not all so far as the public — even the professional public —
was concerned. A thing had happened that happens so frequently in our field.
The public had caught hold of the surface meaning of a word and this was all
it was interested in. Fund — how definite that sounds! Labor must get it and
cannot ever get more! Popular writers, if of a certain color, made this mean
that raising wages is ‘scientifically impossible.’ Popular writers, if of another
color, foamed with indignation at so vile an attempt to thwart labor’s hopes.
How absurd all this was should be obvious . 63 No less obvious should it be

having sent his pamphlet to Mill that the latter had read it. Moreover, though Longe
anticipated the substance of Thornton’s criticism of the wage-fund theory, the latter’s
book contained several points that were new. Outstanding among them is his emphasis
on expected consumers’ demand as the true guide of the producers. In view of the
importance the element of expectations has gained of late, Thornton’s book must be
allocated a place in the history of analysis that is quite independent of the particular
wage-fund issue. J. S. Mill’s review article appeared in the Fortnightly Review, May
1869, and was, besides being a remarkable display of good feeling in the face of what
other men would have taken as a provocation, a gentle correction of superficial mis-
understandings rather than a retraction.

* 60 Longe and Thornton brought forth also other criticisms than the one we are
going to notice. They criticized, e.g., the concept of an average rate of wages and the
way in which the wage-fund theory handled the supply and demand apparatus. There
is something in these other criticisms but they could all be met without giving up the
theory itself and do not go to the bottom of the issue.

61 Both Longe and Thornton blur the issue — and incidentally betray inadequate
grasp of the 'classic’ analysis — by speaking of 'money’ without making sure that this
money stands for physical goods. This is even more true of H. D. Macleod’s argument
in Elements of Political Economy (1858; 3rd ed.. Elements of Economics, 2 vols.,
1881-6).

62 Cairnes, Leading Principles, Part n, ch. 1, especially pp. 214 et seq. But (p. 186)
he interpreted the wage fund in a way that left little to defend. This does not apply,
however, to his views on Thornton’s attack upon Supply and Demand.

63 But let me repeat: first, that the wage-fund theory implies nothing of the sort;
second, that, if it did imply it, it would still be irrelevant to 99 per cent of all wage
struggles, in which claims to higher wages are rationalized by arguments that have
nothing to do with any equilibrium rate of wages, but contend that, for reasons such
as friction or weak bargaining power, workers do not get these equilibrium wages.

GENERAL ECONOMICS: PURE THEORY 67 1

that the 'practical' diagnosis behind most of the wage-fund theorizing, even
if coarsened for the benefit of the public, is not more than common sense:
it makes (real) wage rates and (real) wage income dependent - upon the effi-
ciency of the productive process, 'habits' (high or low customary standard Of
living and, in connection with this, rate of propagation), free trade in food
and other necessaries, and the rate of saving — all of which was no doubt tail-
ored to the prevailing English situation but on the whole quite reasonable. 64
If the importance of changes in money wage rates was discounted — as it is
being discounted in Keynesian economics — this was but an additional merit
And so were such warnings as may be found in it against irresponsible 'wage
policies.’ J. S. Mill did not renounce any warnings he had uttered himself.
Still there it was — the first English economist of the age had disavowed the
hateful scarecrow.

But that emotionalism and the not less absurd belief that 'theories' guide
policy 65 lent zest and glamour to what on its merits should have been a dry-
as-dust discussion on a technical point. This had its repercussions on scientific
literature. In England and the United States, killing the wage-fund 'theory'
became a favorite sport: the names of F. A. Walker and H. Sidgwick suffice to
illustrate this. On the Continent, especially in Germany, Hermann’s opinion —
quite all right in itself, but a mistake if framed as an objection — prevailed on
the whole: though Rau’s textbook (in its 8th ed., 1868) upheld the wage-
fund doctrine as it did other heirlooms, Roscher (1854) followed Hermann
as did Roesler in his fairly influential history of wage theories and L.
Brentano. 66

(g) Rent. Whereas the so-called wage theories that were then current did
not invoke different explanatory principles but were nothing but more or less
valuable parts of a more comprehensive theory of 'wages and capital' that
failed to mature, the period’s explanations of the rent of land (generalized
into the. rent of natural agents) really were different theories based upon dif-
ferent principles. We shall refer to them as the monopoly theory, the pro-
ductivity theory, and the diminishing-return theory. This is not to deny the
presence of a unifying principle. Ricardo himself began his discussion of the
subject by defining rent as 'that portion of the produce of the earth which is
paid to the landlord for the use of the original and indestructible powers of
the soil’ 67 (Principles, ch. 2), and J. S. Mill started his by recalling the triad

64 The only element in this that is really inacceptable to the modem radical is the
relation between wages and saving.

65 In the pages of the American Economic Review there has been an interesting dis-
cussion concerning the actual influence of the wage-fund theory on popular thought
and political action.

66 C. F. H. Roesler, Z ur Kritik der Lehre vom Arbeitslohn (1861). Lujo Brentano,
'Die Lehre von den LohnSteigerungen,’ Jahrbiicher fur Nationalokonomie (1871).

67 Let us briefly note that the writers of the period still struggled with the problem
of identifying the phenomenon to be explained. A. Smith, as Ricardo noticed, had been
vague on the subject and had not always clearly distinguished between pure rent and
the total income from the ownership of land, which also includes the return from

672 III: FROM 1790 TO 1870

of the requisites of production, which comes to the same thing (Principles,
Book n, eh. 16). This points toward supply and demand — the principle that
not only unifies those three theories hut also assimilates rent with all other
kinds of incomes generated by a stationary business process. But the great
majority of economists did not take this route so that it is historically more
realistic to speak of three distinct theories after all.

The monopoly theory, espoused by A. Smith, 68 counted adherents, then as
always, among politicians and pamphleteers. But its role in the scientific litera-
ture was not nearly so important as it seems to be, at first sight, owing to the
frequent occurrences of the term monopoly in this connection. The examples
of Senior and J. S. Mill will suffice to show this: when we analyze their use
of the term, we discover immediately that they did not mean to assert that
landowners formed cartels and that the services of land were priced — as a
general rule; there is of course the unique mine or vineyard — according to the
rules of monopoly theory. All they meant was that rent constitutes a case of
pricing 'costless’ things that exist in definitely limited quantities, which their
defective theory of price led them to identify with the genuine monopoly case.
J. S. Mill even wrote of a 'monopolized' thing among the holders of which
there is 'competition' (Book n, eh. 16, § 2); and both Mill and Senior really
adopted, though quite illogically, the diminishing-return theory to be dis-
cussed presently. The reader may well ask whether anyone actually held a
monopoly theory of rent that was more than an agitatorial phrase, in view of
the fact that monopoly that may be present in any case of pricing is consti-
tutionally incapable of explaining the nature of a return. The writer who, so
far as I have been able to make out, came nearest to doing so was T. P.
Thompson. 69

improvements, such as drainage, fencing, and the like — what Marshall was to call quasi-
rent. The distinction, clearly indicated by A. Smith, established itself quickly however.
(Thiinen called the total income from land Gutsrente and the pure rent Grundrente.)
Another question arose concerning exhaustible natural agents such as mines, return
from which Ricardo’s definition excludes. But the similarity of the two cases being
easily recognized, no trouble arose about that ( Principles , ch. 3). The short-run simi-
larity between rent in this sense and returns from any appliance, the quantity of which
cannot be changed within the time span that constitutes the short run was, however,
not clearly seen before Marshall, and this did entail some consequences of importance:
whoever sees this similarity and, hence, that in the short run there is no difference
between rent and quasi-rent, is bound, sooner or later, to ask himself whether the yield
of physical capital goods is really the same thing as interest.

68 But after having interpreted the rent of land as a monopoly gain, A. Smith
declared that rent 'enters into the composition of the price of commodities in a different
way from wages and profits. High or low wages and profit are the cause of high or low
price; high or low rent is the effect of it’ ( Wealth , Book 1, ch. 11). He does not seem
to have observed that this contradicts his monopoly theory of rent for, if rent were a
monopoly gain, it would enter into price. However, this blundering sentence may have
given a clue to Ricardo, with whose analysis it agrees much better than with Smith’s.

69 Thomas Perronet Thompson, The True Theory of Rent (1826), an anti-com-law
pamphlet. I wish I had space to say something on this vital and most interesting man —

GENERAL ECONOMICS: PURE THEORY

673

The diminishing-return theory (or as we could also call it, the differential-
cost theory), as everybody knows, is associated with the name of Ricardo,
who made such a success of it that it survived into the twentieth century. It
was part of the great Ricardian detour 70 for it was essential to Ricardo's ana-
lytic pattern as a device for eliminating the land factor from the value problem
(see above, sec. 2). 71 Actually, of course, rent enters or else does not ‘enter
into prices' in exactly the same sense in which the one proposition or the
other is true of wages. 72 Nevertheless, Ricardo achieved his purpose of exclud-
ing rent from the price (value) problem in this way. In practice, firms operate
under different cost conditions — an observation which then as now was part
of the economics of the man in the street — there are ‘low-cost' and ‘high-cost'
firms. We may, of course, array them in ascending order of costs, and we
further observe without difficulty that, in a state of perfect equilibrium and .
perfect competition, price cannot be lower and is not likely to be much higher
than the average costs of the highest-cost firm. This is what Ricardo meant
when he said sometimes, for example, in Chapter 27 of the Principles , that
the ‘real value of a commodity is regulated ... by the real difficulties en-
countered by that producer who is least favoured.' 73 Referring to this, espe-

a type who could not be left out of any sociology of nineteenth-century England. The
memoir by C. W. Thompson (1869), though not a great performance, is worth reading.

70 The detour character of Ricardo’s work shows in this instance with particular
clarity. For he actually did begin with the price ‘which is paid ... for the use of the
. . . powers of the soil/ a definition that contains all that is needed for a satisfactory
theory of rent, and then, before our eyes, turns away from the open road and embarks
upon his detour.

71 J. S. Mill and Marx also wished to eliminate the land factor from the value prob-
lem. But while this was entirely unnecessary for Mill’s set-up — as he would have been
bound to see had he but stopped to think out the implication of his own ideas, it was
as necessary for Marx’s as it was for Ricardo’s. What Marx actually did was to merge
rent with profit into the homogeneous pool of surplus value, and then, at one remove
from the fundamentals of distribution, let landlords and ‘capitalists’ fight it out; This
enabled him — as mere decision to do so enabled J. S. Mill — to neglect the existence of
rent in his basic analysis of value. On Rodbertus’ attempt to rationalize the way in
which rent is determined, see above, ch. 4, sec. 5.

72 J. S. Mill’s attempt to get round this (Book n, ch. 16, § 6) is a most instructive
example of a type of specious reasoning by which we often delude ourselves when
defending a proposition that, from habit, we have come to believe needs no defense at
all. The case is so instructive, first, because J. S. Mill erroneously thought that he needed
the proposition that rent does not enter into prices and, second, because his argument
is ingenious and, at first sight, convincing. He actually arrived at the conclusion that
Tent does not really form any part of the expenses [my italics] of production, or of the
advances of the capitalist.’ And this patent absurdity is coolly upheld on the ground
that ‘whoever cultivates land, paying a rent for it, gets in return for his rent an instru-
ment of superior power to other instruments of the same kind,’ i.e. he enjoys a differen-
tial advantage which the payment of rent does not more than compensate!

73 There is no contradiction between this and A. Smith’s apparently opposite opinion
that it. is the lowest-cost firm that tends to regulate price. For A. Smith thought of the

674 in: FROM 1790 TO 1870

daily in Chapter 2, he recognized that different portions of the output of a
single firm may also be produced at different costs, for example, if produced
on plots of different fertility; that these portions too may be arrayed in ascend-
ing order of their costs ; 74 and that in a state of perfect equilibrium and per-
fect competition, the highest of these costs will tend to equal price. Finally,
he generalized this to include the logically heterogeneous case where it is not
possible to speak of different costs of the different portions of any given total
output, and where every part of this output costs just as much as every other
part, but where it is still possible to allocate to each successive increment of
output the increase in the cost of total output which must be incurred in
order to produce it . 75 Whenever we have decreasing returns in any or all of
these senses, there is always 76 an element of product that is being produced
without any differential advantages and for which it is therefore tautologically
true that its producer does not pay for differential advantages and that pay-
ments for intramarginal advantages do not enter into marginal expenses of
production . 77 Now, most of these advantages are essentially temporary — a su-
perior type of machine tends to displace inferior types — and others are linked
to persons. There are no permanent differential advantages that are linked to

process by which more progressive firms crowd out less efficient ones and for a time
force them to sell at losses. Ricardo described an equilibrium state.

74 The resulting ‘curve’ has been . called Particular Expenses Curve by A. Marshall
(Principles, p. 521).

75 This is as far as Ricardo got. That is to say, we may attribute to him — as we may
to other writers of the period such as Rooke — a conception of marginal cost that differs
from the modem conception only in technique. But we should not, as some interpreters
do, attribute to him — or to any other writers of the period except Longfield and
Thiinen — an understanding of the principles of marginal productivity analysis: his theory
of rent, far from amounting to a. recognition of these principles in a particular case,
really amounts to a denial of them. This has been obscured by the fact that some later
marginal productivity theorists, in particular J. B. Clark, represented their theory as
an outgrowth of Ricardo’s theory of rent and may have reached their view from a
critical elaboration of the latter. Some spoke of a Law of Three Rents without making
it clear, perhaps without realizing, that they were not generalizing Ricardo’s schema
but upsetting it. It cannot be objected that marginal cost and marginal product are
logically related and that, therefore, he who understands the one also understands the
other. But this is not so: understanding a concept that implies another does not imply
understanding the latter, and, to a great part, advance in theoretical analysis precisely
consists in elaborating implications of older thought that had not been seen or not
clearly seen before. Any doubt or confusion that may exist in the reader’s mind on the
subject could best be cleared up by perusal of Longfield’s Lectures.

76 This presupposes the ordinary assumptions that every pure theory makes, con-
tinuity of schedules and absence of institutional inhibitions among others. Many objec-
tions that were raised against the West-Ricardo theory of rent did and do rest on
nothing but a failure of the critic to understand what pure theory is.

77 Since these marginal expenses — under usual assumptions — equal price, it is there-
fore quite true that payments for intramarginal advantages do not enter into price,
which is the sense in which A. Marshall upheld the Ricardian proposition — i.e. as an
empty truism.

GENERAL ECONOMICS: PURE THEORY

675

material factors except the differential advantages of location and fertility of
land 78 (and other natural agents). And it must have occurred to Ricardo
that here was his opportunity to get rid of the element of rent that disturbed
his labor-quantity theory of value. From the structure of his argument in
Chapter 2 of the Principles , 79 it is perfectly clear that it was location and
differential fertility of different plots of which Ricardo thought primarily,
and that the case of decreasing effects of successive applications of equal
‘doses' of labor to the same plot was, for him, a matter of secondary impor-
tance and was never fully absorbed into his system, though it not only came
in usefully for the purpose of meeting objections but also was necessary in
order to make his argument complete.

There is nothing logically wrong with this device. If we do insist on a
labor-quantity conception of value, or even on a theory of value that rests
on real cost in the sense of disutility and abstinence, and accordingly wish
to eliminate requisites of production that are costless in this sense, the device
does its duty. 80 But it is not an explanation of the rent of natural agents, but
only a substitute for one, which carries meaning only within that theoretical
set-up and is nothing but an obstacle to the recognition of important sym-
metries within any other. However, instead of realizing this and forgetting
about it, most economists throughout the nineteenth century treated what
Soon became known as the Ricardian Theory of Rent as if it had content

78 Elaborating suggestions of Ricardo (see especially Principles, ch. 14), J. S. Mill
wrote a sketchy but suggestive paragraph on urban rent ( Principles , Book iit, ch. 5, J 3)
that was to be developed by Edgeworth.

79 Chs. 18 (‘Poor Rates’) and 32 (‘Mr. Malthus’s Opinions on Rent’), also his Letters
to Malthus and Notes on Malthus’ Principles , are essential complements to ch. 2, and
Ricardo’s views on rent cannot be fully understood without this additional material.
Perusal of it, however, strengthens the impression that emphasis upon the case in which
payment of rent is associated with the different effects of equal ‘doses’ of other factors
successively applied to the same plot of land was the result of discussion and his own
further thought rather than a ground-floor idea. Even in ch. 2 the passages on this
case read like an insertion into an argument that did not originally contain them. This
is why superficial readers so often raised the objection that Ricardo’s theory postulates
the existence of rentless land.

80 It should not be added, however, that the diminishing-retums theory of rent has
the additional advantage of bringing out certain properties of the incomes from the
ownership of natural agents that are important for many purposes such as taxation.
For these properties can be stated just as well from the standpoint of any other theory
of these incomes, such as the marginal productivity theory. It cannot be too often
repeated, in particular, that the marginal productivity of an agent that exists independ-
ently of any activity of its owner proves nothing for the income of this owner and is,
therefore, in itself of no value for purposes of apologetics, though the theory has often
been misunderstood in this sense. Vice versa, the Ricardian theory of rent is neither
necessary nor sufficient for an attack upon the landed interest and it is nonsense to
maintain, as A. Held has averred, that we must explain it by the hatred that Ricardo
was supposed to harbor for the landowning class.

676 HI: FROM 1790 TO 1870

irrespective of that set-up . 81 Thus, a pointless discussion of its truth or falsity
grew to be a standard topic of the economic periodicals of the time. Admirers
not only were in a majority but in general also had the better of the argu-
ment. For the objections that were raised rested mostly on misunderstandings,
which J. S. Mill’s standard exposition 82 disposed of with ease. Some of them
— such as those of Carey or R. Jones 83 — are interesting examples of typical
errors that are again and again committed by would-be theorists who have
disdained to learn the art of theorizing. The reader will find what he may
need in J. S. Mill and in Cannan . 84

Requisiteness and scarcity 85 of natural agents being all that is necessary
in order to explain the phenomenon of rent, we might expect to find, at least
among votaries of the triad of factors of production, vigorous assertion of a

81 It might be objected that Anderson (see above, Part n, ch. 5, sec. 2) had taught
that theory without at the same time anticipating any other part of the Ricardian
system. But his teaching on rent is best conveyed by the phrases that rent is a premium
paid for the privilege of using superior land and that its payment equalizes the profits
of farmers tilling land of different quality. But they point toward a productivity expla-
nation: one pays more for good than for bad land exactly as one pays more for a good
than for a bad workman; and competition of capitals enforces that equalization exactly
in the same way in both cases. Let us note in passing that J. S. Mill, while denying the
allegation that Ricardo made the cultivation of inferior land the cause of the payment
of rent on the superior, tried to mend the case by asserting instead that it was the
necessity of cultivating the inferior land that causes rent to be paid (Book 11, ch. 16,
J 5). But this is not true either; at least it is not more true than to say that it is the
necessity of employing inferior workmen that is the cause of the higher wages of the
superior ones.

82 As a consequence of his immature systematization that was due to the hurry in
which his Principles was written. Mill impaired his treatment of the subject by dealing
with it twice in two far distant chapters: Book xi, ch. 16 and Book ni, ch. 5. These
two chapters are entirely on Ricardian lines, more so than are any others. This is
another instance of Mill’s failure to see the implications of his own theoretical insight.
However, he did glance in passing at cases in which rent constitutes an element of
cost of the opportunity-cost type and even admitted that rent is an element of cost
when it results from a scarcity value ( Principles , Book 111, ch. 6, prop, xx), without
realizing the damaging nature of these concessions that give the whole case away.

83 R. Jones, An Essay on the Distribution of Wealth (1831), of which only Part 1,
‘On Rent,’ was completed.

84 Did space permit, I should, however, advert to a class of objections that arose
from Ricardo’s and his followers’ carelessness. They spoke of ‘doses’ of capital and
labor that were being applied to land — the term was introduced by James Mill —
without making any attempt at dealing with the problems incident to the composition
of these doses. Nor did they take account of the difficulty that land cannot be satis-
factorily graded as to fertility without reference to given uses. And they committed
many other peccadillos. Objections of this kind are not decisive. But neither are they
mistaken. We cannot stay, however.

85 Scarcity, it should be observed, does not imply decreasing returns. Rent would be
paid if successive ‘doses’ of capital yielded increasing quantities of product up to the
nth dose and nothing at all from the nth on.

GENERAL ECONOMICS: PURE THEORY 677

productivity theory of rent. But, as we have seen on other occasions, mere
recognition of the element of productivity does not help us much unless it
is streamlined by the notion of marginal productivity, exactly as the element
of utility will not produce any serviceable theory of price unless streamlined
by the notion of marginal utility. A marginal productivity theory was, in fact,
presented by Longfield, who not only anticipated the theory that was to win
out in the last decades of the nineteenth century, but in .addition said practi-
cally all that needs to be said from this standpoint on the West-Ricardo
theory. Nobody paid much attention, however, and J. B. Say’s conception
of incomes as prices of productive services — which he himself spoiled by at-
tributing the price of the services of land to the institution of private property
in land — also remained sterile for the time being. So great was Ricardo’s suc-
cess that even some writers, who adopted Say’s schema in other respects, in-
serted into it a Ricardian treatment of rent without betraying any symptom
of logical discomfort: J. S. Mill himself is the outstanding example and
Roscher is another. But application of the supply and demand apparatus,
which was being slowly perfected, should have been sufficient to straighten
the matter out and to end all doubts as regards such points as whether im-
provements in agricultural methods of production benefit or injure the land-
owner’s interest. It would be, therefore, a useful exercise for us to analyze the
position of Malthus, since he was as prominent among the builders of the
Ricardian theory of rent as he was among the builders of the supply and de-
mand apparatus. We cannot, however, go beyond the following comments. 86

In his Inquiry of 1815, Malthus developed a view that looks much like
West’s and Ricardo’s. The latter evidently was of this opinion since he stated
in the preface to his Principles that Malthus and West ‘presented to the
world . . . the true doctrine of rent.’ But even there we may observe die
seeds of the controversy that was to follow. 87 Among other things, Malthus
insisted on the proposition that rent is a surplus that we owe to the bounty
of nature. Now this clumsy phrase, which has been much misunderstood, 88
adumbrates a productivity explanation of rent. The reason why it was in-
acceptable for Ricardo was not that it complimented the landlord: his not
less clumsy phrases about the ‘niggardliness of nature’ mean not more than
that land is not a free good, a fact that is just as necessary for a productivity
explanation as is the bounty. The reason was that this idea was incompatible

86 Malthus’ chief contributions to the pure theory of rent are his Inquiry into the
Nature and Progress of Rent (1815), ch. 3 of his Principles, and his answer to question
3341 in the Third Report on Emigration (1827).

87 For Ricardo’s side, see especially ch. 32 of his Principles and Notes on Malthus’
‘Principles of Political Economy’ (Hollander and Gregory, ed., 1928). We shall neglect
the disagreement between Ricardo and Malthus concerning the relation of the land-
owners’ interests to those of society, which produced nothing worthy of attention.

88 Some critics saw nothing in it but an attempt at ‘justifying’ the landlord's income.
I cannot see, however, that it improves the case for the landlord if he be represented as
intercepting nature’s bounty, which is the obvious conclusion for enemies of private
property in land to draw.

678 in: FROM 1790 TO 1870

with his value theory . 89 And so we have after all, in spite of the acknowledg-
ment in Ricardo’s preface, a fundamental theoretical difference between the
two from the start. Actually, Malthus did not need diminishing returns to
account for the emergence of rent. But he did not grasp this clearly and, as
was his wont, looked for concrete facts associated with the phenomenon to
be described, whether they were essential to it or not. Eventually he produced
a mongrel, which ;:y?as much more vulnerable to Ricardo’s rapier than a cor-
rect statement need have been, of what he ineffectually strove to express. He
even had trouble with rentless land and could not quite assimilate the notion
of the rentless last dose of capital. He attached explanatory significance — we
sense amusement in Ricardo’s comment in the chapter on Malthus’ opinions
on rent — to the fact that land can produce more than is necessary for the
maintenance of the labor employed on it . 90 He was not less sure of the im-
portance of the further fact, already stressed by A. Smith, that agrarian pro-
duction was peculiar in that it created, as it expanded, additional demand for
its products, not in the sense of Say’s law, but because increase in food spelled
increase in population — which is not true even according to his own (later)
views. And so he got the worst of it, although there was a strong case be-
hind all his irrelevancies . 91

Finally, another range of topics must be touched upon. West and Ricardo
looked upon their theory of rent as an explanation of a particular branch of
income that goes to a particular class. They did notice in passing, but did not
make much of the fact, that the income of this class comprises not only pay-
ments ‘for the use of the original and indestructible powers of the soil’ but
also payments for the improvements the landlords have made on it. They
might have noticed that, in a short-run that may extend over many decades,
payments for these improvements do not display any economically significant
differences from those elements of the ‘rent’ which the farmer pays that may
be interpreted as being paid for those ‘original’ powers. In other words, they
might have discovered the phenomenon of quasi-rent. This would not have
materially affected their theoretical structure in general or the nature of their
rent concept in particular. But other generalizations of this concept did affect

86 Recall: from the standpoint of a value theory that rests upon ‘labor embodied,’
neither bounty nor niggardliness of nature can have anything to do with the value of
the product; but the idea of an addition to product value by something that is not
labor would seem from this standpoint particularly objectionable.

90 It is not without melancholy interest to note how often both in the theory of
rent and in the theory of profits this ‘argument’ recurs in nineteenth-century literature:
dozens of authors thought that they were saying something when they gravely pointed
to the fact that the productive process produced more than is necessary in order to
maintain the labor employed.

91 Occasionally, however, Malthus made a good point. His view that improvements
in agricultural technique affect rent favorably is indeed not truer than is Ricardo's
opposite view. But he was right in pointing out in his Principles that, this time,
Ricardo argued the short-run case (as he did more often than either he or his followers
realized), and Ricardo seems to have admitted as much.

GENERAL ECONOMICS: PURE THEORY

679

its meaning — and were indeed nothing but steps in the inevitable process of
disintegration of the original West-Ricardo ‘theory’ of the rent of land.

We have noticed above the analogy that exists between payments for the
services of superior land and payments for the services of superior work.
Samuel. Bailey was the first to turn this fact into an objection to the West-
Ricardo theoretical pattern. He was right, though many later authors, Senior
in particular and also J. S. Mill ( Principles , Book m, ch. 5, § 4), generalized
the 'West-Ricardo concept of rent without polemical intention. 92 There are
generalizations that spell additional success for a theory: they enrich and ex-
tend, but do not endanger, its original interval of application. But there are
others that spell or foreshadow the break-up of the theory: by showing that
properties which the theory holds to be peculiar to a given phenomenon are
also to be found in others, they destroy its original significance and substitute a
new for its old meaning. Generalization of the rent- concept was a case of
the second kind. By virtue of it, rent, the specific return on unimproved soil,
merged into the logically distinct category of Costless Surplus, 93 of which the
Rent of Ability, recognized by Mill and put to good use by von Mangoldt, is
the most important instance.

(h) Distributive Shares and Technological Advance . The study of the nine-
teenth-century literature on this topic is a tedious task. But it may bring solace
to the hearts of those who despair of the value of the technique that devel-
oped in the last decades of that century, 94 for the superiority of that tech-

92 J. S. Mill was no more aware of the implications of this generalization than he
was of the dangers that lurked behind his admissions of the opportunity-cost type.

93 During the period under survey, this meant, primarily, returns that are earned
above other people’s return without an increase in ‘sacrifice’ (‘real’ cost in this sense).
But later oh it was realized that such a surplus may also be defined in terms of the
opportunity-cost analysis. It then means a surplus above what would be necessary in
order to draw a service to any particular employment (transference cost). At the
moment, we are only concerned with those generalizations that emerged during the
period. Reference should, however, be made at once to F. A. Fetter: ‘The Passing of
the Old Rent Concept,’ Quarterly Journal of Economics, May 1901.

94 Some familiarity with the elements of modern technique is in part necessary in
order to appreciate the argument of this subsection. The reader finds all he needs for
this purpose in J. R. Hicks, Theory of Wages, 1932; see especially ch. 6. I wish to
point out, however, that in analyzing the effects of factor-saving machinery (no matter
whether the factor saved is ‘labor,’ land,’ or ‘technological capital’ itself), we must be
careful to distinguish two cases. Technological improvement may impinge upon the
productive process from outside, that is to say, through some innovation that revo-
lutionizes the technological horizon of producers (changes their ‘production functions’).
The ‘classic’ writers thought exclusively or almost exclusively of this case and hardly
every realized — an exception was Barton — that there is another case the effects of
which differ substantially from the first: machines may also be introduced that are no
novelties to producers and, so far as technological knowledge is concerned, could have
been introduced but were not introduced before, because it would not have been
profitable to do so. Owing to a change in the relative prices of factors (e.g. an increase
in wage rates), their introduction may, however, become profitable. Here we have no
change of technological horizons but a change in the combination of factors within

68o

ni: from 1790 to 1870

nique — so often called into question — in the solution of practical problems
nowhere stands out better than it does in this field. So do, by the same token,
the shortcomings of ‘classical’ analysis. The economists of that period were
unable to see the general problem at all: they tried to forge different doc-
trines for the effects of technological advance on the rent of land and on
wages. They had to consider the problem separately, as a semi-independent
side issue of the theory of distribution or as something to build onto the
latter’s main structure instead of solving it on the ground floor of the main
structure. We have seen, in fact, that in their analysis of fundamentals they
made, and had to make, the assumption that the ratio between wage capital
and technological capital is constant and that new savings — this does not
apply to Marx, however — are invested in the same ratio. Finally, they were
unable to follow the effects of technological advance through the economic
system as a whole but picked out bits of them here and there, so that fre-
quently such disjointed elements of what should be a comprehensive theory
were marshalled against each other as if they involved different theories. 95 In
order to bring this out clearly, we shall confine ourselves to the problem of
how technological advance affects the interests of labor 96 and in addition
posit this restricted problem in the form in which it posited itself to Ricardo
in the famous Chapter 31, ‘On Machinery,’ which he added to the third edi-
tion of his Principles , that is, in the form that occurs naturally from the wage-
fund standpoint and indeed is an excellent illustration of the wage-fund doc-
trine, considered as a method of analysis. We shall ask: how does the introduc-
tion of a newly invented machine 97 affect the size of the wage fund?

Long before the industrial revolution, people realized the obvious fact that
machinery often displaces labor. As we have seen above, governments and
writers worried about this and labor groups and citizens’ guilds fought against
machinery, the more so because immediate effects of this kind are concen-
trated in time and place, whereas the long-run effects on general wealth are
much less visible in the short run and much less easy to trace to the machine.
The public, too, did not in general look with favor upon machine production
because, in addition to being associated with unemployment and child labor,
it was then also associated with inferior quality of product. The growing labor-
ist literature 98 voiced those observations and feelings not more strongly than

unchanging production functions. A third case was recognized by A. Smith, namely
the case where the introduction of a machine that had been known before becomes
profitable as soon as output expands beyond a certain figure.

95 These shortcomings were not so much due to faulty handling of the 'classic’
apparatus of analysis but to deep-seated faults of this apparatus itself. These faults
were many. But if we were called upon to name one as more important than others,
we should have to name once more the failure of the ‘classics’ to understand substitu-
tion (both of factors and of products) in its full importance.

96 On the ‘classic’ theory of the effects of technological advance on the interests of
landowners, see above, ch. 6, sec. 6h.

97 See first footnote of this subsection.

98 As a typical example, see Observations on the Use of Machinery in the Manufac-
tures of Great Britain ... By a Mechanic, 1817.

GENERAL ECONOMICS: PURE THEORY

68l

did some writers of scientific standing, such as Sismondi," who, mostly, de-
rived from them another argument against saving. Most English economists
saw deeper than that and did in this matter exactly the same kind of thing
that they did in others, as, for example, in the matter of international trade:
preoccupied with what they considered to be fundamental truth and fighting
the public’s propensity to attend too exclusively to temporary phenomena,
they attended too little to temporary phenomena themselves. With the en-
gaging frankness that was justly commended by Marx, Ricardo explained on
the first page of his chapter on machinery that he had shared the prevailing
view that, barring temporary difficulties of transition , 100 labor-saving ma-
chinery had no effect other than to benefit all classes as consumers. Like in-
crease in foreign trade, therefore, the process of mechanization was a matter
of welfare — which it was sure to increase — rather than a matter of that value
(Ricardian value), with which he was chiefly concerned, except of course
that mechanization would reduce the real and the relative values of the
products affected by it, a fact to which Ricardo points again and again . 101
The reason why he thought that no (permanent) reduction in wages (total
real wages in our sense of the word) would be induced by it, was that mech-
anization would not decrease the wage fund . 102 But then he went on to com
fess that he had discovered reasons for believing that it would.

Before presenting Ricardo's argument, I shall introduce a book that evidently had
more to do with Ricardo’s change of mind on the subject of machinery than his
reference to it suggests: John Barton’s Observations on the Circumstances which in-
fluence the Condition of the Labouring Classes of Society (1817). It is a remarkable
performance and far above the rest of the literature that currently criticized the 'classic'
leaders for their lack of realism, actual or supposed. There is even a small element of

99 French economists of the ‘conservative’ type, such as de Villeneuve-Bargemont
(see above, ch. 4, sec. 4) and L. G. A., Vicomte de Bonald (see Oeuvres completes,
ed. J. P. Migne, 1859, vol. n) went still further than Sismondi. But even Sismondi’s
argument is, so far as its analytic aspects are concerned, nothing short of deplorable in
places. See, e.g., his reasoning in Nouveaux Principes, vol. 1, pp. 375-80, and in ‘Du
revenu social’ in the 1st vol. of the Etudes sur Veconomie politique (1837-8).

100 Marx, with glowing rhetoric, was to point out the terrors that may be and some-
times were covered by that cool phrase. It would have been more to the point, how-
ever, if he had pointed out, even though at some sacrifice of rhetoric, that displacement
of labor by machines may be temporary so far as the effects of each distinct act of
mechanization is concerned, and yet explain permanent presence of unemployment on
the assumption that such distinct acts occur often enough. This point should not be
overstressed, but a little overstressing of it would have supplied Marx with a theory of
permanent unemployment that would have been much less untenable than was his
own, besides saving all the trouble and bile he wasted upon the effort to refute what
he called the theory of compensation.

101 It may be noted in passing that the long-run prediction about the course of rela-
tive values, which follows from Ricardo’s theory of value, constitutes its main factual
justification: clearly products that embody less and less labor per unit as time goes on
have historically fallen in price, at least relatively to the others.

102 We see here, clearly and instructively, the effects of Ricardo’s general set-up which
hid from his eyes any analogy between rent and wages.

682

hi: from 1790 to 1870

truth in the note that Professor Foxwell put on the copy that is in the Kress Library:
‘a very able tract. . . Its solid and weighty character contrasts in a marked way
with Ricardo’s flimsy and unreal speculations’ [sic!]. Barton knew better than to object
to abstract reasoning per se or to point to facts that seemed to contradict Smith’s or
Ricardo’s conclusion: he knew how to reason and to indicate the cause of those dis-
crepancies between theory and facts. Thus his 'reconciliation’ of the views of Ricardo
and Smith on the subject of the fall in the rate of profits (op. cit. p. 23m) is as sim-
ple as it is ingenious. But we must confine ourselves to the only proposition that is
relevant to the point in hand. He denied that demand for labor always and necessarily
increases proportionately to the increase in total wealth (capital plus revenue, accord-
ing to A. Smith) and that it cannot increase for any other reason (as asserted in the
Poor-Law Report of the House of Commons, which appeared shortly before the pub-
lication of Barton’s book). 103 And the reason why he denied it was that annual sav-
ings do not necessarily issue in proportional increases in fixed and circulating capital
(meaning technological and wage capital) but may increase the one more than the
other, according to which of the two is more profitable. He explains correctly that if
wage rates rise relatively to commodity prices, ‘masters’ will try to use as much ma-
chinery as possible, whereas in the opposite case they will be induced to hire more
hands: here, then, we have a clear perception of the relation of substitutability be-
tween capital and labor that improved upon Lauderdale’s and anticipated Longfield’s
but was also ignored by the more influential writers. But though Ricardo did not
realize the importance of this principle, he at least accepted the idea that the intro-
duction of machinery into the productive process may injure the interests of manual
labor (irrespective of the temporary disturbances that do so in any case) by reducing
the total demand for it;, and he illustrated this by a numerical example that differs
but little from Barton’s (op. cit. p. 15).

Ricardo argued like this. A ‘capitalist/ who so far has employed a certain
number of laborers with a certain amount of ‘fixed’ capital, decides to intro-
duce a newly invented labor-saving machine and lets part of these laborers
produce this 'machine, which in his balance sheet now stands for part of the
wage capital that he used to reproduce, with a profit , 104 year after year before.
His motive for doing so is that, since not all firms adopt a new machine si-
multaneously, a temporary profit is attached to the introduction of the ma-
chine. In Ricardo’s example, the ‘capitalist’s’ capital remains intact — it neither
increases nor decreases in value. But it has changed its organic composition.
Wage capital has been converted into technological capital — there is now
more of the latter and less of the former. When the temporary gain has been
eliminated by the competition of other firms who do the same thing, then it
is possible that the amount and rate of profit on the total capital will be
what they were before the insertion of the machine. Prices of commodities
will fall, however, and the manufacturers’ wage fund will be permanently

103 He also denied that ‘liberal reward of labour, as it is the effect of increasing
wealth, so it is the cause of increasing population.’ But into his argument against this
we cannot enter here.

104 In this chapter, Ricardo comes nearer than he does anywhere else to the profit
analysis that Marx was to make his own. Nowhere else is their relation so clearly the
relation of Professor Ricardo and tutee Marx — though, as may be the case sometimes,
neither would have been completely pleased with the other’s performance.

GENERAL ECONOMICS: PURE THEORY 683

decreased and population will have become ‘redundant/ which is what Ricardo
set out to prove.

Ricardo concluded from this that the opinion prevailing in ‘the labouring
class, that the employment of machinery is frequently detrimental to their
interests, is not founded on prejudice and error, but is conformable to the
correct principles of political economy.’ It was this sharp-edged pronounce-
ment that monopolized professional attention, reinforced as it was by another
passage in the same chapter which affirmed that in cases like the one dis-
cussed ‘there will necessarily be a diminution in the demand for labour, popu-
lation. will become redundant, and the situation of the labouring classes will
be that of distress and poverty.’ Friends and foes seem to have seen nothing
else and, ever since, Ricardo has stood in doctrinal history as the chief ex-
ponent of the view that those statements in fact do seem to express. But, if
we take account of the rest of the chapter and bear in mind that it professedly
deals with what Ricardo used to call permanent effects, it is clear, first, that
they do not follow from the numerical example alluded to and, second, that
Ricardo was aware of this and did not mean at all what these statements
say. As regards the first point, Ricardo’s example covers only part of the
course of events that the introduction of the machine sets into motion: his
analysis of the case is indeed an example of the method of Comparative Statics,
but the second of the two states compared is not a definitive state of equi-
librium, for we are not told what happens to the workmen who have lost
their jobs, yet they cannot remain unemployed unless we are prepared to vio-
late the assumption that perfect competition and unlimited flexibility of
wages prevail. As regards the second point, Ricardo, though in a particularly
narrow and inconclusive way, fully recognized that mechanization may in-
crease productive efficiency so greatly ‘as not to diminish the gross produce’
(gross produce in his sense, that is, the net national product including wages)
in terms of commodities. This amounts to saying that real wage income (in
our sense) need not fall ‘permanently’; and that in any case, the purchasing
power of profits and rents being increased by the fall in prices resulting from
mechanization, ‘it could not fail to follow’ that, with constant propensity to
save, capitalists and owners of natural agents would fill up the depleted wage
fund again by means of increased savings. These admissions (for brevity's
sake I neglect others) are not exceptions to his argument but result logically
from it, if it be continued beyond the point reached by the numerical ex-
ample. Thus they make Ricardo the father of what Marx called the Theory
of Compensation — the theory that the working class is being compensated
for initial sufferings, incident to the introduction of a labor-saving machine,
by favorable ulterior effects — which Marx attributed to James Mill, McCulloch,
Torrens, Senior, and J. S. Mill, thereby constructing an entirely unrealistic
contrast between these men and Ricardo. More or less, most economists have
done the same thing, even those who did not wish, as did Marx, to single
out this so-called theory of compensation for vituperative comment (see Das
Kapital, vol. i, ch. 15, sec. 6).

684 III: FROM 1790 TO 1870

The controversy that went on throughout the nineteenth century and be-
yond, mainly in the form of argument pro and con 'compensation/ is dead
and buried: as stated above, it vanished from the scene as a better technique
filtered into general use which left nothing to disagree about (see reference
to Hicks's Theory of 'Wages , first footnote of this subsection). Nevertheless, in
order to understand an important phase of past doctrinal history, a few clarifi-
cations will be useful. In the first place, the reader must not think that Ri-
cardo was wrong in the result that he formulated in the two statements quoted
above. On the contrary, if we interpret him to have meant that mechaniza-
tion may permanently decrease labor’s relative and possibly even absolute share
in national income (no matter whether this be real income in our sense or
in Ricardo’s), he was correct. Only, his argument taken as a whole does not
prove it. In the second place, so far as Ricardo meant to convey not only an
abstract theorem but a picture of practically relevant processes and likelihood,
he obviously underrated the effects of the increase in productive power that
mechanized capitalism would display and of the expansion of output that
would result therefrom — so that long-run 'distress and poverty’ looms larger
in his text than it should in a realistic picture. On the one hand, this was
due to something that is much worse than defective technique, namely, to
lack of imagination: he never clearly realized that the essential fact about
capitalist 'machinery’ is that it does what, quantitatively and qualitatively,
could not be done at all without it or, to put it differently, that it 'replaces’
workmen who have never been born. But, on the other hand, this was due
also to the shortcomings of his analytic apparatus, which did not lend itself
readily to the description of quantitative expansion. In particular, in the Ri-
cardian system prices can fall to cost level directly, that is, in a way other
than by increase of output ( Principles , ch. 30): hence he failed to see that
total output in terms of goods must increase, under conditions of perfect com-
petition, which he assumed, in consequence of mechanization. He further
failed to see clearly that, if we express the wage fund also in terms of com-
modities, it can increase without any increase in saving, though it is then
much more natural to say simply that real wage incomes (in our sense) in-
crease than it is to say that the wage fund increases and that real wages in-
crease in consequence of this.

In the third place, the reader who, on perusal of Ricardo’s chapter on
machinery, sets it down as a mess is perfectly right; and he may well ask for
the reason. It seems to me that the reason is that Ricardo, while retaining
his own approach in terms of real value (‘labor embodied’), at the same time
repeatedly crossed the frontier that separates this approach from analysis in
terms of goods. Why he did this is clear: his exact reasoning is always in
terms of the labor-embodied approach; but this approach does not lead to
any results about anyone’s distress or welfare, which were what interested him |

in this chapter. And so he mixed up the two, sometimes speaking of 'distress
of labor’ when summing up an argument that was in terms of labor embodied
and hence irrelevant to real incomes in our sense, that is real income in terms

GENERAL ECONOMICS: PURE THEORY 685

of goods, sometimes speaking in terms of his real value in the course of an
argument that makes sense only in terms of absolute quantities of goods.

Finally, in the fourth place, additional clarification may be desirable as re-
gards that increase in saving by capitalists to which Ricardo attributed ef-
fects that would or may remedy the injury the machine does to workmen.
Since this injury, within Ricardo’s wage-fund method , is described as a re-
duction in the Ricardian value of the wage fund, additional saving will in fact
tend to repair the damage. Now this additional saving comes from profits for
two alternative reasons. First, even if the rate of profit be not increased per-
manently (if, in Ricardo’s language, the ‘value’ of profits be not increased),
a fall in prices of the goods they consume makes it easier for capitalists to
save, which (if propensity to consume remains constant as it always is with
both Ricardo and Keynes) they will accordingly do. But, second, if the cheap-
ened goods are, wholly or primarily, consumed by workmen, then, according
to Ricardo’s theory, the fate of profits will increase. And increased saving will
follow from this. Let me add that J. S. Mill did accept Ricardo’s methods,
but did not follow them closely. The main comfort he had to offer to the
working class was that mechanization occurs in a process that produces ample
savings that easily replace reductions in the wage fund caused by mechaniza-
tion (they would otherwise spill over into colonies and so on) so that these
reductions are likely to be potential rather than real. Marx ought to have
liked this — for it offers a nice suggestion for the socialist theory of im-
perialism (see below) — but he did not display gratitude when he used it.

Marx (op. cit. ch. 15) accepted Ricardo’s analysis, adding nothing essential
but minimizing the Ricardian qualifications, beating out the slender result to
its thinnest leaf, making the most of the unemployment that has been his-
torically associated with the process of mechanization, and allowing himself
to be carried on by his glowing rhetoric to a pitch of excitement such that
he even overlooked some points he might have made for his own theory
or against the hated theory of compensation. Perhaps this shows, as do in
his case other excesses of this kind, that he was not quite sure of his ground.
Certainly it shows that he was aware of the decisive importance of the mech-
anization problem for his ultimate conclusions concerning the future of the
capitalist system. Machines had to throw the laborers ‘on the pavement’ —
still better, because of English machines the bones of Indian weavers had to
‘bleach in the sun.’ Marxist unemployment is essentially technological unem-
ployment. This technological unemployment had to create a permanent ‘in-
dustrial reserve army’ — Ricardo’s redundant population. And the presence of
this permanent industrial reserve army — only temporarily absorbed in spells
of high prosperity — had to depress real wages (in our sense) to levels of ever-
increasing misery, degradation, and so on ( Verelendung ) that would eventually
goad the proletariat into the final revolution. Of course, this was only an
‘absolute law.’ 105 Of course, Marx’s effective display of severely selected his-

105 The reader should remember what this phrase means in the Marxist lingo,
namely, the same thing as an abstract tendency that is not necessarily verified in any
given stretch of economic history.

686

m: from 1790 to 1870

torical facts, which fill out his analysis in that chapter, contains a consider-
able number of qualifications of his own as do some passages in the third
volume. But since abstract tendencies drive nobody into misery and despair
and since Marx took little heed of his qualifications when it came to ultimate
conclusions and purposes (see, e.g., ch. 32, 'Historical Tendency of Capital-
istic Accumulation’), no Marx apologetics can be successful that proceed on
either of those lines. We have no choice but to take statements like that
above seriously. If we do, the failure of Marx’s attempt to turn the possibility
that Ricardo envisaged into inexorable necessity endangers the logical structure
of his system as much as the actual history of the working class endangers
any claim it might have to realism. 106

But it is only the thesis about increasing misery that needs to be dropped
from Marx’s analysis of the process of technological development, although,
from the standpoint of Marxist orthodoxy, it may be all-important. Other
results remain. In order to see them in their proper light, let us remember
that, in Marx’s general schema, social evolution is propelled by a force that
is immanent or necessarily inherent in the profit economy. This force is Ac-
cumulation: under pressure of competition, the individual concern is com-
pelled to invest as much of its profits as possible in its own productive ap-
paratus; 107 and it is compelled to invest them primarily in technological capi-
tal, naturally looking always for machines of ever-new types. This does not
permanently benefit 'capitalists’ as a class 108 for, as Ricardo had already
pointed out, any supernormal gain is quickly eliminated by competitors’
adopting each technological improvement. But the temporary advantage
gained by the one who is first to move gives him a lead in the race: rushing
down on declining average-cost curves and annihilating ('expropriating’) the
weaker ones in the process, capitalist concerns, individually growing in size,
build up vast powers of production that eventually burst the framework of

106 There aie Marxists who actually do not mind taking up the ridiculous position
that a tendency for the working class’s standard of life to fall is in fact observable.
Others have confined themselves to the less absurd proposition that Marx’s abstract
law has been put out of operation, owing to uniquely favorable conditions that have
prevailed in the nineteenth century (such as the opening up of new sources of food-
stuffs and raw materials through the spectacular cheapening of transportation), but will
assert itself eventually if it has not done so already in the 1930’s. Still other interpreters
have made efforts to make Marx’s law mean relative misery only, i.e. a fall in the
relative share of labor, which, besides being equally untenable, clearly violates Marx’s
meaning.

107 Of course, this is saying the same thing as that the individual concern is com-
pelled to save, a phrase the highly undesirable implications of which Marx fought like
a lion to avoid. In pointing out the existence of this compulsion he did, however,
betray a much deeper understanding of the capitalist mechanism than can be attributed
to the 'bourgeois’ economists of his age. But in common with them, he saw nothing
but the mechanical aspect of accumulation, hence not the reality of capitalist evolution
but only its reflection in growing heaps of inanimate things: besides accumulating
these, ‘capitalists’ did nothing but exploit.

108 On the law of the falling rate of profit/ see above subsec. 6c.

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GENERAL ECONOMICS: PURE THEORY

687

capitalist society. Not all this has stood up. Particularly vulnerable is the last
point: Marx never made it clear precisely how the economy of giant concerns
is to break down, and his break-down theory (Zusammenbruchstheorie) has
in fact been renounced by some of his most eminent followers. On the whole,
however, one cannot but be impressed by both the analytic and realistic vir-
tues of this conception of capitalist evolution, especially if one compares it to*
the modest elements of it that Marx found in Ricardo’s chapter on machinery.

CHAPTER 7

Money, Credit, and Cycles

1. England’s Problems 688

(a) War Inflation, 1793-1815 690

(b) The Question of the Standard 692

2. Fundamentals 698

3. Gleanings from the Discussions on Inflation and Resumption 706

4. The Theory of Credit 717

(a) Credit, Prices, Interest, and Forced Savings 718

(b) Gains from the Controversy about Peel’s Act of 1844 725

5. Foreign Exchange and International Gold Movements 731

6. ‘The’ Business Cycle 738

1. England’s Problems

It is the common opinion that the foundations of the monetary science of
today (or yesterday) were laid by the writers who discussed the issues of Eng-
lish monetary and banking policy from the Restriction Act (1797) to the gold
inflation of the 1850’s. This neglects indeed the French and Italian work of
the eighteenth century but nevertheless comes nearer to the truth than such
sweeping statements usually do. Many of those writers moved on an unusu-
ally high level. They soared with ease into the sphere of abstract generaliza-
tion and were possessed of a genuine will to analyze. This is the more re-
markable because most of them were men of practical affairs and primarily
interested in practical measures. We are accustomed to a different state of
things: few modern economists would look to men of practical affairs and
especially to bankers for help in their analytic task or even consider them
as authorities on the principles of their own business. But this situation de-
veloped in the next period. In the one under survey, it was the practitioners
who were in the van of analytic advance, and research workers of' different
types were in most cases content to take their clues from them.

With most of the leading performers we are already acquainted, especially
with Ricardo, Malthus, Senior, Tooke, Torrens, and J. S. Mill. 1 A small num-

i-Some of the relevant publications of these and others have also been mentioned
already. Others will be mentioned in the appropriate places. Ricardo’s main contri-
butions will, however, be listed at once. As the reader knows, it was as a writer on
monetary policy, in ?he discussion on war inflation, that Ricardo first made his repu-
tation. His three letters to the Morning Chronicle (1809, Hollander reprint as Three
Letters on the Price of Gold, 1903) were followed by a fuller statement of his views in
pamphlet form: The High Price of Bullion, a Proof of the Depreciation of Bank Notes
(1810). The Reply to Mr. Bosanquet’s Practical Observations on the Report of the
Bullion Committee, Ricardo’s only exploit in ‘factual’ work — but very interesting as

MONEY, CREDIT, AND CYCLES 689

ber of others will be introduced as we go along. But Henry Thornton (1760
1815) must be saluted at once. He was a banker, M.P., philanthropist, and —
which he himself and many who knew him would presumably have put first —
a -leading figure in the influential group of Evangelicals that was known as
the Clapham Sect. His Enquiry into the Nature and Effects of the Paper
Credit of Great Britain (1802) 2 is an amazing performance. The product, ac-
cording to Professor von Hayek’s estimate, of work that extended over about
six years during which the author's energy was largely absorbed by business
and political pursuits, not faultless in detail and not fully matured, it antici-
pated in some points the analytic developments of a century to come. No
other performance of the period will bear comparison with it, though several,
among them Ricardo’s, met with much greater success at the time as well
as later. In part this was because the author put no emphasis at all upon his
novel results — the book reads as if he himself had not been aware of their
novelty. Perhaps he was not, though he paid an almost academic amount of
attention to such predecessors as he knew. He was one of those men who
see things clearly and who express with unassuming simplicity what they see.

We shall confine ourselves almost exclusively to English work — a decision
which, for the epoch and the topic, may be justified even apart from the con-
siderations of space that impose it.- With qualifications to be mentioned, this
work was successfully summed up by J. S. Mill. The relevant chapters of the
Principles contain some of Mill’s best work. It displays indeed some contra-
dictions, hesitations, and unassimilated compromises — as does his work on
value — but even these were not unmixed evils since they brought out, in
strange contrast to Mill’s own belief in the finality of his teaching, the un-
finished state of the analysis of that time and thus indicated lines for further
research to follow. In any case, it was primarily in Mill’s formulation that

such — appeared in 1811; the Proposals for an Economical and Secure Currency in
1816. Chapter 27 of the Principles (1817), 'On Currency and Banks’ retains independent
importance in spite of the long quotation from the Proposals. The Plan for the Estab-
lishment of a National Bank (1823) has been reprinted by Professor Hollander in Minor
Papers on the Currency Question , 1809-23, by David Ricardo (1932; see the discussion
of this plan in Professor Rist’s, History of Monetary and Credit Theory, pp. 177-9),
which contains also other pieces that are quite essential to a full understanding of
Ricardo’s views. Other items might be added. Ricardo’s theory of money, credit, and
banking gains on acquaintance, and in perusing his letters as well as his evidence before
the Committees on the Usury Laws and on Resumption, one discovers more and more
fragments that might be combined into a spacious structure. No attempt will be made,
however, to do so. We shall have to be content with a few features of Ricardo’s analysis
that are of major importance to doctrinal history. The reader is warned that this may
involve some injustice to his performance as a whole. But the impression the reader is
bound to get, that Ricardo did not contribute much that was both true and original,
agrees with Viner’s judgment (op. cit. p. 122), and so does, I believe, my opinion that
as an analyst of money and credit Ricardo was inferior to Thornton.

2 The Library of Economics reprint (1939) is prefaced by an essay by Professor von
Hayek, the scholarship of which is surpassed only by its charm. The reader who misses
it deprives himself not only of much valuable information but of an exquisite pleasure.

690 In: FROM 1790 TO 1870

the work of the first half of the nineteenth century reached the writers of the
second half, and we shall therefore keep this formulation in view, as a point
of reference, throughout this chapter.

I have commended the taste and ability for theoretical analysis of the '
writers of that period. Nevertheless, their analysis was too closely bound up
with the conditions and problems of their time and country to admit of expo-
sition without reference to these conditions. Accordingly we shall now cast a
perfunctory glance at them — neglecting entirely, for the reason stated, the
much more exciting experiences of the United States and of some continental
countries. Sources of more adequate information are presented below.

To the student who wishes to have a single reference on which to concentrate I
recommend Professor Viner’s presentation in Studies in the Theory of International
Trade, Chapters in, iv, and v. This masterly piece of research — admiration for which
does not, however, imply agreement in every particular — will serve both for the his-
tory of the most important facts and controversies, and as a guide to further historical
literature. For statistical figures, see N. J. Silberling, 'Financial and Monetary Policy
of Great Britain during the Napoleonic Wars/ Quarterly Journal of Economics, May
1924, and 'British Prices and Business Cycles, 1779-1850/ Review of Economic Sta-
tistics, Preliminary vol. v, 1923, and E. V. Morgan, 'Some Aspects of the Bank Re-
striction Period, 1797-1821/ in Economic History, A Supplement to the Economic
Journal, February 1939.

By far the greatest contemporaneous histoire raisonnee is Tooke and Newmarch,
History of Prices (discussed above ch. 4, sec. 8a). Perusal of Sir T. E. Gregory’s in-
troduction to the 1928 edition of this work is the second recommendation I have to
make. Mr. R. G. Hawtrey’s Currency and Credit (3rd ed., 1928, ch. 18) and Art of
Central Banking (1932, ch. 4), usefully supplemented by Mr. W. T. C. King’s History
of the London Discount Market (1936), come next. Further help will be derived
from J. W. Angell, The Theory of International Prices (1926); E. Cannan, The Paper
Pound of 1797-1821 (1919), which contains a reprint of the Bullion Report; A. E.
Feavearyear, The Pound Sterling (1931, ch. 9); A. W. Acworth, Financial Reconstruc-
tion in England, 1815-22 (1925); R. S. Sayers, 'The Question of the Standard in the
1850’s,’ Economic History, A Supplement to the Economic Journal, January 1933,
and ‘The Question of the Standard, 1815-44’ (ibid. February 1935); R. H. I. Palgrave,
Bank Rate and the Money Market (1903); and Elmer Wood, English Theories of
Central Banking Control, 1819-1858 (1936), with a valuable bibliography which in
particular presents a list of reports of committees on monetary subjects and of other
official papers to which, as usual, no justice can be done here.

(a) War Inflation, 1793-1815. In spite of the suspension of the Bank of
England’s obligation to redeem its notes in gold, 1797, 3 war finance did not
produce any great effects upon prices and foreign-exchange rates until about
1800. To the modern student who is inured to stronger stuff, the most strik-
ing feature of the subsequent inflation is its mildness: at no time was the
public's normal behavior with respect to money seriously disturbed; at no
time did the impact of the government’s war expenditure blot out those fluc-
tuations that might have been expected to occur in the usual course of things;

3 This Restriction Act was not passed as a war measure but in order to stop a run
upon the bank.

MONEY, CREDIT, AND CYCLES

691

at no time was the government driven to anything more unorthodox than
abnormally heavy borrowing from the Bank, and even this borrowing never
surpassed the limits beyond which the term ‘borrowing' becomes an euphe-
mism for printing government fiat; at no time, finally, was the national wage
bill — the chief conductor of inflationary effects — so seriously expanded as to
endanger the currency. It was in fact this very mildness of the inflationary
process that made diagnosis so difficult. In particular, it made it more difficult
to recognize the inflationary element in the situation and to distinguish it
from the effects upon foreign exchange of the two circumstances that a great
part of war expenditure was for financing allied and English armies on the
Continent, and that English exports and imports were for years together seri-
ously interfered with.

Government spent lavishly. But it also did its best, by the introduction
of an income tax and in other ways, to keep the inflationary advances from
the Bank down to a minimum, and its finance never ceased to remain compe-
tent and responsible. But the reticence of the government about the extent
of its borrowings from the Bank, quite understandable until Waterloo, was
a contributory factor in people’s propensity to blame the Bank for whatever
consequences they did not like. This propensity, strong at all times, which was
fully shared by the majority of writers, must be borne in mind throughout:
from Ricardo to the most unsophisticated man in the street, everybody loved
to make a whipping boy of the central bank, a habit economists have retained
to this day. In public at least, the Bank was unable to defend itself, because
no effective defense was possible without giving the government away — and
politicians in power are in a position to make their resentment felt. This may
conceivably explain much that strikes historians as lack of insight in the offi-
cial pronouncements. As a matter of fact, the Bank was obviously not free
to refuse the government’s ‘requests’ for advances. If there can be any ques-
tion at all of its ‘responsibility for inflation,’ it must be understood to refer
to its loans to (discounts for) the public, which were inevitably increased as
a consequence of the government’s deficit spending. But they were rationed
and kept down whenever government borrowed heavily, and cannot be said,
everything considered, to have been obviously excessive — though it is, of
course, always possible to argue that they could have been less had the Bank
been willing to take the responsibility for disturbing production in wartime.
Moreover,, punitive rates 4 above 5 per cent were rendered impossible by the
usury laws until 1832. There is no doubt that such inflation as there was

4 I shall take this opportunity to clear up a point that played a role in the discussion
of the Bank’s responsibility and arises in every war inflation. Government expenditure
financed in any way that does not reduce the public’s expenditure by the same amount
will raise prices, if it impinges on a well-employed business organism, which in the
case before us was so at times but not at others. When prices have risen, then, the money
cost of producing being increased thereby, nongovernmental borrowing will be increased
also: the government inflation produces in this case a secondary wave of credit inflation
and also reinforces itself currently. Now it is evidently possible to say, since such gov-
ernment inflation by definition implies increase in the means of payment and since

692 in: from 1790 to 1870

was strong enough to accentuate speculative excesses and breakdowns, a boom
in agriculture, and conditions of general prosperity in most of the years to
1815, none of which could, however, have been entirely prevented by the
Bank.

On the surface, then, the controversy that contributed so much to mone-
tary analysis was simply a controversy between writers who sought to prove
and to indict inflation and to locate the responsibility for it with the Bank,
and other writers who sought to deny the presence of inflation or to justify
it and to locate the responsibility for rising prices and unfavorable exchanges
with circumstances other than the behavior of the Bank. So far as this goes,
it is possible to speak of two fairly well defined and opposing groups or parties.
Also, the first one may be said to have prevailed in the sense that it succeeded
better than did the other in impressing its views upon the famous Bullion
Report of 1810. 5 In consequence, it has become usual to affix to the mem-
bers of this group the meaningless label Bullionists and to the opponents of
the report the label Anti-Bullionists, although the report itself really repre-
sents various compromises. However, the practical issues and the recommen-
dations as to 'what should be done about it’ are of no great importance for
us. Important is the analytic quality of the arguments and diagnoses produced.
And from this standpoint the party lines lose much of their definiteness and
almost all their interest. The differences between the supporters of the Bullion
Report are actually much more interesting than is the common bond between
them. But before taking leave of this historic document, let us note the sig-
nificant fact that the Report of the Cunliffe Committee that recommended
England’s return to gold at prewar parity in 1918 (final report, 1919) dis-
played little, if any, knowledge of monetary problems that was not possessed
by the men who drafted the Bullion Report.

(b) The Question of the Standard. About twenty years of irredeemable
paper and all the economic changes that had occurred during that time made
the problem of deciding on a monetary policy much more difficult than it
would have been after a shorter disturbance. De facto, though not legally,

the secondary inflation does the same, that the whole trouble is 'increase in the quantity
of money.’ But since this increase in the quantity of money is an incident in a process
that involves many more fundamentally 'causal’ elements (the policy that led to the
war, among others), and since the secondary inflation is in fact induced by a preceding
rise in prices, it is equally possible to say that the bank or banks which finance the
increase in both governmental and business expenditure are playing a ‘passive’ role and
in particular, so far as business borrowing is concerned, are but 'responding to needs’
that have arisen in consequence of high prices and high money wages — or else that the
‘quantity of money’ (notes and deposits) increases because prices have risen. Neither
of these two statements is necessarily erroneous. But each of them becomes erroneous
as soon as it is interpreted to deny the element that the other one emphasizes. This,
however, is what happened in the English controversy of 1800-181.0, as it happens in
any discussion of any inflation. But the fundamental futility of any such discussion
does not exclude the possibility that participants learn and produce valuable results
thereby.

6 See Cannan’s edition mentioned above ( The Paper Pound of 1797-1821).

MONEY, CREDIT, AND CYCLES 693

England had been on a gold standard when restriction was decreed in 1797.
Within a few years a strong political current set in that was to carry her to-
ward the legal adoption of it (1816) and eventually toward the resumption of
specie payments at the prewar par (Peel’s Resumption Act of 1819, actual
resumption 1821). 6 The possibilities of continuing the paper regime of the
war (the course recommended by Lord Keynes in 1923) or of adopting bi-
metallism — or the silver standard — were advocated but not seriously consid-
ered. It should be mentioned, however, that Ricardo’s Plan, according to which
the monetary metal should not enter into hand-to-hand circulation but be
held by the Bank for the purpose of redeeming notes, not in coin but in ingots
of bullion, was actually embodied in the Resumption Act of 1819, though,
meeting with complete indifference on the part of the public and with little
favor on the part of the Bank, the relevant permissive clauses did not become
operative.

Resumption impinged upon a depressive situation. Postwar readjustments
were in any case bound to cause difficulties, particularly in the agrarian sector.
Not only the inevitable fall of prices from the war peak — though the exact
dates and figures given by Silberling have been criticized, there is little doubt
that the price level, by 1819, had fallen by something like 30 per cent in
about five years — but also the adaptation of production to entirely new situa-
tions presented problems of the kind which it always takes a depression to
straighten out. In addition, there was the fact, realized by many but not all
the experts, that the prospects of gold production were distinctly unfavorable.
Finally, however, there was something else which these experts — just as the ex-
perts of 1918 — entirely failed to see: quite independently of the preceding
war inflation, the English economy was then entering upon one of those pro-
longed periods of falling prices, interest rates, and profits, of unemployment
and instability, that always follow upon 'industrial revolutions.’ The last
decades of the eighteenth century had witnessed such a revolution — the new
cotton machinery, the steam engine, and canal building are but the most
conspicuous instances of the events that transformed the very bases of manu-
facturing and trade. Results began to pour forth from 1815 on, upsetting the
pre-existing industrial structure and exerting primarily depressive effect, until
the economic process was steadied again, weakly in the 1830’s, more strongly
in the 1840’s, by the beginnings of investment in railroad construction. In a
situation such as this, even a slightly restrictive monetary policy is not the
matter of indifference which it would be in a situation that is located on an
upward trend of prices. And a slightly restrictive effect resumption undoubt-
edly had.

6 The outstanding symptom of the increasing momentum of that current was Lord
Liverpool’s Treatise on the Coins of the Realm . . . (1805), which, its complete value-
lessness notwithstanding, has retained its place in the history of the subject owing to
the political position of its author. Symptomatic of small middle-class feelings and a
powerful influence in shaping them into a political force was William Cobbett’s agita-
tion against paper (see his Paper against Gold, 1810-11, reprinted 1817). It is said that
Sir Robert Peel was quite frightened of Cobbett's 'thunder.'

694 III: FROM 1790 TO 1870

The surviving sponsors of the policy of resumption recommended in the
Bullion Report had therefore little reason for celebrating, its ultimate success.
They had in fact become silent o\ apologetic a few years before the event.
They, shared with their opponents the erroneous diagnosis according to which
the responsibility for the further fall in the price level throughout the 1820’s
rested exclusively with resumption. Also, they were glad to join these op-
ponents in entirely irrational accusations against the universal scapegoat, the
Bank, which was supposed to have mismanaged resumption and in particular
to have caused international depression by raising the value of gold. We can-
not go beyond pointing out that Tooke was almost the only writer of note
to realize the absurdity of this and to come near to a more reasonable diag-
nosis in terms of non-monetary factors. For the rest, discussion went against
the advocates of the unfettered gold standard until the upswing of 1830-35
and the emergence of another issue deflected attention, and until Russian,
Australian, and Californian gold changed the monetary situation and the
humors of economists: after 1850, Peel’s Act of 1819 became in fact quite
popular with them; toward the end of the century irrational admiration for
the measure had largely replaced irrational condemnation.

(c) Bank Reform. Largely, though not exclusively, the literature on banking
in which we are interested centers upon advocacy and criticism of another
Peel act, the Bank Charter Act of 1844, which tried to give effect to ‘the
theory that banking ought to be separated from the control of the currency’ 7
and actually enforced what may be described as a Too per cent reserve plan’
for bank notes. Again — like resumption — the measure grew out of a strong
current of public opinion that crystallized in the vicissitudes of the years
1836-9 and was thereafter impervious to argument: both public and politi-
cians saw no causes of those vicissitudes other than misconduct or irresponsi-
bility on the part of note-issuing banks. Notes and any troubles that arose
about them were clearly visible. Whereas deposits, the use of which was as
yet confined to a much smaller sector of the public, passed practically unno-
ticed, notes circulated widely and their issue was to the man in the street
the typical form of the Iniquity of Banking. 8 What the average M.P. presum-
ably thought he was doing, when he cast his vote for Sir Robert Peel’s bill,
was that he was stopping a flagrant abuse and protecting the people’s money.

By 1800, England’s banking system had reached an advanced stage of de-
velopment. In the metropolis there were, besides the Bank of England, a

7 See P. Barrett Whale, ‘A Retrospective View of the Bank Charter Act of 1844/
Economica, August 1944. In view of the facts that we are not primarily interested in
the Act itself and in its sociological and economic interpretation and that, in addition,
it would be quite impossible to do justice to this topic even if we were, perusal of this
admirable three-page article is strongly recommended. As regards the history of English
banking, we are in a similar position: for facts and figures the reader is referred pri-
marily to the work of E. Wood (mentioned at the beginning of this chapter); our own
text cannot aim at more than focusing the reader’s attention on a few points necessary
to understand the setting in which analysis and controversy ran their courses.

8 This is the title of an anonymous pamphlet published in 1797.

MONEY, CREDIT, AND CYCLES 695

number of private banking houses (partnerships; the joint stock banks put in
appearance after 1826, giving a decisive impulse to deposit banking because
they did not have the right to issue notes) 4 and bill brokers. Outside the me-
tropolis, and so far as merchants did not directly bank with London (or, after
1826, with one of the branches of the Bank of England), industry and trade
were served by the country banks, whose number declined in the 1820’s after
having greatly increased during the Napoleonic Wars, and also by bill brokers.
Two features must be particularly noticed. First, these country banks, though
they had some deposit business, chiefly financed their customers by the issue
of bank notes (promissory notes payable on demand in coin or Bank of Eng-
land notes) in discounting commercial bills. Against these notes they held re-
serves in varying proportions that were not fixed by law. This practice was
obsolescent even before it was killed by Peel’s Act of 1844. 9 But for many
English writers on banking — and still more so for their continental brethren —
the bank note that originates in the discount of a trade bill remained the back-
bone of the theory of banking throughout the period and beyond. 10 Second,
there was another practice which was very common all over England outside
of London and especially in Lancashire and which is so interesting for us be-
cause it teaches us better than anything else what money really is: traders used
bills of exchange for making payments. That is to say, a firm that had sold some
commodity would draw a bill on the buyer who accepted it, and then endorse
it and hand it on to another firm in discharge of some obligation to the
latter. Thus bills of exchange, accumulating endorsements, actually went from
hand to hand, often without interest, and were, for the time being, no longer
elements in the total demand for money but elements in its supply. 11

9 The issue of notes of banks other than the Bank of England was only limited at a
fixed amount and not stopped by Peel’s legislation of 1844 and 1845. But the intention
and the effect were to induce country banks to abandon their nofe issue voluntarily.

10 This fact is important to keep in mind, not only because it invited the interpreta-
tion of the banking process which we shall presently discuss under the label of Com-
mercial Theory of Banking, but also because it is essential in order to understand fully
the point at issue in the controversy around Peel’s Act: the advocates of this measure
(the so-called Currency School) looked upon the notes of the Bank of England not as
instruments of credit, means of payment that originate in commodity trade, but rather
as what they actually were by that time, a kind of reserve money; whereas the opponents
of the measure (the so-called Banking School), and especially most of its continental
adherents who were influenced by the partly different banking practice before their
eyes, still clung to the trade-bill bank-note schema. In part, therefore, the whole con-
troversy rested upon a question of fact or, so far as this was being overlooked, on a
misunderstanding. The theory of central banking that linked the bank note to the
trade bill proved an extremely hardy plant: its influence dominated banking legislation
on the Continent beyond the nineteenth century; it asserted itself strongly in the Fed-
eral Reserve Act of 1913. For an excellent exposition of this theory, see Vera Smith,
The Rationale of Central Banking (1936).

11 This practice received much attention. There were businessmen who went so far
as to put bona-fide trade bills ‘in the first class of our currency’ (see J. W. Bosanquet,
Metallic, Paper, and Credit Currency, 1842).

696 III: FROM I79O TO 1870

The London bankers acted as agents or correspondents for the country-
banks and stood in a relatively close relation to one another — the London
Clearing House was, by the end of the eighteenth century, already a well-
established institution. Thus we behold an organic system rather than a num-
ber of individual billiard balls. Moreover, the system either had already found,
or was rapidly finding, its central organ in the Bank of England, as the lender
of dernier resort as Sir Francis Baring put it . 12 But even if we had space, it
would be extremely difficult to describe the process by which the Bank came
to realize this responsibility, to accept it, and to develop routine principles
by which to implement it; and it would be still more difficult to appraise, in
the light of the conditions of that time, the success which attended its action
or inaction at each of the stages of that process.

One of the difficulties we experience in finding out what it was the Bank
meant to do at any given time, or even what its practice actually was, is the
reticence of its official spokesmen who, even when they were forced to say
something, did their best to confine themselves to innocuous trivialities that
would give as little scope to hostile criticism as possible. Practitioners of busi-
ness are rarely able to formulate their own behavior correctly. But in this
case there were particular reasons for reticence. The reader will readily under-
stand them if we view the position of the Bank realistically. As I have already
stated, the Bank had few friends; Control is now a popular word. It was the
reverse of popular in the epoch of intact capitalism. To say openly that the
Bank was trying to control the banking system, let alone to manage the gen-
eral business situation, would have evoked laughter if not indignation: the
thing to say was that the Bank was modestly looking after its own business;
that it simply followed the market; and that it harbored no pretensions at
controlling anything or anybody. Moreover, in the formative stage of its pol-
icy, it would have been madness to assume in so many words the responsibili-
ties that we now attribute to a central bank as a matter of course. This would
have meant commitments which the Bank could not have been sure of being
able to fulfil. Moreover, any spectacular announcement of policy would have
brought down upon directors hosts of unbidden advisers, every one of them
convinced that he knew much better what the Bank ought to do-— and there
would have been the danger of public outcries for legislation to force the Bank
to take, or to refrain from taking, particular courses of action. Moreover, cool

12 Observations on the Establishment of the Bank of England (1797). In the same
year, H. Thornton, in his Evidence before the committees of both the House of Lords
and the House of Commons, gave a preview of his ideas on central-bank policy that he
was to present more fully in his famous book of 1802. There are two things to be dis-
tinguished, which are both covered by the last-resort slogan. On the one hand, the
Bank of England was the last source of cash and, in this sense, the guardian of the
currency. On the other hand, it was the banking system’s (the money market’s) last
source of credit and, in this sense, by virtue of its situation if not from choice, the
guardian of the credit structure which entailed the consequence, as Thornton saw or
foresaw, that its policy had to be essentially different from that of any other individual
bank.

MONEY, CREDIT, AND CYCLES

697

refusal to take responsibility in crises did not necessarily mean what it seems
to mean. In 1782, 1792, 1811, 1825 the result of such refusals was that the
government was forced into action: it issued exchequer bills to merchants in
difficulty and thus provided them with material which the Bank was ready
enough to discount — and the motive of ths refusals may have been precisely
to open up this delightfully safe way of coming to the market’s aid. There
is thus less reason for the indignant .surprise some critics of the Bank seem to
feel at the reluctance the Bank displayed 'to recognize its responsibilities' and
at such sentiments as those of Thomson Hankey (Governor, 1851-2) who, as
late as 1867 (in his Principles of Banking), came near to denying any respon-
sibility of the Bank for the money market — though what he really denied was
only that 'good Bills of Exchange . . . ought at all times to be discounted
at the Bank of England’ (p. 33 of 2nd ed., 1873). If we add that fine steer-
ing looks like no steering, we cannot exclude the possibility that both the
insight and the practice of the directors were above — and especially ahead of —
what they have been credited with.

Actually, owing to the mere size of the Bank, nothing that happened in
England or indeed in the world can, from the first, ever have been irrelevant
to its decisions. A little reflection will convince the reader that directors, even
if they had been guided exclusively by the Bank’s long-run profit interest and
even if they had recognized no responsibility to anyone except the Proprietors
(stockholders), would have had to do most of the things which, in the historical
conditions of every stage of the Bank’s career, constituted the functions of a
central bank. There is more to the old theory that a central bank serves the
economy best if it attends to its own profit interest than we are at present
willing to admit. Precisely when directors, clearly and consciously, began to
attend to larger considerations is not known. Symptoms that admit of such an
interpretation are certainly observable in the Bank’s behavior during the Na-
poleonic Wars, when some methods of credit control developed, such as ra-
tioning, irrespective of the standing of borrowers, and possibly also attempts
at influencing, through the London market, the behavior of country banks. 13
After 1815, the Bank began to shape its permanent peace-time policy by an
eminently healthy method of trial and error, much as the Federal Reserve
System evolved what was believed to be its permanent policy from 1918 to
1923. We get two interesting glimpses of some milestones on this road from
statements made by the Governor, J. Horsley Palmer, in his evidence before
the Parliamentary Committee of 1832 on the Bank of England Charter. The
one refers to an empirical rule ('Palmer’s rule’) that had been adopted in
1827, namely, the rule to keep the Bank’s 'securities’ (discounts, loans, invest-
ments) approximately constant so that changes in circulation would occur
only as gold flowed into or out of the country and circulation would behave
as if it were wholly metallic. This rule — not meant to be obeyed strictly —

13 On incipient open market operations through the management of government
deposits, special deposits, and special advances, see the work of E. Wood (English
Theories of Central Banking Control, 1819-1858) mentioned above.

698 in: FROM 1790 TO 1870

anticipated the principle of Peel’s Act to some extent and may in fact have
been adopted in expectation of some such regulation. More important is the
other statement that actually embodied a piece of analysis. Slightly reformu-
lating Palmer’s answer to Question 678, we may put it like this. Accepting an
unfavorable turn of foreign exchanges as a sign of an 'unduly’ great expansion
of credit, he averred that the Bank could prevent or stop an outflow of gold
by raising its rate: the increased rate would reduce borrowing; reduced borrow-
ing would mean a smaller volume of transactions and employment, and lower
prices; reduced prices would increase exports and decrease imports; and this
would turn the balance of payments, hence exchange rates. It is gratifying to
note that this proposition does not stand in the name of some professor of
economics. But it sounded too academic for professors to miss it. And it be-
came the basis of the ‘classic’ theory of central-bank policy as taught in nine-
teenth century textbooks. The much more important short-run effect of an
increase 'in bank rate — that it will attract short balances from abroad — was
also discovered as we shall see (Thornton, 1802; Tooke, 1838).

We cannot go any further into the evolution of central-bank policy during
the period — the increasing importance, within the Bank’s deposits, of bankers’
balances, its varying policies with respect to its own discount business, its
changing attitudes to the money market, and so on. One point cannot be
passed by, however. Some critics have averred that the Bank, when it had real-
ized its responsibilities at long last, allowed itself to be guided exclusively by the
state of the foreign exchanges, that is, by actual or expected gold movements.
Available information does not lend support to this view. Directors seem to
have been guided by their diagnoses and prognoses of the general business
and political conditions at home and abroad. There was indeed strong correla-
tion between the bank rate and foreign-exchange rates. But this correlation
is easily accounted for by the fact that, under the unfettered international
gold standard, gold movements were a sensitive index of general business
conditions.

2. Fundamentals 1

vVe shall not expect that writers of the type that created the literature we
are about to survey would be greatly interested in the logical fundaments of
the theory of money and credit — the kind of thing that the German term
Grundlagenforschung denotes. There is indeed a flavor of primitivity, not to
say crudity, about the conceptualization of those economists, which at the
time and later led to various misunderstandings and futile controversies. This
is no mere matter of terminology. In the case before us, hazy terminology was
the result of haziness of thought about what money is and what money does.
From the first (Thornton, 'Evidence before the Committees of Secrecy,’ 1797),
a comprehensive category was formed of all means of payment — also called
the circulating medium and sometimes 'currency’ — that included full-value

1 The chief authority on the purely theoretical part of that period’s work is Arthur W.
Marget (Theory of Prices, 1938-42, passim).

MONEY, CREDIT, AND CYCLES 699

and token coins, bank notes, deposits subject to check or, alternatively, the
checks themselves, and, under certain conditions, bills of exchange. This was
all right: obviously, the total of All We Pay With is a meaningful notion;
its chief analytic value consists in the recognition it implies of the fact that
there is no essential difference between bank notes and deposits. And that
this fact was not self-evident but had to be ‘discovered' is proved by the fur-
ther fact that some writers refused to recognize it. Lord Overstone and the
advocates of Peel’s Act of 1844 generally drew a sharp dividing line between
bank notes and deposits which was clearly not merely terminological and the
precise significance of which is not easy to ascertain, because none of those
authors was sufficiently explicit about logical fundaments. 2 Tooke was at first
one of those who fought against the conceptual merger of bank notes and
deposits, until 1840, when the third volume of his History appeared. By 1844
(Inquiry), he had changed his mind and adopted it, perhaps — as it is hardly
too uncharitable to suspect — because this merger offered a convenient argu-
ment against Overstone and Peel’s bill.

But even most of those who used that comprehensive concept of Means of
Payment 3 did not, as do most of us, identify it with the concept of Money. 4
The great majority of leading authors, among them Thornton, Ricardo, Senior,
Fullarton, J. S. Mill, and Marx, defined money, as it had been defined by
Galiani, Beccaria, and Smith, as a commodity that has been chosen for means
of exchange, measure of value, et cetera. Roscher expressed dominant opinion
when he said that the false theories of money may be divided into two groups:
those that hold that money is more, and those that hold that money is less,
than the most salable commodity. This, on the face of it, makes them Theo-
retical Metallists (see above. Part 11, ch. 6, sec. 2).

2 The nature of the resulting difficulty of interpretation will be realized if we consider
separately the case of English bank notes. Bank of England notes, and Bank of England
notes in wartime. As regards the first, as has been pointed out already, there are tech-
nical and practical reasons why a man who puts bank notes and deposits on a par
on logical principle might still refuse to do so for purposes of policy. As regards the
second, as we have also seen, the notes of the Bank of England, being ‘reserve
money’ for the other banks, had in fact a distinctive place in England’s monetary sys-
tem, recognition of which was again compatible with treating them like deposits on
principle. As regards the third, it may be held— and this is important to remember in
order to understand Ricardo’s attitude — that the notes of the Bank of England changed
character in wartime and turned into something not essentially different from govern-
ment fiat. Which of these possible standpoints an author takes makes a lot of difference
to his fundamental construction. Yet, unless he is very explicit about it, it is difficult
to say which of these standpoints he actually did take — and, in addition, whether he
adhered to it consistently.

3 This was not always done explicitly. Thus this concept must, as we shall see, be
attributed to J. S. Mill, whose theoretical construction nevertheless avoids its explicit use.

4 An example of such identification has been pointed out by Viner (op. cit. p. 247) :
E. Hill, Principles of Currency (1856). Currency, however, did not always, though it
did often, mean the same thing as money, but was also used as a synonym for means
of payment in the widest sense.

700 III: FROM 1790 TO 1870

To establish this proposition we must take account of several facts that ap-
parently contradict it. First, not all writers accepted the metallist doctrine as
explicitly as did Fullarton (who included in money only full- value coin) and,
above all, Marx. Others, notably Thornton (see the first page of Paper Credit)
implied it rather than stated it. Second, all or most included irredee ma ble
government paper or would have included it if pressed. But this does not con-
tradict our proposition, because paper money may be construed in such a
manner as to come within a metallist definition of money. Thus Ricardo, not
inelegantly, construed paper money as money, the whole cost of which ‘may be
considered as seigniorage' ( Principles , eh. 27). Nor should it be urged that
Ricardo cannot have been a metallist because he advocated a monetary sys-
tem ( Proposals for cm Economical and Secure Currency, 1816) in which gold
would be completely eliminated from circulation and because he held that ‘a
currency is in its most perfect state when it consists wholly of paper money'

( Principles , ch. 27), for the sentence goes on like this: ‘but of paper money
of an equal value with the gold which it professes to represent/ Such a gold-
certificate currency would function exactly like a gold-coin currency and dif-
fers from it not by any basic principle but merely by certain economies. The
very idea was to make sure that the value of the monetary unit should fluctu-
ate according to the value of gold: such a system is still metallist.

Third, however, we must take into account the tendency to assimilate bank
notes with paper money. Sir Robert Peel, in introducing his bill, defined
money to cover coin of the realm and bank notes, the latter being ‘paper cur-
rency,’ and this manner of speaking was very common. But it does not signify
that credit means of payment were to be considered as money but merely
that, in the opinion of Ricardo and Overstone, bank notes were not credit
means of payment but de facto money though they should not be. Or to put
it differently, using a phrase of Roscher’s: they were money paper that had
illegitimately usurped the role of paper money and were now to be forced
to behave as if they were legitimate gold money. This is the whole philosophy
of Peel’s Act. Therefore, the inclusion in money of bank notes that are viewed
in this light does not contradict our proposition. J. S. Mill excluded bank
notes precisely because, having departed from the Ricardo-Overstone teaching,
he did not view them in this light. 5

But if we claim the majority of writers for theoretical metallism — since
most of them also held that it was practical wisdom to base the currency upon
gold (or silver), they were also practical metallists — we must be careful to
make sure precisely how much this means. It does mean that they — and with
unmistakable clearness Ricardo, Senior, Mill, and Marx — construed the phe-
nomena of money from the case of full-value metallic money, as we shall
presently see. It also means that this impaired their analysis of the subject
of Money and Credit, as will be explained in Section 4. But it does not mean

6 Hence he was in error when he believed that inclusion or exclusion of bank notes
from money was a terminological issue, a mere ‘question of nomenclature’ ( Principles ,
Book m, ch. 12, J 7). *

MONEY, CREDIT, AND CYCLES 701

that this metallist basis of their analysis hampered them at every step. Some-
times it was happily forgotten. And at other times apposite constructive devices
prevented it from doing harm. One such device we have observed already.
Some later German writers have held that the metallist starting point makes
it impossible to do analytic justice to the facts of irredeemable paper money.
Yet Ricardo and J. S. Mill experienced no difficulty at all in fitting these facts
into a metallist theory.

As in the subsequent period, the central problem of monetary theory was
the value of money. More definitely than in the preceding period, this value
was identified with the exchange ratios between money and goods or the
former’s Purchasing Power . 6 But the fact that all money prices do not nor-
mally change in the same direction, let alone proportion, that is, the fact that
gives rise to the problem of the general purchasing power or its reciprocal,
the general price level, caused difficulties that were very obvious in the dis-
cussion on war inflation and were never really overcome. Most of us — un-
critically perhaps — believe that we may solve them by the method of index
numbers, and this method, as we know, was already available. But few the-
orists took kindly to it. Wheatley was the first one to do so as far as I know.
Most of the rest, up to and including J. S. Mill, distrusted it or even did not
grasp its possibilities, the efforts of Lowe and Scrope notwithstanding. Neither
did they develop any articulate theory of the price level. They talked loosely
about prices in general or general prices or, more precisely, about the scale
of prices (Cairnes), but they cannot be said to have done more than adum-
brate the idea, and some, among them Ricardo, definitely rejected it . 7 This
is the reason why his proof that bank notes were depreciated during the
Napoleonic Wars relied primarily on the premium on bullion and why, in
dealing with the monetary aspects of foreign trade, he compared prices of in-
dividual commodities at home and abroad, though he and others may have
believed that these were representative of more general variations.

The leading 'classics’ solved the problem of this rather dubious value of
money simply by extending to it their general theory of value. Accordingly,

6 Confusion occasionally arose from the usance of businessmen that identifies value
of money with the monetary rate of interest. Economists’ anxiety to avoid this con-
fusion may be responsible for the aversion of some of them to recognize the relations
between purchasing power and interest. The former term was, however, also used in a
different sense, e.g. by J. S. Mill, namely in the sense of the maximum of purchases
an individual can effect.

7 See, e.g., his categorical statement in the Proposals. Professor Viner (op. cit. p. 313,
where the reader also finds that statement) points out, however, that Ricardo used the
term price level in his correspondence. The refusal to recognize the price level as a
meaningful, or measurable, concept is* however, a point against Ricardo only from the
standpoint of modem economists, who handle it as a matter of course. From the stand-
point of the small but distinguished group who believe neither in price index numbers
nor in the price-level concept itself (like Professor von Mises, von Hayek, and, with
some qualifications, also von Haberler) it is, of course, a point in his favor and proof
of sound insight.

702 III: FROM 1790 TO 1870

they distinguished a natural or long-run normal value of money and a short-
run equilibrium value. The former or, as they also said — misleadingly — the
‘permanent* value was determined by the cost of producing (or obtaining) the
precious metals , 8 the latter by supply and demand.

Observe three things. In the first place, this procedure ratifies our calling
them theoretical metallists. In the second place, both propositions are ob-
viously equilibrium propositions, though they refer to different types of equi-
librium. In the third place, the words ‘determined by* are misleading and
should be replaced by ‘determined at/ For there is no particularly strong
causal connotation to this determination. The reader can easily satisfy him-
self of this by considering the following case: suppose that the. public changes
its habits of payment permanently so that henceforth everybody holds less
cash (in gold coins) than he did before; less gold will then be 'required* at a
given level of prices; gold production will, within the assumptions of this
analysis, certainly so adjust itself that (marginal) costs equal the new and
lower value of the monetary unit; but it should be clear that in this case costs
are being adapted to value at least as much as the new value is adapted to the
new costs. In other words, our long-run equilibrium proposition is one of
many long-run equilibrium conditions and can acquire causal connotation
only by the grace of the theorist, that is, by the latter's decision to freeze all
other factors in the situation. Even then, a change in the marginal costs of
gold will affect the value of money only through affecting the supply of
money, as Senior and J. S, Mill recognized . 8 Of course, it must be borne in
mind that, owing to the extreme durability of gold, the total stock of it varies
but slowly in response to the annual rate of production and that, hence, the
pattern of short-run equilibrium will in the case of gold be of greater impor-
tance relatively to the pattern of long-run equilibrium than it is in the case
of other commodities. Even Ricardo, in spite of his bent for long-run analysis,
reasoned about money chiefly in terms of the former, that is, in terms of
supply and demand.

We are now prepared to consider the vexed and vexing questions how far
the ‘classics’ accepted the quantity theorem and whether or not it acquired
illegitimate authority with them. For three of the leading writers, Thornton,
Senior, and Marx, the negative answer is so clear as not to require proof . 10

8 This is how it was put by J. S. Mill ( Principles , Book m, ch. 12, J 1; but the sedes
materiae is ch. 9), who emphasized the fact that gold is an imported commodity. But,
less elaborately, Ricardo and, much more elaborately. Senior and Marx were of the
same opinion. Senior was the only one, however, who worked up that theorem into a
comprehensive theory: he saw the cost of production of money not only in its relation
to the demand for gold in the arts but also in its relation to the public’s demand for
cash to hold (Three Lectures on the Value of Money, delivered 1829, printed 1840,
London School Reprint, 1931).

9 Ricardo should not have admitted it because, in his general theory of value, the
price of a commodity can fall without an increase in its supply.

10 Something will have to be said about Thornton’s position, however. The only one
of the three to repudiate the quantity theorem altogether was Marx, who called it an

MONEY, CREDIT, AND CYCLES 703

Let us then look at the positions of Ricardo and J. S. Mill. First, recall that
mere recognition of the relevance to value of the supply or quantity of gold
does not imply acceptance of what we have called the ‘strict 7 quantity theorem
(Part 11, ch. 6, sec. 4). That is to say, the mere statement that the purchasing
power of a monetary unit ‘depends upon 7 supply and demand does not identify
any particular theory of money. The first of the troubles with which the reader
has to cope in this matter is that Ricardo and James Mill (and a long list
of later writers on money, including Pigou and Cannan) did not realize this
but, in striking analogy with their procedure in the case of the wage fund,
tried to deduce the quantity theorem from the ‘law 7 of supply and demand.
As a result, in every individual instance, one has to ask himself whether they
meant something that does follow from the ‘law 7 of supply and demand — for
example, that ceteris paribus an increase in the quantity of money will tend to
decrease the purchasing power of the unit — or whether they meant more —
for example, that ceteris paribus ( strictissime ) an increase in the quantity of
money will decrease the purchasing power of the unit proportionately. The
second of the troubles with which the reader has to cope arises from the fact
that the term ‘quantity theory 7 covers several meanings, so that if he finds that
two writers disagree on whether or not ‘the 7 quantity theory should be at-
tributed to a given author, he must keep in mind the possibility that the two
writers simply mean different things by that term. For our present purpose we
shall define it to mean: first, that the quantity of money is an independent
variable — in particular, that it varies independently of prices and of physical
volume of transactions; 11 second, that velocity of circulation is an institu-
tional datum that varies slowly or not at all, but in any case is independent
of prices and volume of transactions; 12 third, that transactions — or let us say,
output — are unrelated to quantity of money, and it is only owing to chance
that the two may move together; fourth, that variations in the quantity of
money, unless they be absorbed by variations in output in the same' direction,
act mechanically on all prices, irrespective of how an increase in the quantity
of money is used and on what sector of the economy it first impinges (who
gets it) — and analogously for a decrease.

I maintain that Ricardo, before him Wheatley, after him James Mill and
McCulloch, held the quantity theory in this strict sense and that no other
major writers did. It is true that Ricardo — and the same goes for McCulloch
but not for James Mill — introduced qualifications occasionally and that, here
arid there, he made statements that were logically incompatible with his strict

‘insipid hypothesis’ ( abgeschmackte Hypothese). It seems that he took this position
under the impression that the quantity theory of the value of money and the cost of
production theory of money are alternatives between which the analyst has to choose.
This is not so: the value of money as ‘determined’ by quantity and the value of money
as determined by cost of production must, in the long run, necessarily coincide, as Mill
elaborately showed.

II As we shall presently see, this again carries different meaning according to the
definition of Quantity of Money an author adopts.

12 This may be relaxed by inserting the word ‘normally . 7

704 III: FROM 1790 TO 1870

quantity theory, exactly as he did in matters of his labor-quantity law of value.
In both cases, however, he mentioned them only in order to minimize their
importance. In the same sense in which we are within our rights in averring
that he held the latter, even though only as an approximation, we are also
justified in attributing to him the strict quantity theory, as an approximation. 13

The case of J. S. Mill is quite different. 14 At the start, he committed himself
indeed to a strict quantity theory in the sense defined, even asserting in so
many words that Variations in the quantity of money will affect its value 'in a
ratio exactly equivalent’ and that this property is ‘peculiar to money’ (Book
hi, eh. 8, § 2). But he closed the chapter by saying that this strict quantity
theory is nevertheless under modern conditions ‘an extremely incorrect ex-
pression of the fact.’ The apparent contradiction is easy to resolve. First, he
confined the range of application of the quantity theorem to societies that
know of no other means of payment except coin and irredeemable paper. The
emergence of ‘credit,’ according to him, changes the situation radically: with
a developed system of ‘credit,’ prices no longer depend, in any simple manner,
on the quantity of money in that sense. 15 Second, he emasculated the quantity
theorem still further, even for the case of a purely metallic circulation, by
restricting its validity to the quantity of money that actually circulates. But
the circulating quantity of money is certainly not independent of the business
situation — output, employment, and so on — as J. S. Mill indicated by his turn

13 It only serves to blur the lines of historical development if some historians, exactly
as in the field of the theory of value, insist that if all of Ricardo’s asides be collected
and worked out, practically everything might be attributed to him that we find in any
later writings. But he is fairly entitled to defense on another score. Writing at a time
when 'bank directors and ministers gravely contended . . . that the issues of notes by
the Bank of England, unchecked by any power in the holders of such notes to demand
in exchange either specie or bullion, had not, nor could have, any effect on the prices
of commodities, bullion, or foreign exchanges’ ( Principles , ch. 27), he was quite right
to put the case against such foolishness more strongly than Thornton, with a more
refined theory, was able to do. His famous analogy between the Bank’s power under
the Restriction Act and the discovery of a gold mine in the Bank’s courtyard was not
only telling but, so far as it went, also correct. This does not alter the fact, however,
that, in matters of monetary as of general theory, Ricardian teaching is a detour and
that it slowed up the advance of analysis, which could have been much quicker and
smoother had Thornton’s lead been followed — had Ricardo’s force not prevailed over
Thornton’s insight.

14 Mill’s exposition of the theory of money, or the bulk of it, is to be found in
Principles, Book in, chs. 7-14 and 19-24.

15 The question arises whether the quantity theorem now applies to quantity of
‘money’ that includes notes and deposits. In its more modern versions, the quantity
theorem is usually understood in this sense. But J. S. Mill did not take this line. Still
less did he adopt the proposition that the quantity theorem retains validity for coins
plus irredeemable paper, even in a developed credit system, because deposits bear a
constant proportion to the reserves that consist of legal-tender money. This proposition,
which was to be sponsored at the end of the subsequent period by Irving Fisher, was
at the time held explicitly by Torrens and implicitly by Lord Overstone.

f -I

MONEY, CREDIT, AND CYCLES 705

of phrase about the quantity of money 'which people are wanting to lay out;
that is, all the money they have in their possession except what they are
hoarding, or at least keeping by them as a reserve for future contingencies’
(Book in, ch. 8, 52). Moreover, he was quite aware of the implications of
this as we have seen in our discussion of his interpretation of Say’s law. And
if we co-ordinate this with his recognition of the fact that purchases 'on credit’
— that is, by means of credit instruments of one kind or another — influence
prices as much as do purchases for money (ibid. ch. 12), we discover that in
his analytic schema it is not at all the quantity of money per se which acts
upon 'general prices’ but simply expenditure, and that this expenditure is not
closely, let alone uniquely, related to the quantity of coin or paper money.
Thus, there is hardly any difference left between Mill’s version of the quantity
theory and the views of its opponents, contemporaneous or later. J. S. Mill’s
conceptual arrangement achieved the same end that others achieved by mak-
ing velocity an economic variable. For to make the relevant quantity of money
a variable in the purchasing-power problem by defining it as the quantity
that is actually being spent evidently comes to the same thing as to start
from a given quantity of money (however defined) and to make average ve-
locity an economic, and in particular a cyclical, variable. The former procedure
takes the curse off constant velocity and has in addition this advantage, that
it enables us to separate the two constituents of what is usually labeled as
velocity: the rate of spending, which is certainly variable, and velocity in a
narrower sense, which, being determined by habits of payment, the degree of
concentration of industry, and the like, may in fact, normally at least, be
treated as an institutional constant. There is no need to show how near this
comes to very modern views.

Before going on, I shall hastily mention two points about velocity that were of no
great importance at the time though they gained some during the next period. First,
then as later, some writers expressed themselves to the effect that the use of credit
'economizes’ money or 'makes money more efficient.’ This obviously invites the idea
that credit increases the velocity of the legal-tender reserve money which, even though
at rest in the vaults of banks, may then be said, metaphorically, to ‘circulate’ with a
velocity much greater than it would have, if it actually did circulate. This idea was
developed by Rodbertus ( Die preussische Geldkrisis, 1845; see M. W. Holtrop, ‘Theo-
ries of the Velocity of Circulation of Money in Earlier Economic Literature,’ Eco-
nomic History, A Supplement to the Economic Journal, January 1929, p. 520). Sec-
ond, attempts at formulating an equation of exchange algebraically — which does not
necessarily involve acceptance of the quantity theory — go far back (John Briscoe, H.
Lloyd, see above, Part n, ch. 6, sec. 2c), but the most elaborate one of all belongs in
the period under survey: J. W. Lubbock’s On Currency (1840) — an interesting book
by a still more interesting man. His equation has been reproduced in Viner (op. cit.
p. 249m) and Marget (op. cit. vol. 1, p. 11, and p. 12 , n. 8).

706

III: FROM 1790 TO 1870

3. Gleanings from the Discussions on Inflation and Resumption

To be sure, no element of Mill’s performance originated with him. Yet
there is historical merit in it. Both facts will stand out if we now survey a few
of the landmarks on the road that led to his position. 1

The Englishmen who started writing on monetary policy around 1800
knew very little about the English work of the seventeenth and even eight-
eenth centuries and still less, almost nothing in fact, of the non-English work
of those centuries — an interesting example of how the advance of economics
has been and is being impaired by these recurrent losses of previous accumu-
lations of knowledge. In particular, they knew nothing about Cantillon and
Galiani and not much about Steuart. Even the relatively learned Thornton
knew the works of Locke, Hume, Montesquieu, and, of course, A. Smith, 2
but not much else. Substantially they started afresh, which goes far to explain
the frequent occurrence of quite primitive arguments, even with the best of
them. Since we are not primarily interested in the practical issues at stake but
in the methods of analysis that were used in their discussion and in only those
methods that bear upon the fundamentals of monetary theory, there is not
much to report.

As we have seen, the Order in Council that suspended redemption of the
notes of the Bank of England (1797) was a precautionary measure that was
taken in response to a crisis and a run. Government borrowing from the Bank
did not produce particularly visible effects for several years. When, however,
prices began to rise and exchanges to fall, a torrent of articles and pamphlets
poured forth whose thema probandum was that ‘excessive’ issue of irredeem-
able bank notes was responsible for those ‘evils.’ From his evidence before
the two Committees of Secrecy (1797) to his two speeches on the Bullion
Report (181 1), 3 Thornton’s contributions outdistanced all others so far as
width of comprehension and analytic power are concerned. Three of them
are of the first order of importance for the history of monetary analysis. The
first is the treatment of the ‘rapidity of circulation’ as a variable quantity that
fluctuates with the state of ‘confidence,’ that is, substantially with general
business conditions: 4 this rediscovery of a fundamental truth that stands his-
torically in the name of Cantillon was never again lost, but it was so little at-
tended to that it had to be rediscovered once more by Keynes. 5 The second is

1 Reference is again made to the extensive literature on that development (see above,
sec. 1) and especially to the works of Viner and Marget. I now add J. H. Hollander,
‘The Development of the Theory of Money from Adam Smith to David Ricardo,’
Quarterly Journal of Economics, May 1911.

2 Familiarity with the 'Wealth of Nations implies, of course, some knowledge of the
literature that influenced A. Smith. But I do not think that even such English works
as Joseph Harris’ Essay (1757-8) were known in any other sense.

3 See Appendices I and m to the Library of Economics reprint of Paper Credit.

4 Paper Credit, ch. 3, especially p. 97.

5 Tract on Monetary Reform, 1923, pp. 87 et seq. The variability of Keynes’s k and
k' is in fact the main theoretical contribution of the Tract.

MONEY, CREDIT, AND CYCLES 707

the introduction of interest into the theory of the monetary process or, more
precisely, the casting into a scientific mold of ideas on the relation between
money, prices, and interest (see below, sec. 4a) that are intuitively familiar
to every banker. 6 The third, which concerns the monetary aspects of inter-
national trade, will be discussed below in Section 5.

But there is something else. In bringing his analytic apparatus to bear upon
the facts and practical problems of his day and country, Thornton proved him-
self a past master of the art of economic diagnosis. He was the only one of
the leading writers to see the effects -of the Bank’s note issue and at the same
time to keep it in its proper place in the total pattern of factors that shaped the
English monetary situation during the first decade of the nineteenth century.
Such merits as the Bullion Report of 18.10 undoubtedly does possess — espe-
cially that honest, if somewhat uninspired, listing of all relevant facts whether
causes, consequences, or symptoms — must be ascribed primarily to him- 7

The other ‘bullionists’ or supporters of the policy that is embodied in the
Bullion Report — resumption of specie payments by the Bank of England at
the earliest possible date — are not, either by virtue of equal quality of work
or by virtue of close similarity of views, entitled to be classed with Thornton.
In addition to Wheatley and Ricardo, who represent a distinctly different
school of thought, we merely notice Boyd and Lord King, whose arguments
belong to the Wheatley-Ricardo line rather than to Thornton’s, and Malthus
for whom the opposite. would be nearer to the truth. 8 Basically, their case was
very simple. That the premium on bullion was proof of a ‘depreciation’ of
bank notes was little more than a definition. That this premium was greater,

6 It might be said that the ‘inflationists’ of the seventeenth and eighteenth centuries,
the French and Italian as well as the English, had already explored the matter. But they
had done so unsystematically and without facing the theoretical issues involved. The
only economist who may claim to be Thornton’s forerunner in any more significant
sense was Hume, and even he was not in possession of the propositions that are charac-
teristic of Thornton’s teaching, except the one to be mentioned below. Verri is in the
same case.

7 According to a letter of Francis Homer, quoted in Hayek’s Introduction to Thorn-
ton’s Paper Credit, p. 54, the report was ‘a motley composition by Huskisson, Thornton
and myself.’ My impression is that Homer may be, to some extent, considered a pupil
of Thornton. Huskisson cannot. But he was an. experienced and intelligent man who
was not in the habit of running away with one-factor explanations. It is I think fair to
say that much of the adverse criticism of the Report was directed against its recom-
mendations of policy rather than against its analysis. But as is usual in such cases,
critics who took exception to the recommendations (and this was very understandable)
thought themselves in duty bound to attack the analysis from which the recommenda-
tions were supposed to follow. Malthus ( Principles , p. 7), however, paid a judicious
compliment to the report’s analysis.

8 Walter Boyd, A Letter to . . . William Pitt (1801); Peter King, Thoughts on
the Effects of the Bank Restriction (1803). King exerted considerable influence upon
Ricardo. Malthus’ two papers on the ‘Depreciation of Paper Currency’ and ‘Review of
the Controversy respecting the High Price of Bullion,’ both appeared in the Edinburgh
Review, 1811 (vols. 17 and 18).

708 hi: from 1790 to 1870

exchanges more unfavorable, and prices higher than they would have been,
other things being equal, with a note circulation such as would have been
possible had the notes been redeemable — that is, simply with a smaller note
issue — only unreasonable stubbornness could deny. It was the not much less
unreasonable stubbornness, with which they minimized all other factors in
the situation, that laid them open to replies which were successful on sev-
eral points. 9 Disapproval of a note issue greater than the amount possible
under redemption of notes on demand presupposes, of course, that the latter
is taken for the normal or ideal condition of the currency. This makes theo-
retical and practical metallists of all these Tmllionists.’ But it does not neces-
sarily mean that they held any strict quantity theory — Thornton, for example,
certainly did not. There are much, more interesting questions which emerge
behind these basic ones as soon as it comes to analyzing the mechanism of
inflation in detail, particularly the relations between the issue of the Bank of
England and the country banks. But we cannot go into these.

The considerable success of the Wheatley-Ricardo line was due not only to
Ricardo’s force and brilliance but also to the lack of these qualities in his
opponents. We shall confine ourselves to the outstanding authority among
them, Thomas Tooke, 10 whose writings, though the first of them appeared
only in 1826, represent better than do any others the strong as well as the
weak points in the case against Ricardo’s analysis.

The most obviously strong point — we continue to neglect the issue of policy
— was of course that, in an inflation as mild as was the one of the English
restriction period, the influence of non-monetary factors and even of factors
that affect directly individual commodities or groups of commodities only
(such as the cereals) must necessarily account for a much greater part of ob-
served phenomena than would be so in cases of advanced, let alone wild, in-
flation. A good or bad harvest, a boom or a crisis, will then sometimes domi-
nate a given price situation so as to reduce, for the moment, the inflationary
influence to insignificance. The thing for the analyst to do in such cases is
to assemble and to discuss the data carefully, year by year or even month by
month, in order to make them speak for themselves. Tooke did this very well

9 On the concessions which the bullionists did make and those which they ought to
have made, see Viner, op. cit. pp. 127-38. The ‘anti-bullionists’ relied, for the expla-
nation of the persistently unfavorable exchanges, mainly on the balance-of-payment
argument. See below, sec. 5. In retrospect, it seems as though they would have been
wiser had they admitted the basic contention of their opponents and confined them-
selves to asking what of it and to attacking the recommendation of speedy return to
gold at prewar par.

10 All the reader needs — and more — is contained in the monumental History of
Prices (6 vols., 1838-57) which we have characterized already. But the work that was the
first to present his views in something approaching a systematic form ( Considerations
on the State of the Currency, 1826), a second work (On the Currency in Connection
with the Corn Trade . . . 1829), and the work in which polemical ardor got the
better of him and led him to abandon some of his best results (An Inquiry into the
Currency Principle, 1844) have some independent importance.

MONEY, CREDIT, AND CYCLES 709

and with a considerable measure of success, and this would have been quite
enough to invalidate Ricardo's theory in its application to the situation then
prevailing. But Tooke aimed at more than this and attacked Ricardo’s theory
as theory. This, also, could have been done successfully — on lines that could
have been derived from Thornton’s work — but Tooke was quite unequal to
this task. He had no notion of the logical relation between observation and
analysis and never understood what facts may, and what facts may not, be
adduced in verification or refutation of a theory. 11 And the moment he lost
contact with individual situations, which he knew how to analyze, he seemed
to lose the ability to think — the most eminent of that large class of econo-
mists who are in the same predicament. He then even lost that healthy sense
for the absurd, which stood him in good stead in his factual analysis, and
had no hesitation in committing himself to obviously untenable propositions
such as some of the conclusions in the Inquiry of 1844 by which he tried to
sum up his views on the fundamentals of monetary theory. The twelfth of
these conclusions declares in so many words that prices of commodities do
not depend — he failed to add 'uniquely,’ which would have saved the situa-
tion — 'upon the amount of the circulating medium’ but that, on the contrary,
the amount of the circulating medium 'is the consequence’ of prices. How-
ever, before we put this down as downright silly, it is as well to recall that
he was facing economists who denied entirely the existence of the relation
which his twelfth conclusion asserted and that Tooke may be in part jus-
tified on this ground — and also be given the benefit of the mitigating cir-
cumstance that he was unsurpassable in clumsiness of formulation. The thir-
teenth conclusion then gives, though in a form that is not less clumsy, Tooke’s
theory of general prices, which has been much admired, especially in Ger-
many, 12 where, partly improved, it experienced a revival in the first two decades
of the twentieth century. Essentially, it comes to this. Since, on the one hand,
commodities may be purchased without the use of 'money’ and since, on
the other hand, 'money’ need not all become active (in which case it really
is, as far as action upon prices is concerned, nonexistent), the quantity of
money on which Ricardo reasoned is not a useful datum. What acts upon
prices is expenditure, however financed. Within total expenditure of all kinds
and for all purposes, the expenditure for consumption or investment by house-

11 The best example of this curious failing, which Tooke shared with so many econo-
mists of his day and of our own, is his later attempt (in the Inquiry of 1844) t° refute
the theory that a money rate of interest which is lower than the prevailing (marginal)
rate of profit tends to raise prices. In 1826, he had upheld and even elaborated this
proposition of Thornton’s: to have done so is in fact one of his chief services to monetary
analysis. In 1844, he tried, however, to refute it, and even to uphold the opposite
thesis by 'factual proof.’ The reader will realize that this is quite easy to do and about
as intelligent as it would be to hold that taking aspirin does not alleviate, in fact even
causes, headaches on the ground that the consumption of aspirin is undoubtedly asso-
ciated with people’s having headaches.

12 The German enthusiasm for Tooke as a theorist was I think in great part due to
the influence of Adolf Wagner.

710 III: FROM 1790 TO 1870

holds enjoys a particularly important position. 'And here we come to the ulti-
mate regulating principle of money prices’ ( History , vol. hi, p. 276): the fun-
damentally determining factor consists in 'the revenues of the different orders
of the state, under the head of rents, profits, salaries, and wages. . In other
words, we come out with the ‘income approach’ to the problem of the value
of money. 18 It should be said at once that Tooke himself offers several clues
for restating this Income Theory of Money more correctly and for developing
it in various ways, one of which ends at Keynes’s General Theory. But as left
by Tooke, it is open to a criticism that greatly reduces its importance: 14 those
revenues are obviously not ultimate data; prices determine them as much as
they determine prices; and in the complex of factors that generate them,
quantity of money has its place. It is not difficult to imagine the gusto with
which Ricardo would have taken his hatchet and so trimmed down Tooke’s
disorderly argument as to be able to show triumphantly that those revenues
were nothing but quantity of money times velocity. Still, though we shall have
to notice more important contributions of Tooke, the importance of this one
should not, if its suggestive power be duly taken into account, be evaluated
at zero.

Let ns now return for a moment to J. S. Mill and his performance. In the
light of what we have learned since we left him, we might describe his teach-
ing as a blend between Ricardo’s and Tooke’s. He saw the shortcomings of
the Wheatley-Ricardo analysis and filed off its rough edges or some of them;
he saw the shortcomings of Tooke’s analysis and quickly corrected their most
glaring faults; but he did much to salvage the truths they contained. To some
extent, especially in his treatment of the monetary mechanism of interna-
tional trade, he rediscovered Thornton’s line, and here and there he improved
upon it. There are but two qualifications to be added to this appraisal of a
considerable achievement that, had it been better understood, might have been
instrumental in bringing about a new epoch of monetary analysis. 15 First,

13 For a history and discussion of this income approach, see primarily Marget, op. cit.
vol. x, ch. 12.

14 In fact, Wicksell, in the preface to his Geldzins und Giiterpreise (1898), was able
to say that ‘a closer study of the writings of Tooke and his followers’ had convinced
him ‘that there really was no theory of money other than the quantity theory and that,
if the latter was wrong, we actually have no theory of money at all.’ This means that
one of the men who were most competent to judge refused to consider Tooke’s approach
as an acceptable alternative to Ricardo’s. I confess that I cannot understand such
overstatement in a writer of Wicksell’s competence and fairness. But he did no more
than overstate a truth.

16 So far as the general theory of money and monetray policy are concerned, the non-
English work of the period was little more than the reflex of the English work, though
a fuller exposition would have to note a few minor contributions. J. B. Say’s theory of
money is not one of his strong points. But he was one of the first authors to identify —
or, if the reader prefers, to confuse— the velocity of circulation of money and of goods.
If, as was natural for a Frenchman — the debacle of the assignats having occurred only
a decade before — he noticed the phenomenon characteristic of wild inflation, namely,
that everyone attempts to get rid of money, which in consequence acquires an abnormal

MONEY, CREDIT, AND CYCLES 711

though his retention of the theorem that an increase in money will, ceteris
paribus , raise prices in the same proportion (the property peculiar to money)
is all right when hedged in as he hedged it in, he also retained the erroneous
Ricardian doctrine that variations in quantity of money and variations in
physical volume of output have nothing to do with one another and will never
coincide except by chance. Second, this denial of the possibility of 'monetary
stimulation’ is but the most important instance of the narrow views on the
ideas of monetary management that emerged in the twenties and thirties
of the nineteenth century. These must now be briefly noticed. 16

Even before the passing of Peel’s Resumption Bill (1819) or the actual re-
sumptions of specie payments by the Bank of England (1821), many people
voiced misgivings about the possible consequences of this step, which was
bound to mean a jolt and might mean more than a jolt. When people began
to realize that they were in for a serious depression — which actually prevailed,
with the exception of the spurts of 1817 and 1824, from 1815 to 1830 and
(after the upswing that set in about 1830) resumed from 1836 on — they put,
as we have seen, all the blame on the factor that was most obvious on the
surface, resumption, and the way in which it was carried into effect by the
Bank of England. Politicians were relatively reasonable — the spokesmen of
the agrarian interest being the only group that, as a group, went to any un-
reasonable lengths in this respect. 17 But bankers, financiers, and economists

'velocity,’ this would seem small merit had not the same phenomenon been ‘discovered’
again, with much complacency, by writers in the inflations during and after the First
World War. Nevertheless, Say’s analysis of money is of interest to us because it shows
that he was perfectly aware of people’s variable attitudes toward holding cash and thus
may be adduced in support of our interpretation of Say’s law. Also, let us note in
passing that Say was to be a strongly hostile critic of England’s return to gold at
prewar parity which shows that he cannot have considered price level as a matter of
indifference. The reader who wishes to know more about French monetary theory is
referred to M. Chevalier’s volume, La Monnaie (1850), and to the relevant articles in
the Dictiorinaire d’economie politique (1853-4, e d. by Coquelin and Gamier). From
the Italian literature on money, we shall notice only Ferrara’s piece on Corso forzato ,
1868 (irredeemable legal-tender paper), though his Prefazioni and Lezioni also contain
other contributions to the subject. The German literature was stronger on the theory
of credit and banking than on the general theory of money. But there are some original
points on paper money in Buquoy's treatise. For the United States, it will suffice to
mention E. Lord’s Principles of Currency and Banking (1829); George Tucker’s The
Theory of Money and Banks Investigated (1839); and W. M. Gouge’s well-known
Short History of Paper Money and Banking (1833) — none of which is particularly
strong but all of which were typical performances so far as their theoretical sketches
are concerned.

16 Only very few issues and names can be mentioned. For a fuller exposition, see,
besides Viner, op. cit., R. S. Sayers, 'The Question of the Standard, 1815-44,’ Economic
History , A Supplement to the Economic Journal, February 1935, and 'The Question
of the Standard in the Eighteen-Fifties,’ ibid., January 1933, and authorities there
referred to.

17 There is not space, nor is there any need in a history of analysis, to tell the story
of 'Squire’ Western — how he foamed, how he was ridiculed, how he became something

712 III: FROM 1790 TO 1870

inspired by the viewpoint of bankers and financiers, especially those who felt
on the defensive owing to their previous sponsorship of the Bullion Report,
had most of them no doubt whatever that the root of all evil was money and
nothing else, in most cases not even troubling to establish what seemed so
indubitable a diagnosis. Accordingly, they criticized resumption, or at least
resumption at prewar parity, as untimely or altogether pointless, and they
produced remedies and schemes of reform that ranged all the way from ex-
cluding gold from actual circulation and the insertion of silver into monetary
reserves, through anticipations of the 'commodity dollar’ to a managed paper
currency that was to stabilize prices and employment. We know, of course,
that history incessantly repeats itself. But it is amazing and perhaps a little
sad to observe that economists, swayed by the prevailing humors of the hour,
also repeat themselves and that, blissfully ignorant of their predecessors, they
believe in each case that they are making unheard-of discoveries and build-
ing up a brand-new monetary science. However, there are some things to
be gleaned from a history of analysis. 18

In the first place, the question of diagnosis was indeed neglected, but not
entirely. As we should expect, Tooke shone in. the discussion. He had the
great merit of not being a monetary monomaniac, and his common sense
and command of facts enabled him to analyze the decline of prices from
1814 to 1837 in a thoroughly sensible manner. His ‘six causes’ 19 — good har-

of a tragi comical figure. I cannot help feeling that some injustice has been done to
that worthy. His argument would, if anything, have shown up favorably in the U.S.
discussion on money, 1930-34. See, e.g., his Letter to the Earl of Liverpool (1826).

18 Ricardo was one of those who smarted under responsibility — real or imagined —
for the recommendation of the Bullion Report and for resumption. The main justi-
fication for his refusal to share the responsibility for the latter in the form in which it
was actually carried out is his Ingot Plan, which he first recommended as early as
1811 ( High Price of Bullion . . . , 4th ed., Appendix). Essentially, the plan proposed
is the same as the system that England adopted on her return to the gold standard in
1925: the Bank was to be ‘obliged to purchase any quantity of gold that was offered
them, not less than twenty ounces at 3 1. 17 s. per ounce, and to sell any quantity that
might be demanded at 3 Z. 17s. 10 %d.,’ export and import of bullion to be entirely free
(Proposals for an Economical and Secure Currency, 1816). As has been pointed out
already, this means a full and free gold system, except that no gold coins are used in
internal hand-to-hand circulation. From the standpoint of the problem of how to
mitigate the impact of resumption upon prices, the plan is relevant only by virtue of
the fact that the Bank, if it did not have to provide gold for internal circulation, would
have needed a smaller gold stock than if part of its notes were to be replaced by coins.
Since the writers who blamed the depression on resumption were soon driven back to
asserting that the cause of all the trouble was that the Bank, by its purchases of gold,
had caused an international deflation — ‘raised the value of gold’ — policy according to
Ricardo’s plan would in fact have met the chief objection to resumption. The argument
itself about the Bank’s having ‘raised the value of gold’ cannot be discussed here. For
details of Ricardo’s plan and its history, the reader is referred to James Bonar’s article,
‘Ricardo’s Ingot Plan, a Centenary Tribute,’ Economic Journal, September 1923.

19 History of Prices, vol. 11, pp. 348-9.

MONEY, CREDIT, AND CYCLES 71 3

vests, favorable foreign exchange, removal of obstructions to foreign supplies
and the emergence of new sources of raw materials, falling rates of freight
and insurance, technological progress, increasing supply of capital, hence lower
rates of interest — do not indeed reveal ideal analysis and there is much in
them to find fault with from a theoretical standpoint. But at least they con-
tain the most important factor — the tremendous increase in productive effi-
ciency in consequence of the Industrial Revolution — and in addition most of
the salient characteristics of that epoch, though Tooke failed at the analytic
task of bringing them into their proper relations.

In the second place, the variations in the purchasing power of money
brought up the question of 'justice' as between creditors and debtors (or else,
so far as the public debt was concerned, taxpayers). As always, 'justice' was
what benefited the interest with which each writer sympathized. But more
substantial arguments, sometimes crude, sometimes more refined, reinforced
or even supplanted considerations of justice. 'Squire' Western made the point
that there are situations in which, higher prices being the only alternative to
widespread bankruptcy, a falling value of money might be deemed to be in
the interest of creditors. Others emphasized that, on the whole, debtors repre-
sent the active elements in the economy so that a benefit to them in the
end benefits everybody. Still others learned to qualify their dirges about the
discouragement of industry through falling prices by stating 'unless this fall is
caused by a fall in costs’ 20 — though some were for price maintenance even in
the face of falling costs. Like Hume (and Wicksell) most writers on currency
preferred slowly rising to stable prices. Needless to say, the usual confusion
between the prices a writer was interested in and the price level impaired
arguments throughout; most writers, as we have seen above, were having a
hard time in defining what they meant by 'general prices.’

In the third place, definite ideas of monetary management were taking
shape and some of them were more than mere repetitions of seventeenth-
century argument. There was the idea of a stable price level; the idea of mone-
tary stimulation of production (what we call pump priming); the idea of
stabilizing interest rates; and the idea of stabilizing employment.

Our few illustrative examples will be taken primarily from the economists
of 'scientific' reputation. Thornton offered several suggestions for monetary
management in times of crisis. Ricardo's plan we have noticed already. Joseph
Lowe’s tabular standard , 21 intended for voluntary use for the stabilization of
long-run contracts, marks a distinct advance in monetary analysis. Inconvertible
paper currency was sponsored by T. P. Thompson . 22 Poulett Scrope did not

20 Some writers, though not the better ones, mentioned fall in costs besides increase
in supply.

21 The Present State of England (1822). In his Essay of 1807, Wheatley had already
made a similar proposal. The idea itself, of course, goes back at least as far as Fleetwood.

22 He presented his ideas on monetary policy first in his Westminster Review article
'On the Instrument of Exchange’ (1824; reprint 1830). They grew naturally out of a
situation in which irredeemable paper had been actually circulating without blotting
out sun and moon, whereas resumption proved a painful operation. Many people

7^4 111 : FROM 1790 TO 1870

go so far as this but adhered to the metallic standard (gold or silver ). 23 How-
ever, besides sponsoring and elaborating Lowe’s tabular-standard idea he
tackled the whole complex of problems that arose from variations in the pur-
chasing power of money, including their effects upon labor. He wrongly held
that labor’s relative or absolute share in 'gross produce’ must be reduced as
the share of creditors (at fixed interest) increases, but he had the merit of em-
phasizing the influence of falling prices upon employment. This was also done
by Bollmann . 24 The only other name I am going to mention, the name of the
two heroes of the Birmingham Currency School, is Attwood . 25 The Birming-
ham Currency School is correctly described by the label it accepted itself:

besides 'Squire’ Western must have felt that it would be much better to carry the war
system into peace practice, i.e. to retain it for good. Thomas Perronet Thompson, like
Keynes in 1923 — the basic recommendation of the Tract on Monetary Reform was
precisely this, although Keynes retained a gold reserve — must therefore have voiced the
feelings of many more people than were prepared to speak up. The ideas as well as the
situations of 1824 and 1923 present in fact striking similarities, and both Thomas Per-
ronet Thompson and Poulett Scrope, but most of all Thomas Attwood (see below)
deserve to be known better than they are. So does Glocester Wilson, who, in his
remarkable Defence of Abstract Currencies in Reply to the Bullion Report (1811),
makes the statement that was often sneered at in the second half of the nineteenth
century and yet contains a profound truth (which very naturally was commonplace
among Austrian writers) that gold is no more essential to the guinea than is brass to
the ruler that is made of it.

23 On Credit Currency . . . (1830) and Examination of the Bank Charter Question
. . . (1833). The whole of the discussion now under survey, of course, bears in many
points on questions of bank credit which we shall take up in the next section. In some
points, the two discussions merge into one another and our attempt to separate them —
which in any case has no other justification than expository convenience — breaks down
occasionally.

24 Justus E. Bollmann, a physician who after some adventures in Europe settled in
the United States, occupies a considerable position in the history of the theory of
banking in America. The works that are relevant in the present connection are A Letter
to Thomas Brand Esq. ... on ... a Resumption of Specie Payments (1819), and
A Second Letter ... on the Practicability of the New System of Bullion Payments
(1819). As do his earlier works, Paragraphs on Banks (1810) and his- Plan for an
Improved System of the Money Concerns of the Union (1816), those Letters display a
grasp of the problems involved that was far above average.

25 The brothers, Thomas and Mathias Attwood, were both bankers — Mathias also
an extremely successful company promoter — and anything but cranks or visionaries.
Mathias was simply a bimetallist who stated his case ably and soberly. But Thomas
liked pamphleteering, agitation, mass meetings, and phraseological overstatement, and
he had to pay the price: professionals did not take him quite seriously. They were
wrong, however. A very considerable analytic performance might be distilled from his
writings and evidences. See his Letter to Nicholas Vansittart, on the Creation of
Money, and on its Action upon National Prosperity (1817); Observations on Currency,
Population, and Pauperism (1818); A Letter to the Earl of Liverpool (1819); also his
articles in the Globe, reprinted under the title The Scotch Banker in 1828. It is from
these writings that any study of modem ideas on monetary management ought to start.

MONEY, CREDIT, AND CYCLES 715

Anti-Gold Law League. As we might expect, many of its members were just
inflationists. But Thomas Attwood was much more than that. If I have
caught the meaning of his message, he was an anti-deflationist in the modern
sense. He had an almost hysterical horror of what we call deflation and at-
tributed to it every economic difficulty of his age. And in deflation itself he
saw nothing but the vagaries of an essentially irrational system of money and
credit. But whatever we may think of this diagnosis — many of us are bound
to sympathize with it — it had the merit of serving as a magnifying glass that
enabled him to see what the leading economists of the period refused to see,
namely, that an ideally managed paper money could avoid some consequences
of the gold automatism that are in fact functionless. So far as I know, he
did not work out his principle fully and systematically. But, barring exaggera-
tions, his advocacy of the principle itself is free from anything that deserves
to be called freakish. His claim to being considered as a serious specialist on
money is further strengthened by his recommendation to resume gold pay-
ments, if indeed they had to be resumed, at a reduced gold value of the pound
— a remarkable anticipation of an idea of 1919.

None of these ideas entered Mill’s authoritative text except as so many er-
rors that need to be exposed. In his chapter 'Of an Inconvertible Paper Cur-
rency’ ( Principles , Book m, eh. 13), besides asserting that a power 'to depre-
ciate the currency without limit’ is an 'intolerable evil,’ he encountered with
a flat negative not only Attwood’s but also Hume’s and Thornton’s arguments
about the possibility of monetary stimulation. From our standpoint, we have
no right to object to Mill’s evident dislike of the idea. Nobody is in duty
bound to approve of monetary management, and there were and are perfectly
good reasons for distrusting the ability, independence, and what-not of the
agencies that would have to undertake it. There are also reasons, good or bad,
for wishing to put up with all the vagaries of automatic money rather than
with the vagaries of politics. But we do have a right to object to Mill’s re-
fusal to consider the theory of managed money and to face squarely the facts
and problems that gave rise to the idea. By doing so, he impoverished mone-
tary analysis and left it, in this respect, in a state that explains, though it
does not justify, the impression so prevalent in our day that there is an im-
mense scientific gulf between him and us.

Nor is his chapter 'Of a Double Standard’ (Book m, ch. 10) any more dis-
tinguished. What he had to say on bimetallism rests on the suspicion — in
general well-founded, of course — that the sponsors of bimetallist schemes sim-
ply want to depress the purchasing power of money. Since he disapproved of
this, he brushed the whole subject aside without entering seriously into the
analytic problems involved, though a considerable literature on silver and on
bimetallism developed during the period under survey — Henri Cernuschi’s
Mecanique de Vechange appeared in 1865 — and though it was clearly the
duty of the writer of a treatise such as Mill’s to deal adequately with it irre-
spective of his sympathies. 26 The little that can be said in this book about

26 For a time, Ricardo had advocated silver as a standard metal.

71 6 hi: FROM 1790 TO 1870

those problems will be deferred to Part iv (ch. 8). Gold production moved on
a low level until the 1840’$. When Russian and then Australian and Cali-
fornian gold came in to change the situation, facts and effects were zestfully
debated throughout the 1850's and 1860's. There could be no reasonable
doubt that the new gold was exerting some influence upon prices but there
was all the more doubt whether this influence, counteracted as it was by the
flow of gold to India, China, and other countries and by the concomitant in-
crease in the output of goods, was strong enough to raise English prices by
any appreciable amount. 27 This implied investigation of the modus operandi
of the new gold upon monetary systems, credit, interest, output, and so on
all over the world. Nobody doubted that first effects were upon interest; that
the easy reserve situation prevented what might have been a financial crisis
in 1853; but that high profits and speculation, engendered by the monetary
stimulation of the economic process, would lead to stringencies and accentu-
ate cyclical ups and downs. 28 With due respect to many a sensible piece of
analysis that a more complete report would have to mention, I cannot but
conclude that the gains for economic analysis were slender and that the econo-
mists of that time missed an opportunity to build the lessons of those experi-
ences into their general theory of money. This shows also in the way in which
the plethora of gold affected opinion on bimetallism.

On the whole, people enjoyed the prosperity that the gold discoveries
seemed to have brought: Providence was, for the time being, popular with
the stock exchange. Dissent was not lacking, however, and some of the dis-
senters began to think of the adoption of a silver standard as a remedy for the
gold inflation, that is, for reasons exactly opposite to those that had recom-
mended the silver standard to some writers around 1820 29 and were again
to recommend it from the 1870's on. In addition, however, history was put-
ting economists under obligation by performing an interesting experiment in
bimetallism under their very eyes. France had then a de facto bimetallist sys-
tem at the rate of 1:15%. As gold fell it began to flow into French circula-
tion and reserves and to drive out the silver. This was the famous parachute
effect, as Chevalier called it, that is to say, the effect of bimetallism to absorb

27 On samples from this literature and on the level of this discussion, see Sayers (op.
cit. 1935, secs, n and v). M. Chevalier’s On the Probable Fall in the Value of Gold
(1857; English trans. by Richard Cobden, with a preface, 1859) should be particularly
noticed, as should Caimes's contribution, three articles, ‘Essays on the Gold Question'
(1859-60), republ. in Essays in Political Economy . . . (1873). The discussion gave,
of course, a powerful impulse to the development of price-index numbers. It produced
Jevons’ A Serious Fall in the Value of Gold . . . (1863) and the Depreciation of Gold
(1869), both reprinted in Investigations in Currency and Finance (ed. by Professor
Foxwell, 1884).

28 Mill’s views on the modus operandi of the new gold are concisely formulated in a
letter of his to Cairnes (see the Mill-Cairnes correspondence publ. by G. O’Brien,
Economica , November 1943, p. 279).

29 On the most important English sponsor of the silver standard, James Maclaren,
see Sayers, op. cit., 1933, passim.

MONEY, CREDIT, AND CYCLES

717

the depreciating and to set free the appreciating monetary metal and so to
stabilize the value of the monetary unit, at least so long as the latter was not
entirely displaced. It does not reflect much credit upon economists that this
effect had not occurred to them before . 30 But it reflects still less credit on
them that they did not understand it fully when they had it before their eyes.
The first economist to work out the complete theory of the bimetallist standard
at a fixed ratio was Walras.

4. The Theory of Credit

Even today, textbooks on Money, Currency, and Banking are more likely
than not to begin with an analysis of a state of things in which legal-tender
'money’ is the only means of paying and lending. The huge system of credits
and debits, of claims and debts, by which capitalist society carries on its daily
business of production and consumption is then built up step by step by in-
troducing claims to money or credit instruments that act as substitutes for
legal tender and are allowed indeed to affect its functioning in many ways
but not to oust it from its fundamental role in the theoretical picture of the
financial structure. Even when there is very little left of this fundamental
role in practice, everything that happens in the sphere of currency, credit,
and banking is construed from it, just as the case of money itself is construed
from barter.

Historically, this method of building up the analysis of money, currency,
and banking is readily understandable: from the fourteenth and fifteenth cen-
turies on (and even in the Graeco-Roman world) the gold or silver or copper
coin was the familiar thing. The credit structure — which moreover was in-
cessantly developing — was the thing to be explored and to be analyzed. The
legal constructions, too — remember that most economists who were, not busi-
nessmen were jurists — were geared to a sharp distinction between money as
the only genuine and ultimate means of payment and the credit instrument
that embodied a claim to money. But logically, it is by no means clear that
the most useful method is to start from the coin — even if, making a conces-
sion to realism, we add inconvertible government paper — in order to proceed
to the credit transactions of reality. It may be more useful to start from these
in the first place, to look upon capitalist finance as a clearing system that
cancels claims and debts and carries forward the differences — so that ‘money’
payments come in only as a special case without any particularly fundamental
importance. In other words: practically and analytically, a credit theory of
money is possibly preferable to a monetary theory of credit . 1

The situation of this period’s theory of credit and banking may now be

30 Ricardo, e.g., did notice this mechanism ( Principles , ch. 27) by which the standard
would be sometimes gold and sometimes silver. But he saw nothing in it but ‘an
inconvenience which it was highly desirable should be remedied.'

1 1 hope that this sentence is self-explanatory. It will, however, be illustrated in the
money chapter (8) of Part iv by a discussion of one of the consequences of economists’
failure to go through with the idea adumbrated above.

718 hi: FROM 1790 TO 1870

characterized like this. The English leaders from Thornton to Mill did ex-
plore the credit structure, and in doing so made discoveries that constitute
their chief contributions to monetary analysis but could not be adequately
stated in terms of the monetary theory of credit. But they failed to go through
with the theoretical implications of these discoveries, that is, to build up a
systematic credit theory of money , 2 and on principle clung to the monetary
theory of credit. So they produced in the end something that was neither the
one nor the other. An eminent critic of our day who is a strong adherent
of the monetary theory of credit. Professor Rist, was therefore, formally, within
his rights when he accused some of the authors of that period of having 'con-
fused' money and credit. Their waverings in the use of terms certainly sug-
gest this . 3

Keeping this in mind, we shall in this section discuss cursorily (a) the most
interesting of the period's conquests in the theory of credit, and then (b) a
few more points about banking and central banking that are most conven-
iently presented with reference to the quarrels between the 'currency' and
'banking' schools over the principles embodied or supposed to be embodied
in Peel’s Act of 1844 — though those quarrels, unlike the ones over war in-
flation and resumption, produced more heat than light . 4

(a) Credit , 5 Trices , Interest, and Forced Savings. As soon as we realize that
there is no essential difference between those forms of 'paper credit’ that are

2 We might see the outlines of such a theory in the works of Macleod. But they
remained so completely outside of the pale of recognized economics that we transfer
them and their author to Part iv. Compare also Wicksell’s dictum, mentioned above.

3 Yet, as we know, facts and ideas that were familiar to the projectors of the seven-
teenth century and, in a purified form, to the scientific economists of the first half of
the eighteenth, such as Boisguillebert, Cantillon, and Verri, might have set the writers
of 1800-1850 on the track of what I believe to be a more adequate analysis. But these
facts and ideas were practically forgotten by 1800 — or a shudder at John Law’s prac-
tices was all that was left of them — and they had to be rediscovered by men who
worked in the strait-jacket of the monetary theory of credit.

4 The reader is again referred to the works of Viner, Marget, and Rist. And also to
V. F. Wagner, Geschichte der Kredittheorien (1937); Harry E. Miller, Banking Theories
in the United States before i860 (1927; a book the reader will find particularly useful
since it is impossible in this sketch to do justice to the important American literature
on banking); and L. W. Mints, A History of Banking Theory (1945), a work that
reports on over 600 items but, as a consequence of its wholesale and uncritical con-
demnation of the commercial-bill theory of banking, pours away the baby with the
bath water.

5 Writers had difficulty in defining 'credit.' Accordingly, the term was very loosely
used all along. Thornton defined it as 'confidence,' which is an obvious logical misfit.
We come nearer to what these writers wanted to express and what that difficulty was
when we leam that Mill (Book in, ch. 12, § 1) averred that it was Credit which acts
on prices and not ‘banknotes, bills, and cheques.’ He meant that an individual's power
to purchase, which is the objective element behind demand in terms of numeraire, is
not fully represented by the amount of the credit instruments that are actually used in
'payment' or even, so we should add, by the deposits, overdrafts, etc. against which
checks are drawn, but by the total amount that an individual could command if he

MONEY, CREDIT, AND CYCLES 719

used for paying and lending , 6 and that demand, supported by ‘credit,’ acts,
upon prices in essentially the same manner as does demand supported by
legal tender, we are on the way toward a serviceable theory of the credit
structure and, in particular, toward the discovery of the relations between
prices and interest. Before turning to the period's theory of these relations we
must, however, consider the obstacles that prevented many authors from ac-
cepting the two propositions just alluded to. We have already seen that the
monetary theory of credit in itself constitutes such an obstacle because, de-
veloping the theory of the network of credit "payments’ from the case of pay-
ment in specie, it assigns to legal-tender money a logically privileged position.
But we still have to consider some practical reasons that seem to militate
against an analysis that puts, say, ‘money’ and ‘deposits’ on essentially the
same footing.

In the first place, the law treats different types of means of payment dif-
ferently. In the case of legal-tender money, it insists on acceptance; in the
case of an accepted and endorsed bill of exchange, it does not. For the legal
mind, the two are anything but ‘essentially the same thing,’ since the credit
instrument is on the face of it a claim to money. In the second place, and
in connection with this, ‘money’ and ‘paper credit,’ and again the various
forms of ‘paper credit,’ are not in practice equally well qualified for every
purpose. They are not perfect substitutes for one another: legal-tender money
is a universal means of payment; bank notes and deposits are less widely ac-
ceptable; the accepted and endorsed bill of exchange can circulate only in a
relatively small circle of business concerns. And only legal-tender money is
recognized, in most historical cases, as the ultimate reserve money of the
banking system. These differences are of course quite important, and no-
body would think of trying to explain the way in which a given monetary sys-
tem functions without taking account of them. And this is why Thornton’s
perception of the fact that the different means of payments may , on a certain
level of abstraction, be treated as essentially alike was a major analytic per-
formance, for the mere practitioner will in general be impressed by the tech-
nical differences rather than by the fundamental sameness . 7 But precisely for
the same reason, it is quite understandable that, though Thornton’s view even-
tually prevailed with J. S. Mill, the opposite view found sponsors all along.
And this was one of the reasons, though not the only one, why some writers

wanted to, i.e. the amount that is actually at his disposal in some measurable form
plus something that might be called potential credit, which defies measurement, yet is
a factor in any given situation. And we may assume, I think, that it is this total that
people meant when they used the term Credit.

6 For jurists, I repeat that the word ‘paying’ is not used in the legal sense, and is
meant to comprise, besides what constitutes legally definitive payment ( solutio ), also
much of what legally is a mere substitute for definitive payment { datio in solutionem).

7 We might, therefore, speak of a genuine discovery of Thornton’s, were it not for
the fact that it had been made long before. See, e.g., the Discourse of 1697, attributed
to Pollexfen, mentioned above, Part n, chs. 3 and 7.

720 III: FROM 1790 TO 1870

stoutly denied that ‘credit’ acts upon prices. 8 Now we turn to the subject of
Prices and Interest or, as we may also call it, of the Real and the Money
Rate of Interest

Within the scholastic system, interest being simply the price for the use
of money, the phrase Real and Money Rate of Interest is a label on an empty
box — there was no problem of any direct relation of this kind, any more than
there is in the Keynesian system. 9 But when, under A. Smith’s influence,
Barbon’s analysis began to prevail, according to which interest was that part
of business gains that accmed to the purveyor of physical capital, the ques-
tion was bound to arise how this interest was related to the interest in the
market of money loans, which after all is a distinct phenomenon. A. Smith an-
swered 10 in effect that the loan rate of the money market was simply the
shadow of the ‘rate of profit’ on real capital — the latter being ‘lent in the
form of money’ as the later slogan has it — and that quantity of money, how-
ever defined, had nothing at all to do with it. I cannot emphasize sufficiently
that this remained the dominant opinion throughout the nineteenth century,
at any rate until Wicksell; that it was, as will be presently explained, also
Ricardo’s; and that even Thornton’s contributions to the problem of the
relation between ‘money,’ prices, and the ‘real’ rate of interest (important
though they were), which point to a different conclusion, were largely for-
gotten.

Thornton related the volume and the velocity of money and other circu-
lating media to interest in the four following ways. (1) He was the first to
point out that a high rate of discount will attract gold from abroad. (2) He also
pointed out the relevance of the prevailing money rate of interest for the
public’s willingness to hold cash. 11 (3) Further, he pointed out the effect
upon the loan rate of expectations about the future course of prices. 12 (4)

8 Tooke must be classed with them, even after he had recognized the fundamental
sameness of notes and deposits, if we take some of his utterances literally. But the
denial in tum admits of different interpretations. We shall return to the argument
below.

9 Of course, if we dig more deeply, the problem does reappear in both systems.

10 The key performance was D. Hume’s essay ‘Of Interest’ ( Political Discourses , 1752).
A. Smith quoted approvingly its argument against the view of Locke, Law, and Montes-
quieu that the American gold and silver had been the cause of the fall of the rate of
interest that occurred in Europe (Wealth, p. 337), but neglected to make full use of
the rest of Hume’s theory that, anticipating much later work, went some way toward
giving the monetary factor its due. Thornton improved upon Hume’s position, but
neither he nor J. S. Mill was quite fair in their criticism of him. Hume, as we know,
was anticipated, in several essential points, by Cantillon.

11 While it should be admitted that the loss involved in holding idle cash varies
with the rate of interest and that this fact does make some difference, the empirical
correlation between large cash holdings and low rates of interest must not be con-
sidered as causally explained by this fact: large cash items and low rates are primarily
consequences of decisions to restrict operations in depressive situations, and there
would be correlation between them even if there were no functional relation at all.

12 This piece of analysis, succinctly presented in the first of the two ‘Speeches'

MONEY, CREDIT, AND CYCLES

7 2I

Finally, soaring high above the commonplace controversy on the question
whether or not banks have the power ‘to inflate the currency/ he presented
(all the essentials of) a complete analysis of the market for loanable funds
that pivots on the fundamental equilibrium theorem, that the loan rate (money
interest) tends to equal expected marginal profits of investment (marginal ef-
ficiency of capital ). 13 This requires some elaboration.

First, Thornton’s theorem occurs in the course of an argument to the ef-
fect that there does not exist, within the logic of the credit mechanism itself
and apart from convertibility, any restriction that will prevent bank credit
from exceeding the limit beyond which it will cause an inflationary increase
in prices ; 14 and that, in particular, ‘sound banking practice/ that is, the prac-
tice of lending on good security only or even discounting bona fide commer-

appended to the Library of Economics reprint of Paper Credit, pp. 335-6, is nothing
short of admirable. It is easy to see that in a period of falling (rising) prices the creditor
gets more (less), in terms of goods, than he bargained for. It is less easy, but still easy,
to realize that this fact, if foreseen, will influence the terms of the loan contract, a
lower (higher) rate in terms of money being stipulated for than would be the case
otherwise. But Thornton saw that this is inconclusive, at least if expected price changes
are moderate, unless the mechanism be uncovered by which that result is brought about
even in the absence of what we may call conscious expectations. So he pointed out
that if prices rise (fall), the debtor will make gains beyond (below) expectations, that
this will induce him to borrow more (less) — so long as this lasts, the case merges into
(4) — and that this will tend to adjust the rate of interest to rising (falling) price levels.
It should be observed that, as a short-run qualification, this fits perfectly into what has
been called in the text the ‘recognized opinion’ about the relation between the rate of
profit on real capital and the money loan rate. Thornton’s idea was taken up again,
independently, by Irving Fisher in 1896 (see below. Part iv, ch. 5, sec. 7b) and before
that by Marshall.

13 It is for the reader to decide whether or not this formulation, clad in modem
terminology, renders Thornton's meaning faithfully: while it rests on many other
passages, it is meant to convey particularly the paragraph on pp. 253-4 of Paper Credit.
No essential discrepancy, considering the banking practice of the time, is involved in
Thornton’s speaking of the rate of the Bank of England. Nor should qualms be caused
by Thornton’s speaking simply of ‘the current rate of mercantile profit.’ Apart from
the fact that my rendering of this phrase might be considered fair, even if there were
nothing further to support it, the element of expectation enters into many other argu-
ments of Thornton’s (see p. 158) and was perfectly familiar in the literature of the
period (J. S. Mill used it in Principles, Book in, ch. 12, $ 3). But the addition of the
adjective ‘marginal’ to ‘profits/ at least in the form of the profits of the least favored
firm, is an improvement that was added by Ricardo. If my reading be unobjectionable,
it must also be unobjectionable to say that Thornton propounded a theorem that is
fundamental to the Marshall-Wicksell-Hawtrey analysis. This is also Professor von
Hayek’s opinion.

14 Thornton was primarily concerned with the lending of the Bank of England and
with its note issue. He was, however, fully aware of the complications that arise from
the influence of this issue upon the country-bank issue and upon the behavior of
London bankers and ‘other discountants.’ This seems to justify the generalizing state-
ment of our text.

722 III: FROM 17gO TO 1870

cial bills only, does not constitute such a restriction. The reasons for this are,
of course, that an expansion of loans, unless accompanied by a compensating
reduction of expenditure by people other than the borrowers, will increase
money incomes, hence raise demand schedules for goods and services (not
necessarily their prices), so that every wave of additional borrowing tends to
justify itself ex post ; and that such an expansion of loans can — at least in
favorable situations — be induced by the offer to lend at a rate that is below
expected marginal profits. In other words, the equilibrium of Thornton's the-
orem is unstable: an increase in loans beyond the equilibrium amount will
eventually (though not necessarily at first) result in an increase in prices
and, if the rate of interest continues to be kept at its old level (the level
that induced the first expansion), further borrowing will continue to be profit-
able at the new level of prices; further expansion of credit will follow, and
so on, without any assignable limit, and we shall have the Wicksellian Cumu-
lative Process (for restatement and criticism, see below. Part rv, ch. 8, sec. 2 ).
To enforce stability, other conditions, such as convertibility — direct or indirect
— of notes and deposits in gold, are therefore necessary. This practical con-
clusion, if not the whole of Thornton’s analysis, was widely accepted, among
others by King, Ricardo, Joplin, and Senior. J. S. Mill also accepted it though,
presumably under the influence of Tooke, he toned it down.

Lord King was, so far as I know, the first to follow Thornton in his Thoughts on
the Effects of the Bank Restriction (1803). Ricardo accepted the doctrine resolutely,
at least in the faulty form that, if banks ‘charge less than the market rate of interest,
there is no amount of money which they might not lend’ ( Principles , ch. 27, but see
High Price of Bullion , 1810). Senior expressed himself similarly (see Industrial Effi-
ciency and Social Economy, S. L. Levy ed., 1928, vol. 11; the essay is a review of
Lord King’s pamphlet), using the term ‘usual’ rate. Since the market or usual rate
itself may be below that equilibrium level which would prevent credit inflation, Ri-
cardo and Senior must be interpreted to have meant something akin to Wicksell’s
‘real rate.’ Ricardo seems to indicate this by another faulty phrase that occurs in the
paragraph from 'which I have quoted and lets interest be ‘regulated’ by ‘the rate of
profits which can be made by the employment of capital and is totally independent
of the quantity or of the value of money/ Clearly two different sets of considerations
fight each other in this paragraph. On the one hand, Ricardo meant to uphold what
has been described above as the Smithian view of the relation between the ‘real’ and
the money rate of interest. On the other hand, no practical financier could deny that
any increase of the circulating medium, no matter whether of gold or notes or any-
thing else, will tend to depress the rate of interest at least temporarily. So he recon-
ciled Thornton’s theory, which does not fit at all well into his quantity theory, first, by
underlining the ‘temporarily’ and, second, by emphasizing, to the exclusion of every-
thing else, the inflationary effect of such an increase, as we shall presently see. Tooke
might have pointed out, and to some extent did point out, that there are many quali-
fications to the proposition that low interest raises prices. As it was, probably carried
away by his controversial ardors, he in the end denied the existence of any such nexus
as unreasonably as he denied the existence of any nexus between quantity of money
and prices. J. S. Mill, on this point as elsewhere, ‘rationalized’ Tooke. This he did by
the formula that the lending by banks qua lending does act on the interest rate and
not on prices; but that, since the ‘currency in common use, being a currency pro-

MONEY, CREDIT, AND CYCLES

MONEY, CREDIT, AND CYCLES 723

vided by bankers, is all issued in the way of loans’ ( Principles , Book hi, ch. 23, § 4),
the lending by banks qua creation of currency acts upon prices and not on the interest
rate. The recognition of the currency-creating power of banks (which Tooke denied
in the Inquiry) is as interesting as the recognition of the relation, so strongly empha-
sized in the United States, between lending and repaying, on the one hand, and ex-
pansion and contraction of the circulating medium, on the other — in which relation
some of the more naive American currency doctors saw (perhaps see) the source of
all sorts of evil. J. S. Mill made nothing of all this, as will presently be pointed out
again. Still, nothing of it escaped his attention — or should have escaped the attention
of his readers.

Second, Thornton knew of course perfectly well that the inflationary process
he described presupposes an uncompensated expansion of lending. If the in-
crease in loans is compensated, for example, by saving, it will not start that
process. But, preoccupied as he was with the operation of ‘paper credit’ in
. wartime, he did not bother about this and so he failed to state explicitly the
condition for stable equilibrium in the market for loanable funds which
reads, in Wicksell’s formulation of 1898, that loans should equal people’s
voluntary savings. To some extent, at least, this lacuna was filled by Joplin, 15
though he got still less credit for it than he got for having anticipated the
principles of banking policy that, so far as the notes of the Bank of England
are concerned, were carried into effect by Peel's Act. Like Ricardo he strongly
disapproved of the power of banks to create, by their lending, net additions
to the total stock of means of payments, but he did not deny its existence —
this was done by others — and pointed out that, if it were done away with
and if banks were accordingly prevented from increasing the total of their
loans beyond the amount of the public’s current savings, then a stable equi-
librium in the money market might exist. It will be observed that in this case
the equilibrium theorem is nothing but a particular way of stating the Turgot-
Smith theory of saving and investment.

Third, Thornton realized not only that bank loans which add to the means
of payment may stimulate output rather than raise prices if they impinge
upon an underemployed economy, 16 but also that, even after full employment

15 Thomas Joplin, Outlines of a System of Political Economy . . . together with the
Fourth Edition of an Essay on the Principles of Banking (1823) and Analysis and
History of the Currency Question (1832). Joplin was the first to propose a 100 per cent
reserve system of banking, the idea being to make money interest behave as it would
behave with a purely metallic currency, and to render the creation of bank currency —
the creation of means of payment by lending — impossible. In his elaborate statement,
the difficulty that all such schemes meet stands out very clearly: preventing banks from
creating near-money (this American term owes its origin I believe to near-beer) will not
prevent the trade from doing so. Also, in his schema, gold inflows would still be
allowed to disturb equilibrium in the money market.

16 The practical importance of this truth is not great because underemployment of
resources will in general occur in depression when there is no demand for additional
credit. But its theoretical importance is nevertheless considerable because it forces us
to recognize the existence of relations between the circulating medium and output,
which the Ricardian or strict type of quantity theory so steadfastly denied.

724 m : FROM 1790 TO 1870

has been reached, credit expansion may still have some effect upon output,
though he immediately proceeded to show that this effect will be smaller than
the inflationary one ( Paper Credit , pp. 236, 239 et seq.). If some money in-
comes do not increase in step with prices, their recipients may be forced to
curtail their purchases of goods and services, that is, to perform a kind of
involuntary saving which may increase real capital as does saving in the ordi-
nary sense. Thus he anticipated Wicksell’s doctrine of Forced Saving. But
Bentham, who coined the phrase Forced Frugality, went much more deeply
into the matter and so did Malthus. 17 Ricardo turned a deaf ear to Thorn-
ton’s suggestion and kept on repeating again and again 18 — almost unintelli-
gently — that ‘fictitious’ capital cannot stimulate industry, that capital can only
be created by saving and not by banking operations, and so on, without ever
facing the issue squarely. There was, of course, a reason for this. Here as else-
where Ricardo was a prisoner to once-for-all conceived ideas. In this case, he
had pinned his colors to the mast of a rigid quantity theory. The quantity
theory implies that there is no relation between the quantity of ‘money’ and
output. And he just would not admit that there might be one after all.

J. S. Mill was torn between the two opposing views. Almost certainly, under
Bentham’s influence he had given full scope to the view that expansion of
bank credit may result in revenue’s being ‘converted into capital’ — that period’s
standard formula for the effect of saving — and even used the phrase ‘forced
accumulation,’ 19 which reads like an attempt to improve upon Bentham’s
‘forced frugality.’ In the Principles , as we have seen, the fact that banks create
means of payment by lending is freely recognized, and this implies the recog-
nition of forced saving. Yet we read of a ‘disposable capital’ that is ‘deposited

17 This piece of doctrinal history has been brilliantly elucidated by Professor von
Hayek in ‘A Note on the Development of the Doctrine of “Forced Saving,” ’ Quarterly
Journal of Economics, November 1932, to which the reader is referred for further
details. Bentham’s analysis of Forced Saving was a later addition to the Manual— part
of which was first published in 1798 by Dumont and something less than the whole of
which is included in the "Works , published 1838-43 — and Hayek holds that the passage
in question ‘received its final form in 1804’ an d was probably sketched much earlier.
According to the rules I follow in matters of priority, I have, however, no choice but
to date this theory 1843, although Professor von Hayek is presumably correct in
thinking that Bentham made its contents known to his economist friends. Malthus’
contribution is in his review of Ricardo's High Price of Bullion, Edinburgh Review,
February 1811. Ricardo’s reply, appended to the 4th ed. of the High Price of Bullion,
was that the recipients of fixed incomes might reduce their savings instead of their
expenditure on consumers’ goods. But Malthus, since he had nothing to go by except
the halting and inconclusive, though suggestive, remarks made by Thornton, and since
there is no reason to believe that he was aware of Bentham’s analysis, must be
accorded a high degree of subjective originality. Joplin, in his Views on the Currency
(1828), used the terms ‘forced’ and ‘voluntary economy.’

18 For some samples, see Viner, op. cit. p. 196. Similar sentiments are expressed in
the Principles. The term ‘fictitious’ (with reference to finance bills) occurs in Thornton.

19 Essay on ‘Profits and Interest,’ publ. in Some Unsettled Questions (1844). The
date of writing is not quite certain but 1830 is a common guess.

MONEY, CREDIT, AND CYCLES 725

in banks, or represented by bank notes/ which together with the funds of
those who dive upon the interest of their property, constitute the general
loan fund of the country’ (Book hi, eh. 23, $ 2). In all this and in the whole
tenor of that chapter, Ricardian influence prevails. But in the sixth edition 20
a footnote crept in that reasserted his earlier view. After that, leading econo-
mists practically forgot all about 'creation of additional deposits’ and 'forced
saving/ so much so that they looked askance at Wicksell’s rediscovery of them:
to borrow a phrase used by Lord Keynes in another connection, these notions,
so obviously important and realistic, lived from about 1850 to 1898 a dubious
life in the economic underworld — another lesson about the ways of the hu-
man mind!

(b) Gains from the Controversy about Teel’s Act of 1844. For our purpose,
it is not necessary to go much further. Most of the (none too numerous) im-
portant things that were said in that controversy had been said before. The
two groups that opposed one another on the legislative issue involved be-
came known as the Banking and the Currency Schools. Only Tooke, Fullarton,
and Gilbart of the former, and Torrens and Overstone of the latter, school
are of major interest for us.

Tooke and Torrens we know already, but the latter’s writings on money and bank-
ing have not been mentioned, as yet. From a long list I take his earliest work in the
field. An Essay on Money and Paper Currency (1812); The Principles and Practical
Operation of Sir Robert Peel’s Act of 1844 . . . (1st ed., 1848); and his Tracts on
Finance and Trade (1852), all of them even now worth reading. Of course, we shall
mention in passing also a few other names, but nevertheless the reader must be warned
that our selection is inadequate for any purposes but our own limited one and ex-
cludes several writers of importance. Continental and American literature we do not
even attempt to cover. As regards the latter, reference is once more made to H. E.
Miller, Banking Theories in the United States Before i860 (1927).

John Fullarton (died 1849) made his fortune as a surgeon and banker in India
and took to writing on the theory and policy of banking, after having retired from
business and having settled down in England. His main work (On the Regulation of
Currencies . . . , 1st ed., 1844) enjoyed, in England and on the Continent, a per-
sistent success such as few contributions to an ephemeral controversy have ever en-
joyed — a success that was greater than were its no doubt considerable merits: but it
was the kind of sensible performance that, while meeting higher standards also, is a
boon to large classes of not-quite-professional readers. Also, it was appreciated by Marx
and popular in Marxist circles right into the twentieth century. R. Hilferding's Finanz-
kapital (1910) drew on it largely and uncritically. J. W. Gilbart (1794-1863) was a
banker all his life; the first manager of the London and Westminster Bank, which he
helped to found; an able and eminently respectable member of his profession, which
looked upon him as a leader; the exponent and in part creator of what was to be, for
the rest of the century, orthodox banking doctrine. No student of banking can even
now afford to miss his highly successful Practical Treatise on Banking (1st ed., 1827);
his History and Principles of Banking (1834); and, at least, The London Bankers

20 This is the edition of 1865 in the preface of which Mill acknowledged, especially
with reference to that chapter, his debt to the suggestions and criticisms of 'my friend
Professor Cairnes, one of the most scientific of living political economists.’

726 III: FROM 1790 TO 1870

(1845). His History of Banking in America (1837) may be associated, so it seems to
me, with a distinct American school of thought on banking, whose chief authority he
was. Samuel Jones Loyd, commonly known as Lord Overstone (1796-1883), also a
banker but of inherited wealth and position, was a much more brilliant personality
and much more influential with politicians. He was the currency school's strong man,
and his perspicacity (on the one hand) and his sketchiness (on the other) have led
generations of economists to moderate the range and depth of his thought. He has

left no systematic work, and the best I feel able to do fox the reader is to refer to

his Tracts and other Publications on Metallic and Paper Currency (ed. by McCulloch
in 1857) and his Evidence before the House of Commons Select Committee of 1857
(also ed. by McCulloch in 1858).

Neither group was a school in our sense of the word. Within both, there
were considerable differences of opinion and especially of level. In fact, it is
necessary to distinguish in both cases a popular argument from what was, or

may pass muster as, serious analysis — a distinction that is not always easy to

carry out because few participants in the controversy presented their cases sys-
tematically 21 and in a manner that would have met with the unqualified ap-
proval of their own parties. Most participants attacked not the real views but
a popularized or even distorted picture of their opponents’ positions. And most
scientific economists, foremost among them Mill, ranged themselves with the
.banking school — on the Continent, still more decidedly than in England . 22
But among practitioners and especially among the directors of the Bank of
England, Peel’s Act counted many adherents . 23

21 Torrens and Fullarton came nearest to doing so. But we may add G. W. Norman
(Remarks upon Some Prevalent Errors with respect to Currency and Banking, 1833)
and McCulloch, both of the currency school. McCulloch (see especially his Treatise on
Metallic and Paper Money and Banks written for the Encyclopaedia Britannica, 1858;
and also his comments on money and on Peel’s Act in his edition of the Wealth of
Nations of 1850) supported the currency principle in a manner that overemphasized
the links that exists between it and Ricardo, the Bullion Report, and the quantity
theory as such. It is quite possible to approve of Peel’s Act without upholding the
latter in its strict sense. I take this opportunity to mention James Wilson, a severe
and able critic of the lower ranges of the currency school, founder of the London
Economist, and Minister of Finance of India, one of those excellent men who fare
badly in a history of analysis. See his articles, collected in Capital, Currency, and
Banking . . . (1847).

22 See, e.g., Adolf Wagner, Beitrdge zur Lehre von den Banken (1857), and Die
Geld- und Credittheorie der Peel’schen Bankacte (1862). We have already noticed his
boundless enthusiasm for Tooke. Both in his interpretation and in his criticism, he
completely failed to do justice to Overstone. In France, the only question that excited
real interest was whether or not the Banque de France should have a monopoly of
issue. Those who stood for it sometimes invoked Lord Overstone’s authority, those who
were opposed (Chevalier, Courcelle-Seneuil, and others) sometimes invoked Tooke’s
authority.

23 It must not be forgotten that the directors had every reason to greet an act
which left them absolutely free from regulatory interference, except with respect to
the note issue, with a sigh of relief.

MONEY, CREDIT, AND CYCLES 727

The first thing that strikes the modern observer when he looks back upon
that controversy is the extent of fundamental agreement between the two
‘schools / 24 Neither contained any radical monetary reformers. Both were
equally averse to monetary management or any thoroughgoing control of
banking and credit. This is obvious for the banking school that fought Peel’s
Act without offering any other method of control, but it also holds for the
currency school that wished to regulate the note issue precisely in order to
make the currency ‘automatic’ and to leave banking business — even central
banking — entirely free. That is to say, both groups consisted of laissez-faire
men. Moreover, both groups were staunch supporters of the gold standard
and, in particular, of the regulation of foreign exchanges by free gold move-
ments. If we neglect those of the banking group’s objections to Peel’s Act
and those of the currency group’s arguments for it that were -of a purely tech-
nical nature , 25 it seems that there cannot have been much left to disagree
about. Briefly and not quite adequately, we may say that the ‘banking prin-
ciple’ asserted (1) that, given English conditions and banking practice, and in
particular proper leadership on the part of the Bank of England , 26 converti-
bility of notes was enough to secure all the monetary stability of which a
capitalist system is capable; and (2) that in any case, even if this were not
so, there would be no point in regulating notes alone, since deposits would
raise the same problem. Equally briefly and inadequately we may say that the
‘currency principle’ asserted (1) that convertibility of notes cannot be as-
sured without special restrictions upon their issue; and (2) that the notes of
the Bank of England were actually, or should be treated as, mere gold certifi-
cates — not as credit instruments like deposits or commercial bills but as ulti-
mate (reserve) money just like the coin or bullion which they represented . 27

24 The scientific affinity between Overstone and Tooke — overshadowed though it is
by what seems to have been strong personal aversion — will stand out more clearly in
the last section of this chapter. Now I am speaking of their points of agreement on
monetary and banking policy and on the kind of economy they meant to serve.

26 An example is the objection that the strict division of the Bank into two depart-
ments would make the gold in the issue department inaccessible to the management
of the banking department, except so far as the latter held a reserve of notes. Thus, the
banking department might have to refuse help to the market when the coffers of the
issue department were replete with gold, as in fact happened in 1847. Let us note in
passing, however, that the currency group was right in minimizing, and that the
banking school was wrong in exaggerating, the importance of the recurring suspensions
of Peel’s Act: the necessity of these had been foreseen by Overstone and they were
really, though not officially, part and parcel of his scheme.

This proviso, even where not stated explicitly, is a natural one to make in the
case of so severe a critic of the Bank of England as Tooke. But it should be made
quite generally. The banking school, in particular, never challenged the regulatory
function of a central bank.

27 It is important to note that the words ‘certificates’ and ‘represent’ are Lord Over-
stone’s. I believe that Lord Overstone handed out the key to the understanding of his
position by using them. That is to say, he meant to deny that the notes of the Bank
of England were bank notes at all, as usually understood, especially on the Continent

7 2 8 III: FROM 1790 TO 1870

Only Torrens, in reply to the objection that restriction of the note issue alone
is futile, explicitly went beyond this narrow purpose: 28 believing, as we know
he did, that the amount of deposits banks are able to create by lending is
closely tied to the existing amount of coin plus notes, he asserted that regu-
lation of the note issue would also do something toward regulating the crea-
tion of deposits . 29 But if we neglect this, then the agreement between the
banking and the currency schools about the basic importance of convertibility
of notes is immediately seen to be the fundamental thing, compared with
which their disagreement on the question whether or not there was need for
special guarantees of this convertibility was a secondary matter. For since the
banking school did not hold that the circulating medium would regulate it-
self in the process of competitive banking — why should they have insisted
on convertibility at all if they believed this? — and since it recognized the ever-
present danger of 'overbanking/ all they can have meant by saying that over-
issue of notes was 'impossible’ is that, with convertibility, it will in the end
be severely punished. And this is obviously true . 30 All the currency school
can have meant by insisting on the possibility of an overissue of Bank of
England notes is not denial of this obvious truth nor assertion of the not less
obvious untruth that with convertibility overissue can go on forever, but merely
that, without special restriction upon the issue of the Bank of England, over-
issue might go far enough to be beyond any remedy other than catastrophe.
Thus interpreted, the difference between the two positions remains no doubt of
practical importance. But it involves none but minor 31 disagreements as re-
gards analysis.

(see next footnote). It is only on this hypothesis that the idea of making gold plus
notes behave as gold alone would behave — which is how the 'currency principle’ is
usually expressed — becomes meaningful, i.e; that (1) the quantity of the notes should
exactly correspond to the actual gold 'represented' by them except that (2) there
should be added a constant amount of notes, which was an inheritance from the past
and which it would have been highly inconvenient to eliminate.

28 Reply to the Objections of the Westminster Review (1844).

29 It stands to reason that this idea is capable of being defended, provided one does
not put a greater burden upon it than it can bear. It is interesting to note that Torrens
anticipated an argument that was in our time brought forth by Edwin Canrian ('Limi-
tation of Currency or Limitation of Credit?' Economic Journal, 1924). Professor von
Hayek in Prices and Production, p. 2, has pointed out that Dugald Stewart had already
formulated the issue involved in 1811 in a Memorandum on the Bullion Report
(Works, ed. by Sir W. Hamilton, 1855, vol. vm): 'The one opinion suggests the
propriety of limiting credit through the median of a restricted currency; the other of
limiting the currency through the medium of a well regulated and discriminating credit.’

30 Fullarton (op. cit. ch. 5) did, however, go too far when he expected convertibility
to operate ‘with the precision of clockwork.’

31 Some of these minor disagreements, such as the one on the modus operandi upon
credit and prices of the outflow and inflow of gold, on internal and external ‘drains,’
on how far Peel’s Act interfered (indirectly and unintentionally) with the effective
management of the Banking Department of the Bank, are of considerable scientific
interest. Unfortunately, we cannot go into them.

■Ml

MONEY, CREDIT, AND CYCLES J 29

The evolution of English central-bank practice was not substantially inter-
fered with by Peel’s Act. The changes that occurred in the attitudes of the
Bank of England toward its own customers and toward the loan market, the
growing importance of bankers’ balances within the total of its deposits, and
other features of England’s financial history after the passing of Peel’s Act
were more important than were the effects on policy brought about by that
Act. Most of these changes were slow to penetrate into the theory of central
banking that had become stereotyped by 1850 into what almost amounted
to a cult of the bank rate, the modus operandi of which was analyzed with
little regard to observable facts. All the more important is it to point out
that a central-bank policy of much wider scope had been, on a much higher
plane, blocked out by Thornton at the beginning of the period. His sound
insight into the nature of banking credit and his keen yet balanced sense of
the intimate logic of things qualified him well for dealing with this subject.
He did this in a manner that anticipated practically everything that was dis-
covered about central-bank policy for a century to come. On page 259 of
Paper Credit, he summed up his analysis in a set of rules that constitute the
Magna Charta of credit management in an intact private-enterprise economy.
In order to establish this, I should have to copy out that page. To save space
I merely refer to it.

In concluding the argument of this section, we must attend to one more
topic. So far we have dealt mainly with the topmost stratum of that period's
analytic work. We have noticed several important achievements and we shall
notice some more in the next two sections of this chapter. But we have also
noticed the failure of those achievements to come to full fruition and in
particular the fact that they were not co-ordinated in such a way as to pro-
vide a good spring board for the work of the next period. In fact, we find, in-
stead of an effective presentation of the best results, the emergence of a fairly
general opinion about the nature and practice of banks that preserved many
of the weak spots of the period’s analysis, rather than the strong ones, but
gained wide currency among both bankers and economists and thus proved
an obstacle to further advance. For brevity’s sake, no names will be men-
tioned except those of a few authorities who might, with more or less justifica-
tion, be invoked in support of some of the propositions to be discussed. 32
These propositions are associated with what has been called the Commercial
Theory of Banking and also with part of the argument of the banking school,
but in using these labels we must keep in mind that neither the one nor the
other is indissolubly wedded to them. Perhaps vfre had better dub the doctrine
in question the Commercial-Bill Theory of Banking.

(1) According to the commercial-bill theory of banking, the essential busi-
ness of banks — the business that defines banks — is the financing of current
commodity trade, national and international. It is not essential that this
should be done only in the form of discounting bona-fide commercial bills.

32 The reader will find plenty of names in the work of L. W. Mints referred to at
the beginning of this section.

73 ° III: FROM 1790 TO 1870

each drawn in connection with a particular sale, but we retain our label never-
theless, because this was considered to be the typical case. Even so, this con-
ception of the business of banks, though still too narrow, does not individuate
any particular theory. We get the commercial-bill theory if either or both of
the following propositions are added to that definition of the banker’s business:
(a) banks derive or should derive the funds with which they discount from
deposits entrusted to them by the public; and (b) they satisfy the needs of
commodity trade without influencing prices thereby and without having the
power — in justice we should always add "normally’ — to influence the amount
of credit outstanding.

(2) It should be obvious without further explanation how these proposi-
tions link up with definite errors which, as we have seen, were fully exploded
by the work of the better writers of the period, and especially by Thornton.
It should also be obvious that this view of banking — the helpmate of com-
modity trade, who offers his money to satisfy the needs of business but does
not force it upon business, who has nothing to do with price fluctuations and
overtrading (to put it strongly) — expresses very well the professional ideology
of bankers who like to see themselves in this light. But finally it should be
observed that there are elements of practical truth and wisdom in this doc-
trine. If reformulated to the effect that bankers had better be careful about
their cash position and maturities and that they had better look with equal
care at the soft spots in the applications for credit before them, it becomes
quite unobjectionable. In other words, a faulty theory, in this as it does in
other cases, covers wise advice. The proposition that sound business princi-
ples of discounting are all that is needed to keep the economic ship on an
even keel should indeed have been recognized as erroneous ever since Thorn-
ton; but action in conformity with it would, nevertheless, have avoided all
the worst breakdowns in financial history.

(3) However, we should notice a few arguments about this needs-of-trade
attitude that aimed at more than inculcating responsible lending practice.
First we mention one that is perfectly true so long as we confine ourselves
to considering the individual banking business in a competitive system of
many banks. Credit expansion for the individual bank is, in fact, severely
limited by the drain on reserves that it will eventually entail. Of course, this
is no longer true for all banks taken together; 38 but even for all of them, if
the system be really competitive, that penalty on stepping out of line is a
more effective brake upon expansion in line than critics of banking practice
are usually prepared to recognize. Second, there is less but still something
in Fullarton’s unjustly famous Law of Reflux, which simply recalls to the
minds of reformers the commonplace fact that normally loans are repaid and
that their repayment annihilates purchasing power, so that, though by itself

33 Professor Viner (op. cit. pp. 239 et seq.) has pointed out that this distinction,
which we are in the habit of claiming for our own epoch, when in fact it penetrated
into teaching, was widely understood ever since the 1820’s.

this does not prevent inflationary expansion of credit, there is a very material
difference between the case of bank credit which does, and the case of gov-
ernment paper money which does not, 'flow back' automatically. Finally,
third, we mention the central needs-of-trade argument that has been so un-
critically vaunted by some and so uncritically rejected by others — the argu-
ment that the discounting of bona-fide bills carries its 'proper’ limitation with
it and that in addition it makes the circulating medium expand and contract
'elastically’ as production and trade expand and contract. For this view, it is
possible to invoke the authority of A. Smith and Tooke. It is, however, hardly
necessary to point out its inadequacies. All the more necessary is it to point
out its true core. Consider the most normal of all normal cases: a commodity
has been produced and sold ; the producer A draws on the trader B for the
amount; A discounts the accepted bill at his bank and expends the money on
his current production, while B, selling the commodity to ultimate consumers,
collects from them the money with which to redeem the bill at maturity,
the date being so chosen as to make this normally possible. Note that this is
a piece of observable practice and no theoretical construct; that a bank that
confines itself to this sort of business can, in fact, not increase its lending on
its own, because commodities must be first produced and sold ; 34 and that
there is an obvious sense — though one only out of several — in which it might
be averred that bank money of this kind would vary in a manner roughly
corresponding to the flow of commodities, does not raise prices, and is en-
dowed with 'elasticity.’ We may indeed doubt whether this case has the im-
portance attributed to it by sponsors of the doctrine. And we may not like
this kind of elasticity but there is no warrant for denying its existence. I re-
peat that none of the errors alluded to is inseparable from either the position
of the banking school or of the commercial theory of banking.

5, Foreign Exchange and International Gold Movements

The period’s analysis of the monetary aspects of international economic re-
lations, in the form that J. S. Mill imparted to it, proved an extremely durable
achievement and, though now under critical fire, still underlies much of the

34 This version does not involve the error commonly implied in the statement that
banks cannot give credit beyond the ‘requirements’ of their customers; and it is likely
that Tooke did not mean more than this. The typical attitude of the respectable
English banker may have confirmed him in this opinion as well as in the opinion that
such credit does not act upon prices. On the other hand, it must not be forgotten (this
has been very instructively shown by Kepper, see below, sec. 6) that Tooke did not
strictly adhere to the commercial-bill theory of bankers’ money. In places, he appar-
ently committed himself to a much wider definition of customers’ requirements,
holding that no kind of short-run credit can ever be inflationary that serves a serious
business purpose (he seems to have made an exception for purely speculative transac-
tions in times of ‘overtrading’). This of course is not only difficult to defend but even
difficult to understand, unless we interpret it as a corollary of his opinion that banks
cannot lend more than the public saves. But in the Inquiry he admitted that they can.

73 2 HI : FROM 1790 TO 1870

best work of our own time. 1 In order to appreciate it, we must bear in mind
the following two facts.

In the first place, the ‘classic’ writers, without neglecting other cases, rea-
soned primarily in terms of an unfettered international gold standard. There
were several reasons for this but one of them merits our attention in particular.
An unfettered international gold standard will keep (normally) foreign-ex-
change rates within specie points and impose an ‘automatic’ link between
national price levels and interest rates. The modern mind dislikes this automa-
tism, as much for political as for economic reasons: it dislikes the fetters this
automatism clasps on government management of the economic process —
dislikes gold, the naughty boy who blurts out unpleasant truths. But most of
the economists of the period under survey liked it for precisely the same rea-
sons. Though they compromised in practice as in theory and though they
admitted central-bank management, the automatism — a phrase beloved by
Lord Overstone — was for them, who were neither nationalists nor etatistes,
a moral as well as an economic ideal. It stands to reason that this alone will
make a lot of difference between their problems and ours and that this differ-
ence in practical outlook is bound to assert itself — though perhaps it should
not — in purely analytic work.

In the second place, the ‘classic’ writers were primarily concerned with
commodity trade. Although they did not fail to consider international lend-
ing, subsidies, and tributes, the monetary problems of commodity trade (pay-
ment for imports and receipts from exports, the gold movements and varia-
tions in price levels incident to these, and the effects of gold movements on
domestic credit structures and interest rates) were their central problems, so
much so that they treated everything else from the angle of commodity trade.
In consequence, international finance did not get its due in their analysis —
the credit transaction that did was the transaction embodied in the commer-
cial bill (including, it is true, the finance bill), which, directly .or more dis-
tantly, corresponded to commodity transactions. But the South American
loans and mining stocks, for instance, that were being issued in 1824 and
that for the time being dominated the London money market left no foot-
prints in basic theory. For us, the exactly opposite approach seems more nat-
ural: we are likely to look upon international capital transactions as the basic
phenomenon to which commodity trade is subsidiary, by which it is con-
trolled, from which it must be understood. And this point, too, would suf-
fice in itself to divorce modern analysis from what may be described as the

1 1 believe this to be true of the work not only of Taussig but also of Viner and
Haberler, who no doubt developed the 'classic' analysis and also accepted various new
tools and propositions of others, but did not challenge the ‘classic’ fundaments. These
were, indeed, challenged by Ohlin and other front-rank economists but their contri-
butions too may be formulated as improvements rather than reconstructions. Professor
Viner’s survey of the situation (op. cit. ch. 6) may be referred to in support of this
view. An impression to the contrary rests primarily upon the fact that modern analysis
envisages other practical problems and conditions.

MONEY, CREDIT, AND CYCLES 733

Commodity-Trade Theory of international finance (or of international pay-
ments or of international gold movements).

The commodity-trade theory of international finance is thus open to the
criticism — as is the theory of international values — that its conception of the
phenomena with which it undertakes to deal is much too narrow . 2 Also, it
must be pointed out that its particular assumptions disqualify it for direct
practical application. But there is another criticism that strikes at it within
its own precincts and should be mentioned at once because it has received
undue prominence during the last twenty years or so. A theory of interna-
tional finance that pivots on commodity trade will naturally emphasize the
equilibrating role of variations in relative prices. It has been pointed out, first
by Wicksell, that adjustments to disturbances of trade relations may and
often do take place without actual changes in prices and also without actual
gold movements. This is true, of course, and no classic writer, least of all
Ricardo, would have denied it. But if the 'classic’ theory be nevertheless
criticized on the ground that it put an altogether unjustifiable burden upon
the price mechanism and in doing so failed to notice other equilibrating fac-
tors, then the critic is wrong because price variations of the kind the 'classic’
theory visualizes imply shifts of demand curves which in turn imply variations
in income, as we shall see presently. Moreover, in the pattern which the
'classics’ chose for analysis, price variations in fact do hold the key position.
All the critic can rightfully say is that this is no longer so in patterns in
which prices are rigid and capital movements dominant. Finally, several
writers of the period under survey explicitly introduced the factors that critics
miss in the classical picture . 8

In the third place, the 'classic’ theory of international finance was not
fundamentally new. Thornton, who blocked it out, referred — approvingly and
critically — to Locke, Hume, and A. Smith, and Hume’s analysis undoubtedly
was the starting point of the period’s work. But Hume himself did no more
than formulate effectively the result of a long development in the course of
which 'mercantilist’ work had been slowly moving toward the doctrine of
the 'classics.’ Thornton’s teaching prevailed, more or less, with most of the
leading writers of that and the subsequent period, from Malthus 4 through
Tooke to J. S. Mill and Cairnes and eventually to Taussig. But Wheatley dis-
sented from it and was followed by Ricardo . 5 We proceed to consider the
point at issue.

2 On this, see J. H. Williams, 'The Theory of International Trade Reconsidered,’
Economic Journal, 1929, reprinted in Postwar Monetary Plans and Other Essays (1944),
Part iv.

3 This has been shown by Viner (op. cit. pp. 293 et seq.), who in particular mentions
Longfield, Torrens, and Joplin.

4 Edinburgh Review, 1811, the review articles referred to already on another occasion
(above, sec. 3).

5 To some extent, as McCulloch has pointed out, they were anticipated by Barbon.
See above. Part 11, chs. 6 and 7.

734 ra: from 1790 to 1870

For this purpose, we start from a state of monetary equilibrium between two
countries . 6 Being in possession of the theory of international values and of
the equilibrium condition given by the equation of reciprocal demand (which,
as we know, comprises the principle of comparative cost), we readily see that
the condition of' monetary equilibrium which we must now add is simply
that, claims from commodity transactions canceling one another, there should
be, under our assumptions, no movement of gold from one country to the
other. We proceed to investigate the properties of this equilibrium by assum-
ing it to be disturbed and by analyzing the adjustments that will follow.
First, we assume a disturbance occurring in the sphere of money: we assume,
like Hume, that in one of the two countries everybody’s holding of monetary
gold is suddenly doubled. Without committing ourselves to any strict quantity
theory, we may aver that in this country incomes and business funds in terms
of gold, hence expenditure, will increase; that demand schedules for all
commodities will shift upwards; that gold prices will rise in. consequence; that
exports will decrease; and that gold will flow out until equilibrium is re-
established. Nobody ever challenged this, though the highly artificial process
assumed might have given plenty of scope for quibbling . 7 Second, instead of
assuming that gold has increased in one of the two countries, assume that
commodities have decreased, for example, because of a bad harvest. The
reader will be tempted to argue that, the 'need’ for food imports having in-
creased, an unfavorable balance of trade will ensue and produce ah export of
gold through which adjustment will, for the time being , 8 be achieved. But on
reflection, he will realize that this is not strictly correct and does not consti-
tute a generalization of Hume’s argument but a deviation from it. For the
bad harvest per se does not produce an unfavorable balance. Needs are not
incompressible. So far as the need for food imports is imperative, other im-
ports can be curtailed: in other words, all that has happened is that the
people in the country that experienced the bad harvest are, for the time be-
ing, poorer than they were before and have to readjust their consumption
and investment to a lower level of real income; but on this lower level the
balance of trade can be, and in the absence of money and credit would have
to be, just as much in equilibrium as before. Actually, however, we do get

6 We make the following assumption partly in order to reproduce the 'classic’ pattern
and partly in order to simplify exposition: no international economic relations except
commodity trade with perfectly flexible (and competitive) prices, hence incomes; no
credit whatsoever; perfectly free international gold Standard; two countries only, differing
not too much in size, for neither of which foreign -trade is of negligible importance; no
gold mining; gold, though considered as a commodity, all absorbed in the monetary
function; no cost, risk, or loss of time involved in its transportation or in the transporta-
tion of commodities. Evidently a fairly complete theory can be derived by dropping
these assumptions one by one.

7 I have reduced the scope for quibbling by reasoning in terms of income and
expenditure rather than of mere quantity of money. But there still remains some.

8 The next step would be an increase of incomes and prices in the other country,
which will counteract the process even before normal harvests, re-establishing previous
conditions, reverse it entirely.

MONEY, CREDIT, AND CYCLES

735

the unfavorable balance also if we reason correctly per analogiam of Hume's
argument, only we get it as the effect rather than as the cause of the export
of gold. Since gold has not been decreased by the failure of the harvest and
since we may assume that money incomes and money expenditures have not
decreased either, but since there is now less of commodities to buy, prices
will rise or gold in terms of commodities will get cheaper or, as we may
also say, from the standpoint of the previous price level, gold has become
redundant. This curtails exports and fosters imports of commodities other
than gold exactly as if gold and incomes and expenditures had increased, . out-
put having remained unchanged. 9 We have thus reduced the disturbance that
arose in the commodity sphere to a disturbance in the monetary sphere.

Thornton, who began his investigation into the nature of monetary equi-
librium in international trade by presenting the example of the crop failure
( Paper Credit, p. 143), seemed to argue in the way that has just been shown
to be open to objection. It is tme that in other places (e.g., ibid. pp. 244,
247), his argument indicates that he understood the point I have been trying
to make. But he was so hazy and so hesitant about it that Wheatley and
later on Ricardo were right in asserting that the factors that operate on the
value or purchasing power of gold are one thing and that the operation of
the value or purchasing power of gold is another thing. But they so misman-
aged their case as to leave contemporary as well as later writers to wonder
whether they had any case at all. 10

9 It should be superfluous to point out that the sequence of events described is only
to express the logic of the process and need not always be actually observable. But this
does not constitute an objection any more than it constitutes an objection to the usual
theory of the effects of a specific tax imposed upon a commodity — that its price need
not, as the explanatory schema seems to postulate, first rise by the whole amount of the
tax, then fall again owing to the consequent reduction of quantity demanded, and so
on until it settles at the new equilibrium level, and that in practice some steps may be
omitted. Similarly the gold may start to flow at once in payment of the additional
grain import, and the influence of the crop failure on the price level in the affected
country may never show fully: this need not effect the role of price variations in the
explanatory schema.

10 On this controversy, see Viner, Canada’s Balance of International Indebtedness,
1900-1913 (1924), ch. 9. Wheatley and Ricardo introduced not only irrelevant or non-
essential but also erroneous arguments. For instance, both Wheatley and Ricardo
denied that a crop failure will create 'redundancy' of currency, though Ricardo admitted
this in a letter to Malthus ( Letters , p. 13). But Wheatley, perhaps because he had a
clearer conception of the price level, came much closer than did Ricardo to grasping
the principle involved. Thus, he said boldly that, in spite of all the subsidies and other
sums sent abroad during the Napoleonic Wars, it would have been possible to enforce
'influx of money to any extent’ ( Essay on the Theory of Money . . . , 1st vol., p. 194).
Barring the obvious exaggeration, this clearly implies, though it does not state, the
principle that it is a monetary mechanism which is immediately behind exchanges and
gold flows and that these are never determined uniquely by the factors — -such as
political payments or conditions that determine the demands for individual commodities
— that operate at one remove.

73 ^ III: FROM 1790 TO 1870

But had they? Is it really more than hairsplitting when we insist that gold
flows out because it is the ‘cheapest exportable commodity’ and not because
of a bad harvest when the bad harvest makes gold the ‘cheapest exportable
commodity’? Instead of any other answer, I shall merely point to a fact of
considerable importance both for the history of economic analysis and the
history of economic thought. It is natural for bankers or writers who place
themselves in the position of the individual banker to say that banks cannot
expand credit beyond limits that are given to them irrespective of their own
behavior. It is not less natural for bankers and students of the prob-
lems of the individual bank to start from the obvious fact that outflows or
inflows of gold result from unfavorable or favorable exchanges which in turn
result from the demand for and supply of claims on foreign places. Excepting
the quality of the individual paper, the factors behind demand and supply
seem to be all that the banker has to analyze for purposes of diagnosis and
forecasting: political factors, business situations, state of the crops, and so on;
and' this is in fact the standpoint on which Goschen placed himself in writing
his famous Theory of Foreign Exchanges (1861). 11 Since demand for and
supply of foreign paper reflect a country’s current (and prospective) balance
of payments, we may call this the Balance -of-Payments Theory of foreign ex-
changes. Decades of quiet conditions may pass without anyone’s becoming
aware of the fact that there is anything missing in this theory. But if people
keep on applying it in conditions of violent disturbance, the presence of an-
other factor becomes obvious that cannot be resolved into those which we
may unearth by analyzing the individual items of the balance of payments,
namely, the value (purchasing power) of the monetary units in which bal-
ances of payments are expressed. We may label as Relative Inflation the vari-
ations in the value of a country’s monetary unit, in relation to the value of
other countries’ monetary units, and speak accordingly of an Inflation Theory
of Foreign Exchanges. We shall return to this subject in Part iv, Chapter 8.
Now I wish merely to point out that the first rumble of the prolonged battle
between these two theories — though it should be clear that they do not
amount to alternative explanations — is audible in the controversy between
Thornton and Wheatley-Ricardo: when, in the latter’s phraseology, gold be-
comes ‘redundant’ in a country or ‘the cheapest exportable commodity,’ then
this country experiences ‘relative gold inflation.’ So Wheatley and Ricardo
did have a case and one that was more than chopping-logic, though, so far as

11 George J- (afterwards Lord) Goschen (1831-1907), Chancellor of the Exchequer
in the second Salisbury administration (1886-92) and of historical importance as the last
of the ministers of finance in the pure tradition of classic liberalism (it is highly signifi-
cant though that this liberalism had taken shelter in a conservative cabinet), was a
banker of German extraction. His book describes extremely well what a highly educated
and intelligent dealer in foreign exchange would know about foreign exchanges. As a
piece of analysis, the performance, which nowhere goes below a well-observed surface,
does not rank highly. But it explained things about which politicians and academic
economists are likely to know but little and hence was a boon for both. The success
of the book was sweeping and it is still worth reading.

MONEY, CREDIT, AND CYCLES 737

their attack upon Thornton is concerned, they may have been unjust because
Thornton’s fine mind paid but little tribute to the fallacy in the balance-of-
payments argument.

When countries are in monetary equilibrium with reference to one another,
then, so it has been stated above, gold is distributed between them in such a
way that there is no profit in transferring any part of a- country’s holding to
any other country. We may express this by saying that the purchasing power
of gold is internationally at par and also, from the standpoint of the inflation
theory of foreign exchange, that this parity and its variations are the (im-
mediately) determining factors in the foreign-exchange market. This Pur-
chasing-Power Parity theory, or some rudimentary form of it, goes far back
and can, as we have seen above, certainly be attributed to Malynes. During
the First World War, a particular coinage of it became associated with the
name of Cassel. But the principle involved must also be attributed to Wheat-
ley and Ricardo 12 in whose work it appears, as it was to appear in Cassel,
in characteristic association with a strict (and crude) quantity theory . 13

The ‘classic’ reasoning about gold movements and exchange rates can be
generalized without much difficulty to irredeemable paper . 14 Its application to
the cases of loans, subsidies, and absenteeism 15 — a standard topic of the eco-
nomics of the period — presents more difficulties. Of course, the divergence of
views just described carries over into the discussion of these cases. But this
is not the only problem. All of these cases, but especially international loans,

12 This is not the opinion of Professor Viner (op. cit. pp. 126 and 382 et seq.). But
this is only because he reserves the term for the Casselian form of the principle. This,
of course, cannot be attributed to Ricardo, who always fought shy of the price level
concept that is essential to the Casselian form of the principle though not to the
principle itself. The struggles of economists with the emerging price-level concept have
been discussed above.

13 On a certain level of monetary theory, quantity theory and purchasing-power parity
theory are simply complements or even two different aspects of the same thing. It is,
however, possible to show that, on other levels, they may be so formulated as to con-
stitute logically independent, though still related, propositions.

14 Wheatley (Essay on the Theory of Money, 1807) saw more clearly than did
others that even in this case it was ‘redundancy’ — i.e. pressure upon the price level — and
not any occurrence in the world of commodities per se that would cause an unfavorable
turn of exchange rates. There is an echo of this in J. S. Mill’s rather inadequate treat-
ment of the subject ( Principles , Book hi, ch. 22, § 3).

16 Irish landlords, living in England on the rents of their Irish estates, naturally were
being increasingly discussed, the main purely economic question being whether or not
their living and spending in England and not Ireland made any difference to the Irish
people. McCulloch returned a negative answer on the ground that it does not matter
where a man consumes what he consumes (‘Essay Showing the Erroneousness of the
Prevailing Opinions in regard to Absenteeism,’ Edinburgh Review, 1825, reprinted in
Treatises and Essays on Money, Exchange, Interest, 1859); Senior a weakly affirmative
one ( Edinburgh Review, 1825; see also Senior’s Outline, p. 156).

M. Longfield’s performance ( Three Lectures on Commerce and One on Absenteeism,
1835, London-School Reprint, 1937) is of some analytic interest.

738 III: FROM 1790 TO 1870

raise questions that cannot be satisfactorily treated by a schema derived from
the miraculous increase in the gold stock of a country or from the failure of
a harvest: among other things, income effects begin to play a qualitatively
different role, and interest a decisive one. Results were correspondingly un-
satisfactory. Nevertheless modern criticism — qua criticism — often errs by not
paying sufficient, attention to the particular conditions of the transactions that
individual authors envisaged and the sequence of events that were imposed
by these conditions. Take J. S. Mill’s famous treatment of unilateral political
payments — say, an annual tribute — that served as a starting point and evoked
much criticism in the discussion on German reparations after 1920 ( Principles ,
Book in, eh. 21, §4). The treatment is short and oversimplified, but sub-
stantially correct so far as the one case considered is concerned, namely the
case where the recipient insists on receiving annual sums of money, the first
of which the debtor country has no choice but to collect from the pockets of
its citizens. Here the gold movement is not a question of automatic mech-
anisms at all but is simply imposed by the initial conditions of the problem.
Under these conditions, a fall in prices in the paying country can hardly fail
to come about. This will increase exports and decrease imports and would
bring back the gold but, as Mill constructed the case, the paying country’s
claims to this gold will be absorbed by the receiving country’s claim to the
next instalment of the tribute, so that gold stock, incomes, expenditures, and
prices in the paying country are kept down and its excess exports are kept up.
Another case might no doubt be constructed that would produce a different
sequence of events and contain no gold movements and no price changes at
all but only income changes and commodity movements. But either case
serves to illustrate what from the ‘classic’ standpoint is the essential thing,
namely, that the true equilibrating factor is the commodity transfer. And
neither is very realistic.

6. ‘The’ Business Cycle

One of the most important achievements of the period under survey, and
one of the few that were truly original, was the discovery and preliminary
analysis of business cycles. It is true that the crises of 1815, 1825, 1836-9,
1847-8, 1857, and 1866 pressed the phenomenon upon the attention of even
the most academic of economists. But similar breakdowns had occurred, with
similar regularity in the eighteenth century, and nevertheless nobody had
gone deeply into the matter: nobody had distinguished them clearly from
the effects of war and other external disturbances or seen in them anything
but chance misfortunes or the results of manias or errors or misconduct. The
first suggestion that there might be deeper causes to these breakdowns, causes
which are inherent in the economic process, are indeed to be found in the
‘mercantilist’ literature, mainly in connection with the ideas that were later
on worked up into the various underconsumption theories. But these ideas
were not made explicit before the controversy on gluts, during and after the
Napoleonic Wars, which we know already and which ended, for the time be-

MONEY, CREDIT, AND CYCLES 739

ing, in their defeat. After some additional comments on this controversy, we
shall consider the analyses of business cycles that are primarily due to Tooke
and Lord Overstone and then end up with the contribution of Marx. For an
extensive treatment of the subject, the reader is referred to the work by von
Bergmann . 1

The facts about crises that the press and the public primarily notice and
to which they naturally attribute such effects as bankruptcies and unemploy-
ment are the collapse of credit and the unsalability of commodities: press and
public are inveterate adherents of monetary and overproduction ‘theories.’ 2
It was against the popular ideas of the latter kind that J. B. Say argued in
his chapter on the ‘Law of Markets.’ As has been stated already, so far as the
subject of crises is concerned, the main merit of that law was a negative one.
Say showed successfully that, however large the phenomenon of overproduc-
tion may loom in the historical picture of individual crises, no causal explana - 1
tion can be derived from it: there is no sense in saying that there is a crisis
because ‘too much’ has been produced all round. Though negative, this con-
tribution was very important. It may be said to stand at the fountainhead of
the scientific analysis of cycles and to mark the point at which the latter
broke away from pre-analytic thought. But the positive application that Say
attempted to make of his law was much less valuable. He inferred from it
erroneously, though with apparent logic, that, if general overproduction was
no explanation, then partial overproduction must be at the root of the trouble
• — that some commodities are unsalable because their complements are lack-
ing, or that the apparent overproduction of some was really underproduction
of others. This is the Disproportionality Theory of Crises , 3 as it was called

1 Eugen von Bergmann, Die W irtschaftskrisen: Geschichte der nationalokonomischen
Krisentheorieen (1895). Most authors of systematic works on business cycles present
some information on the history of business-cycle analysis, and there are also a few
other histories. Analytically, Professor Friedrich Lutz’s D as Konjunkturproblem in der
Nationalokonomie (1932) moves on a much higher level than does von Bergmann’s
work. Nevertheless the latter is the only one I know who presents the results of extensive
research in the literature of the period — a fact which is surprising in the case of a subject
that looms so large in modem work. Scholarly effort has been directed toward the
work of individual authors or groups of authors or toward individual issues or theories
Tather than toward a comprehensive survey. On Tooke and Overstone, e.g., there is the
excellent book by Georg Kepper, Die Konjunkturlehren der Banking - und der Currency -
schule (1933). On American work, see H. E. Miller, Banking Theories in the United
States before i860 (1927, ch. 16).

2 Today, the ‘theory’ of business cycles means very much more than explanatory
hypotheses: it means a whole apparatus of the theoretical and statistical tools of analy-
sis. For the nineteenth century, however, it is approximately correct to say that hypothe-
ses as regards the ‘causes’ of crises or cycles were the main, if not the only, contents of
what was meant by theories of crises.

3 The disproportionality that Say envisaged was primarily a disequilibrium within the
same stage of the productive process: overproduction of shoes with reference to the
production of coats. We had better confine the term to this meaning — there is, of
course, no objection to forming larger categories than shoes and coats — and distinguish

74 °

III: FROM 1790 TO 1870

later on, which died from lack of vitality in the course of the nineteenth cen-
tury, though individual adherents might be named throughout. One of them
was Ricardo. Slightly improving the idea in Chapter 19 of his Principles , he
made a reasonable though, of course, inadequate case for Sudden Changes in
the Channels of Trade as the most important single cause of disturbance.

As we know, Sismondi and Malthus (followed by Chalmers) were the lead-
ers in the campaign against Say’s law-some of their arguments having been
anticipated by earlier writers, especially Lauderdale. It is very difficult to
label their theories, which neither of them systematized completely and which
with both of them, but especially with Malthus, were theories of stagnation
and prolonged unemployment rather than theories of ‘crises.’ Malthus, how-
ever, came much nearer to definiteness and may I think be credited — or
debited — with an underconsumption theory of the oversaving type: 4 stagna
tion ensues when people save and invest to such an extent as ‘to leave no
motive to a further increase of production’ owing to the incident fall in prices
and profits. 5 It cannot be emphasized too often that this argument, whatever
its incidental merits — and one of them is that it locates the source of stag-
nation in the saving-investment process — is, as it stands, definitely erroneous
if intended to explain ‘crises,’ though not if merely intended to show the pos-
sibility of production’s becoming stationary. But Sismondi offers such a multi-

it from theories which attribute cycles or crises to disproportionality between stages
taken as a whole, e.g. between investment goods production and consumers’ goods pro-
duction. For disproportionalities of the latter kind are always linked to other factors,
e.g., monetary ones or oversaving, and therefore are symptoms or consequences rather
than ‘causes.’

4 In a sense, of course, underconsumption can always be described as overproduction.

Accordingly, von Bergmann labeled Malthus’ theory a ‘motivated overproduction theory.'
It seems more conducive to clear distinctions to avoid the latter phrase whenever an
author locates the seat of the trouble with the behavior of consumers, even if the result
is also some sort of overproduction — just as, for the same reason, we have adopted a
strict definition of the phrase Disproportionality. We shall distinguish three types of
underconsumption theories, all of which put in an appearance during that period.
There is, first, the oversaving type just mentioned, of which Malthus was the chief
exponent. There is, second, the nonspending type that emphasizes disturbances which
arise from saving decisions that are not offset by decisions to invest. Malthus, as we
have seen, glanced at this idea, which is an old one — to be attributed, e.g., to Quesnay
and several of his French predecessors — but which did not play any great role in
modem economics until our own time. And there is, third, the mass-poverty type that
attributes gluts to the inability of labor, owing to low wages, to ‘buy its own product.’
The most important sponsors of this theory were Sismondi and, much more definitely,
Rodbertus. This theory, as Marx well knew, is beneath discussion since it involves
neglect of the elementary fact that inadequacy or even increasing inadequacy of the
Wage income to buy the whole product at cost-covering prices would not prevent hitch-
less production in response to the demand of non-wage earners either for ‘luxury’ goods
or for investment. *

5 See Malthus’ letter in J. M. Keynes, Essays in Biography , p. 143; also the con-
temporary German discussion of the controversy between Malthus and Say by K. H.
Rauj' Malthus und Say iiber die Ursachen der jetzigen Handelsstockung (1821).

MONEY, CREDIT, AND CYCLES 74 1

plicity of responsible factors that he cannot be classified satisfactorily. The
oversaving argument is no doubt present and forms the core of his analysis of
disequilibria of production and consumption. 6 But underconsumption owing
to low wages is still more prominent, both because of the Vicious’ distribu-
tion of incomes per se and because- of the unemployment created by labor-
saving machinery. Then there is, incident to his sequence analysis, the idea
that increasing outputs meet totals of purchasing power that have been earned
some time before by participation in the production of a smaller output.
Further, Sismondi made much, and rightly, of all the random vicissitudes
through which the road leads to the theorists’ smooth ultimate long-run nor-
mals. Thus he became the patron saint of all those 'explanations’ that are
content to talk about the anarchy of capitalist production, the lack of knowl-
edge of what the other fellow does and of what buyers want, and so on,
though all the crudities that are to be found in the literature of this kind
must not be attributed to him. The phenomena of the post-Napoleonic de-
pressions suggested to him a rich array of sources of trouble of all sorts that
was easier to shape into an indictment than into an analytic organon.

Thus, he stands also in the current of ideas that produced a 'theory’ which
was to command much support by very able economists from, roughly, 1850
to the end of the nineteenth century, and will have to be mentioned again.
In a nutshell, it may be expressed by saying that crises will occur when any-
thing of sufficient importance goes wrong. One of the chief representatives of
this view was Roscher. 7 But in addition to this common-sense, if somewhat
commonplace, theory Roscher presented what can only be described as a
fricassee of most of the ideas that were current at the time he wrote. Emas-
culating all of them, he accepted Say’s law but reduced it to an identity; 8 he
accepted and amplified Ricardo’s sudden changes in the channels of trade;
he cautiously accepted Malthus’ oversaving factor though he said that Malthus

6 See, especially, besides Sismondi’s article in Brewster’s Edinburgh Encyclopaedia
and the Nouveaux Principes, his article on ‘Balance des consommations avec les pro-
ductions’ in the Revue encyclopedique, May 1824. In this same periodical (June and
July 1827) he also crossed swords, on the subject with Dunoyer.

7 Principles ( Gmndlagen , 1st ed. 1854; English trans., 1878), Book iv, 216-17 on
. ‘Commercial Crises,’ and $ 220, entitled ‘When Saving is Injurious.’ The theory that

every circumstance that suddenly and largely increases production or decreases con-
sumption or ‘disturbs the ordinary course of industry, must bring with it a commercial
crisis’ is still more fully explained in Ansichten der V olkswirtschaft (1861). This view
of the matter, sometimes glorified by a shrewd and instructive analysis of individual
situations, was very common in France. Courcelle-Seneuil, Chevalier, and many other
authors who differ only in the relative emphasis they put on the circumstances that are
particularly apt to play a role — credit expansion, e.g. — could be quoted to this effect.
A very typical example will suffice, however: Joseph Garnier’s Elements (1845; later
T raite) and especially his article on ‘Crises commerciales’ in the Dictionnaire universel
theorique et pratique du commerce et de la navigation (1859).

8 In doing so, however, he hit upon a formulation that is not inelegant and will ring
familiarly to modem ears though, as we know, it misses Say’s meaning completely: he
said that Say’s law is true for all commodities including money.

742 Hi: FROM 179O TO 1870

had overstressed his point; he admitted that saving is "injurious’ if savings
are not invested ( Principles , § 220); he accepted several points that had been
made by Sismondi; finally, perhaps under the influence of J. S. Mill, he rec-
ognized the role of absorption of funds in fixed investments 9 — all this with-
out any effort at rigorous formulation or co-ordination. The situation that
produced performances like this invited factual investigation and there were
several good monographs on individual crises, but I shall only mention the
comprehensive and very successful history of crises by Wirth. 10

Of much greater interest than the work we have been surveying so far was
the cycle analysis of Tooke and Lord Overstone. Though ‘crises’ commanded
the scene throughout the century, it occurred to many observers from the
1820’s on — among whom, not much to their credit, the scientific leaders of
the profession were not conspicuous — that crises are but phases in a more
fundamental wavelike movement and cannot be really understood except
within this broader setting. From the first, writers used the term ‘cycle’ or
‘commercial cycle’ in order to denote the units of this movement 11 and
spoke of a ‘periodicity’ of these cycles, by which most of them meant not
more, however, than a definite sequence of phases irrespective of duration. 12
Some, however, did suggest approximate, if not exact, equality of duration
and among these the ‘ten-year cycle’ eventually gained a certain popularity —
even Marx experimented with it in a noncommittal manner. This pioneer
work produced within the period the seminal performances of Jevons and
Juglar, which will however be more conveniently considered in Part iv. In
the footnote below, I mention a few others that have been almost forgotten.
Observe that there is no relation between this work and the earlier discussions
on gluts. It grew up independently and owes little if anything to the general

9 This theory was elaborated at that time by several authors, among others by V.
Bonnet, Questions economiques et financieres d firopos des crises (1859).

10 Max Wirth, Geschichte der Handelskrisen (1858). His contributions to analysis
are insignificant. But he was one of the first to attempt descriptive classification of
crises (credit crises, capital crises, crises of speculation, etc.), an approach to the problem
that appealed to many students in Germany. Also he emphasized the international
aspects of crises.

11 The idea was new but the word was not. Sir William Petty used it with reference
to the sequence of good and bad harvests ('dearths and plenties’) in his Treatise of
Taxes and Contributions (1662), in the course of an attempt to evaluate the normal
rent of land. There is no evidence that he had any notion of a general economic cycle
or that he wished to explain it by the variations in crops.

12 Some confusion about this has arisen from the fact that some modern writers who
use the phrase ‘periodicity’ in the strict sense — recurrence in constant periods — attribute
the same sense to all writers who use the word and then speak of assertion or denial of
periodicity when they should speak of assertion or denial of periods of constant duration.
This must be borne in mind throughout. Lord Overstone spoke of ‘conditions which
are periodically returning’ but did not assert that they were recurring in equal periods.
Juglar (see below. Part iv, ch. 8, sec. 9a) spoke of the retour periodique of crises, but
his dating displays very unequal time distances between them. Moreover, he expressly
denied that the material suggests the presence of any definite period.

MONEY, CREDIT, AND CYCLES

743

economics of the epoch. Its authors stood to the professed economists on a
footing of cool and reciprocated indifference. Yet one should think that each
group might have derived help from the other. 13

But Tooke and Overstone did influence opinion within the fold — and were
in turn influenced by it — and their work succeeded in setting on foot what
may be described as a new analysis of ‘the' business cycle. 14 Also, they in-
fluenced one another more than they realized or, at any rate, were prepared to
admit, and the affinity between their methods and results is more important
than are the differences. The prevailing impression to the contrary is due, in
the first place, to their antagonism in matters of central-bank policy, espe-
cially to their controversy over Peel's Act. In the second place, they were very
different types and would express the same fact or result so differently that it
would look like two different facts or results. In the third place, they did dif-
fer in several points of theory and factual diagnosis, which both of them
stressed unduly but which, so far as business-cycle analysis is concerned,
amount to less than they seem to.

In the state of research in the 1830's, the mere fact that they saw and

13 I mention, first, John Wade, who was a complete outsider and whose politeness
toward 'political economy’ barely veils feelings akin to contempt. In his History of the.
Middle and Working Classes . . . (1833), he developed a pretty comprehensive theory
of ‘the commercial cycle of depression and prosperity,’ to which he attributed an aver-
age length of between five and seven years, in terms, chiefly, of prices and employment.
Faulty and inconclusive though his reasoning is, it is of some interest as a primitive
instance of an endogenous dynamic model that reproduces alternation of depression and

. prosperity by virtue of a lagged relation between prices and consumption. The second
work to be mentioned, Hyde Clarke’s 'Physical Economy’ . . . (Railway Register, 1847)
I know only from Jevons’ report (Investigations in Currency and Finance, pp. 222-3).
He had a ten-year cycle (1796, 1806, 1817, 1827, 1837, and 1847 being the crisis
dates, which suggest a little manhandling) and in addition a longer period of about 54
years, a striking anticipation of the major cycles or spans of later days, especially of
Kondratieff’s long waves (see below, Part iv, ch. 8). But his attempts at explanation
in terms of meteorological facts came to nothing. Next, I want to advert to interesting
work published in the Transactions of the Manchester Statistical Society, notably the
papers by W. Langton (1857-8) and John Mills (1867-8). Both present some evidence
of a decennial cycle which both associate rather vaguely with psychological ■ ('moral’)
factors. The former, in addition, anticipated Jevons’ analysis of the ‘autumnal drain’
and noticed the fact that the third quarter of the year is particularly favorable to the
outbreak of crises; the latter specifically labeled his cycles as credit cycles. In the United
States, periodicity in the sense of recurrence was recognized quite early. For the rest,
the question whether or not bank credit was the cause of cycles was zealously debated
(see, e.g., the discussion in C. Raguet’s Treatise on Currency and Banking, 1839; this
writer produced also an interesting but inadequately motivated overconsumption theory
of cycles). R. Hare (‘Do Banks Increase Loanable Capital?’, Hunt's Merchants’ Maga-
zine, 1852) was one of the earliest of the few writers who attributed to cycles the
function of speeding up economic advance.

14 Some contemporaneous writers, Hyde Clarke and Langton especially, recognized
a multiplicity of cycles that run their courses simultaneously. Tooke and Overstone,
however, knew just one type of cyclical fluctuations.

744 in: from 1790 to 1870

understood — intuitively at least — the phenomenon of cyclical variations in
business situations constitutes in itself fundamental affinity. But the manner
in which they gave expression to their vision illustrates very well the differ-
ence in their mental set-up that induced so many historians to overlook all
they had in common. With Tooke’s method of arriving at results from dis-
cussion of individual situations, the perception of the phenomenon was
merged so completely into the ocean of his details that it nowhere stands out
clearly, and the very fact that he saw it needs to be established against high
authority . 15 Lord Overstone, who theorized — though no doubt also from facts,
especially the facts of his experience as a banker — boldly and purposively set
forth that the ‘state of trade’ (his quotes) ‘revolves apparently in an estab-
lished cycle’ that he divides into states of quiescence, improvement, growing
confidence, prosperity, excitement, overtrading, convulsion, pressure, stagna-
tion, and distress, ‘ending again in quiescence .’ 16 No importance attaches to
these ten phases any more than to Tooke’s two or three. But the sequence
makes sense all the same.

Neither author made any conscious attempt to associate with his phases
general characteristics that would have produced a standard picture of the
cycle. But it could be shown that they saw all those that experienced practi-
tioners of business would see and practically all that our wealth of statistics
has taught us to see. Prices, interest, credit, gold movements, speculation, and
investment, in their relation to business activity and overtrading, naturally
were foremost in their minds. There is this difference though: preoccupied
as he was with the historical facts of successive situations, Tooke presented a
rich assortment of relevant elements that is entirely absent from Overstone’s
publications and presumably was not fully present in his thought. In that
assortment, two things merit particular attention. First, Tooke emphasized
throughout the importance of the ‘corn trade’ and, in connection with this,
of harvests. We cannot credit him with a harvest-theory of the cycle— any
such one-factor theory was quite alien to his way of thinking. But we should,
I think, credit him. with having kept this element before the eyes of students

15 That authority is Sir T. E. Gregory. But Tooke’s description (as has been pointed
out by Kepper) in chs. 9 and 10 of the History (2nd vol., particularly the last para-
graph of sec. 2, ch. 9) of the developments from 1828 to 1837 shows conclusively his
awareness of a definite cyclical mechanism which, in this place, he describes in terms
of a lag of supply behind consumption during 'a state of rising markets’ and of the
reverse in the subsequent phase of ‘stagnation/ 'Phases, within which the changes and
alternations between periods of confidence and discredit, of the spirit of enterprise and
despondency’ revolve, are noticed on p. 175 of vol. 1. There is even a suggestion of a
ten-year cycle.

16 This famous passage, that has been often quoted, occurs in his ‘Reflections sug-
gested by a Perusal of Mr. J. Horsley Palmer’s Pamphlet on the Causes and Conse-
quences of the Pressure on the Money Market,’ 1837 (republ. Tracts, p. 31). But it is
only from unsystematic comments dispersed over the whole of his collected tracts,
letters, evidences (see above, sec. 4b) that a conspectus of his opinions can be gained.
There remain many loose ends and also some contradictions that cannot be resolved —
it is fair to assume that he never completely thought out his ideas.' .

MONEY, CREDIT, AND CYCLES 745

and with having given an impulse to this theory which commanded some sup-
port even before Jevons wrote. 17 Second, he emphasized that periods of pros-
perity are associated with investment in fixed capital — this particularly in con-
nection with the boom in railroad construction during the 1840’s — and tech-
nological change.

Emphasis on these two elements constitutes, of course, an important step
in causal analysis. The cycle theory of both Tooke and Overstone is primarily
an ‘endogenous’ theory, that is to say, both authors tried to show how each
phase of the cyclical process is .induced by the conditions prevailing in the
preceding one. But neither was content with this. Though Tooke’s method
produced a much larger array of explanatory, auxiliary, and random factors.
Lord Overstone also recognized the more important categories, especially tech-
nological improvement, which he came near to considering as the most im-
portant of the causes of upswings. It is, therefore, quite wrong to attribute to
him personally that purely monetary theory of the cycle which saw nothing
in the latter but the vagaries of an. ill-regulated currency and credit system
and which no doubt counted adherents among his English companions-in-
arms and still more in the United States. 18 Overstone himself explicitly stated
that it is not the policy of banks which produces upswings. 19 The sense in
which this explanation is, nevertheless, possible for modern exponents of
monetary theories of the cycle — Hawtrey and von Mises in particular — may be
defined in terms of two propositions.

First, no matter what he thought about the problem of ultimate causation.
Lord Overstone certainly believed that expansion of bank loans, by means
of bank notes and ‘created’ deposits, beyond the boundary of ‘real’ capital 20

17 Von Bergrnann (op. cit. p. 239) mentioned a French author, Briaune ( Des Crises
commerciales . . . , 1840; Du Prix des grains, du libre echange et des reserves, 1857),
who presented a clearcut harvest theory in the sense that the cycle is fundamentally
nothing but the effect of spells of good and bad harvests upon society’s total income.

18 Even G. W. Norman ( Remarks upon some Prevalent Errors with respect to Cur-
rency and Banking), who, of writers of some reputation, came nearest to holding a
purely monetary theory of cycles in the sense above, qualifies it drastically by admitting
many other causal factors. For American examples, see H. E. Miller, op. cit. p. 193
et seq.

19 See, especially, his A Letter to J. B. Smith (1840). No doubt he sometimes
expressed himself rather carelessly on the subject, but I do not think it correct to say
that the statements alluded to are contradicted by others, or that they are no more
than the sort of illogical concessions which people engaged in political controversy are
frequently compelled to make.

20 This is the phrase he used in his Evidence before the House of Commons Com-
mittee on Bank Acts, 1857, and the appendix thereto (republ. 1858). I think it safe to
identify this real capital with the stock of purchasing power that the banks absorb
from the savings of the public or gain through imports of gold, so that his argument
aimed at Ricardo’s ‘fictitious’ capital. Possibly, this distinction linked up, in his banker’s
mind, with the different but related distinction between funds that are available for
long-period investment and funds which, though available for short periods only, are
nevertheless used for the financing of long-period investment.

74 ^ III: FROM 1790 TO 1870

is responsible for a course of events that differs qualitatively from what would
happen if lending always remained within these boundaries. Miscarriages^ so
he argued, would also happen in the latter case; but, however frequent, they
would be each of them individual occurrences, not necessarily connected with
one another, hence capable of being currently absorbed. But if credit has been
substantially expanded beyond that boundary, then the whole structure of the
economic process is distorted. Investment by firms is generally increased to an
extent that the underlying conditions of the economy do not warrant and
which, therefore, justifies itself only so long as this inflation goes on. This is
more than is implied in the statement, which Tooke never denied, that ex-
cessive easy money will facilitate 'overtrading’ and accentuate its consequences.

Second, Lord Overstone explained the turn of affairs from ‘overtrading’ to
‘convulsion, pressure, stagnation’ by a purely or predominantly monetary
mechanism: recession was the reaction to the preceding boom, but it was
primarily a reaction to the credit expansion of the boom. This credit expan-
sion raised prices, thereby causing drains of cash (into circulation as well as
to foreign countries) and threatening convertibility of bank notes. This was
bound to raise interest rates and this again to shake confidence and to con-
tract bank deposits and the amount of commercial bills outstanding ( Tracts ,
1857, p. 264 et seq.). Nothing of all this was worked out with the care and
thoroughness to which later analysis, aided by hostile criticism, has accus-
tomed us. But the general import is clear enough: it is money and credit
which, themselves unstable, unstabilize economic progress, and it was bank
reform which was needed in order to stabilize it, not indeed completely —
Overstone repeatedly disclaimed this — but so far as it is capable of being
stabilized at all. Tooke criticized all this adversely: he did not believe in the
existence or, at all events, in the importance of ‘fictitious’ capital; he mini-
mized the role of interest in the cycle; he did not think that the contraction
of credit was the most important factor in causing the downturn. This was
indeed enough for him to arrive at different conclusions as to policy. But
when we take account, on the one hand, of the qualifications that . Overstone
applied to his argument, and, on the other hand, of all the qualifications that
Tooke applied to his denials, we find the range of their disagreements con-
siderably narrowed.

Thus, a rich crop of ideas and of analytic performances may be garnered
and put to the credit of that period’s account. We have noticed the over-
production theories and at the same time the elimination of their most naive
types; we have noticed several underconsumption theories and, in their case
also, critical work that exposed their errors; we have noticed the random-
disturbance theories in the most varied editions; we have noticed the discovery
of the business cycle and the emergence of both monetary and investment
theories of it; even an overconsumption and the harvest theory were not ab-
sent; above all, we have noticed the beginnings of statistical work on the
problem. But, strange to say, nobody seems to have known all these bricks or
to have understood that they were bricks awaiting the hand that would com-
bine them in a comprehensive structure — comprehensive though provisional —

MONEY, CREDIT, AND CYCLES 747

before the period was out. J. S. Mill failed at the task though he offered more
of a synthesis than appears at first sight . 21 He described the cyclical mech-
anism in terms of expectations of profit — induced by favorable or unfavorable
occurrences — that act upon dealers’ stocks, hence upon prices which even-
tually go on rising for no better reason than that they have risen and, when it
is realized that the rise has gone beyond the extent warranted by the initiating
occurrence, begin to fall until they go on falling because they have fallen.
Carefully pointing out that this could happen even 'in a community to which
credit was unknown,’ he then emphasized the fact that readily extensible
credit will greatly increase the violence of such fluctuations. But commercial
crises — defined as situations in which ‘a great number of merchants and trad-
ers at once either have, or apprehend that they shall have, a difficulty in meet-
ing their engagements’ — may also arise without 'particular extension of credit’
when a large proportion of the capital which usually supplies the loan market
is absorbed by unusual demands for foreign payments, fixed investments, and
the like. He argued against naive overproduction and underconsumption the-
ories, especially the oversaving theory, yet found, within the events of depres-
sion, place for both excess supply and underspending. Interest also gets its
modest place, and so does the purely monetary mechanism of internal and
external drains. Nor is periodicity (in the wide sense of the word) absent. I
think this is enough to impart to readers the sense of flatness I experienced
myself in trying to reconstruct Mill’s analysis of the cycle. But though com-
monplace, all this is also common sense and not a bad foundation for further
work. In perusing what A. Marshall said on the subject , 22 we find indeed
much more material and do not have the same sense of flatness; but substan-
tially his treatment does not amount to more than an elaboration of J. S.
Mill’s suggestions. Many other students were influenced or even initiated by
Mill. Even Marx may have learned something from him.

Marx’s analysis of business cycles is an 'unwritten chapter’ and no coherent
picture of it has emerged, or is likely to emerge, that would command the
approval of all, or even of all orthodox, Marxologists . 23 Several methodolog-

21 This is in part because Mill nowhere concentrated all he had to say about crises
or cycles. He dealt perfunctorily with the subject in Book in, ch. 12, $ 3 of the
Principles. But pertinent material is found in many other places, especially in chs. 14
and 23 of Book m and in ch. 4 of Book iv.

22 The sedes materiae is Book iv on 'Fluctuations of Industry, Trade, and Credit’ in
Money, Credit, and Commerce, published in 1923 but consisting chiefly of results of
much earlier work (some of which dated from the 1880’s). In addition, there are sev-
eral relevant passages in Marshall’s Principles. The phrase above that ‘prices rise or fall
because they have risen or fallen’ is Marshall’s.

23 On the Marxist literature on the subject, see P. M. Sweezy Theory of Capitalist
Development, Part m. More nearly correct than Dr. Sweezy’s own interpretation seems
to me to be the one by H. Smith, ‘Marx and the Trade Cycle,’ Review of Economic
Studies, June 1937, to which readers are particularly referred — a reference that is
to excuse in part the brevity of the comments which follow. The only other excuse
I have is the impossibility of presenting, from the vast mass of relevant material, a
tolerable account within the available space. Most of this material is to be found (the

748 in: FROM 1790 TO 1870

ical features call first for our attention. As always, Marx was conscious of rea-
soning — sometimes on the same page— -on widely different levels of abstrac-
tion. In the matter of cycles, this is particularly important to note because,
each cycle being a historical individual and in part conditioned by circum-
stances for which there is no exact analogue in other cycles, we have always
to deal with — and even to construct ad hoc theories for — facts the relevance
of which varies according to the level of abstraction on which we wish to
move: a cycle theory may still aim at being general or fairly general, and
yet contain elements that are nonessential from the standpoint of a pure
model. This greatly increases the difficulties of interpretation. Moreover, Marx
attended carefully to the vital distinction between general institutional condi-
tions that permit cyclical movements and 'causes' or factors that actually pro-
duce them. For instance, the famous 'anarchy' of capitalist society, the inter-
vention of money between 'real' transactions, and the vagaries of bank credit
were for him facts to be taken account of, but as permissive — though neces-
sary — conditions only, and not as ‘causes': he perfectly realized the emptiness
of any 'theory' that contents itself with pointing to these and similar facts.

Finally, he distinguished, from both conditions and causes, another set of
facts, the symptoms. 24 It stands to reason that neglect of these distinctions
must be a fertile source of errors in analysis and of futile controversy and that
this methodological contribution is in itself sufficient to give to Marx high
rank among the workers in this field.

Next, we must try to appraise the apparent relation, which a passage in the
Communist Manifesto seems to suggest, between cycles and the ultimate break-
down of capitalist society. Marx used the notion of a (perhaps decennial)
cycle as a matter of course. Crises were never more for him than a phase in
the cyclical process. Yet if he did believe, as he seems to have done, that
crises tend to become more destructive as the capitalist epoch wears on, it is
natural to assume that he associated this supposed fact 25 with the ultimate

famous but inadequate passages in the Communist Manifesto and in volume 1 of Das
Kapital are really of minor importance) in volumes 11 and in of Das Kapital and
especially in the Theorien iiber den Mehrwert. Several letters are also essential, e.g.
Marx's correspondence with Engels on the renewal period of durable capital in the
English textile industry.

24 On p. 695 of Das Kapital (vol. 1, English trans. publ. by Kerr, 1906) occurs the sen-
tence: ‘The superficiality of Political Economy shows itself in the fact that it looks
upon the expansion and contraction of credit, which is a mere symptom of the periodic
changes of the industrial cycle, as their cause.’ Of course, Political Economy as a whole
does not do this. Yet there is a lot of truth in what Marx meant to express.

25 There is a lot to be said both about this ‘fact’ itself and about Marx’ s belief in it.
That he held such belief can be 'proved’ in the same way that we can ‘prove’ that
Marx believed in a violent and spectacular breakdown of the capitalist order of things.
It may be that he held, and toward the end of his life abandoned, both these beliefs.
For us it is more important to note (a) that the thesis that crises increase in intensity
is not logically inherent in his general theory, and (b) that some later Marxists, and
especially Hilferdirig, repudiated it until the events of 1929-32 provided the semblance
of a verification.

MONEY, CREDIT, AND CYCLES

749

breakdown or even that he expected that capitalism would break down in a
final crisis that would be so disastrous as to set fire to the framework of capi-
talist society. It is more fair to Marx’s fundamental conception, however, to
neglect such evidence as there is for his having taken this view and to empha-
size that, in his analysis, the cyclical process per se and the trend that points
toward breakdown — especially if the breakdown amounts to not more than
stagnation — are as a matter of fact two distinct phenomena, each of which
might exist without the other. There was nothing in this to have prevented
him from looking upon recurrent crises as 'contributory causes’ to an ulti-
mately untenable social situation.

Finally, we must try to collect Marx’s contributions to a fundamental or
‘causal’ explanation of the cycle, trying to find out, as so many others have
tried before us, whether any definite theory of it can be attributed to Marx
even though he never penned one explicitly. The first step is easy. Marx clearly
visualized that the ‘decennial cycle’ that (‘interrupted by smaller oscillations’)
runs along in a sequence of phases (or ‘periods,’ as he said) of average activ-
ity, prosperity, overproduction, crisis, and stagnation 26 is ‘characteristic of
modern industry’ and not merely the result of a series of incidents or acci-
dents. And he definitely located its source in the process of accumulation.
But beyond this, one thing only is certain, namely, that he treated this proc-
ess, , including the increase in productive capacity it brings about and the
‘industrial reserve army it creates,’ as a movement away from equilibrium,
and crises as the catastrophes which periodically re-establish equilibrium and,
by means of radical destruction of capital values, recreate the conditions for
profitability of business. This is a promising approach that avoids many pos-
sible errors and irrelevancies and purposively leads up to the question that
remains: why should the process of accumulation be essentially 27 disequili-
brating?

Since Marx considered the cycle as an essential form of capitalist life, we
cannot accept a random-disturbance theory as an answer. Since he passed a
contemptuous judgment on credit-theories of the cycle, we can exclude these,
however much he made of speculation and other excesses that are facilitated
by an expansible credit system. He certainly was not an adherent of any
naive overproduction theory of crises in the sense of Fourier’s crises ple-
thoriques . 28 Nor should he be saddled, as he frequently has been, both by

26 Dds Kapital, vol. i, ch. 25, sec. 3 (p. 694 of English trans., 1906).

2 ? There is no difficulty in understanding why, in real life, it is exposed to dis-
equilibrating factors, such as speculative manias, errors, miscarriages of all sorts. But
these factors do not solve the ultimate theoretical problem why cyclical fluctuations
should be inherent in the logic of capitalism — as Marx well knew.

28 The reader must not allow himself to be misled by the frequency with which the
phrase overproduction occurs in Marx’s writings — as we have seen, it occurs even in
his sequence of phases. It has with him no meaning other than a descriptive one. In
his phenomenology of cycles all-round unsalability of goods, of course, does play a role.
But he was above allocating any causal importance to it. Some followers (e.g. K. Kautsky
in Das Erfurter Programm, 1891) were not.

75 ° III; FROM 1790 TO 1870

friends and foes, with that underconsumption theory which associates crises
with inadequacy of labor’s purchasing power and which, to the layman, seems
so closely connected with exploitation . 29 But this theory belongs to Rodbertus
and not to Marx, who, like the good economist he was, was quite aware of its
weakness and repudiated it in so many words . 30 Thus, finally, we seem to be
left with the falling rate of profit — the consequence, with Marx, not of ac-
cumulation per se but of the relative increase in constant as against variable
capital — and several possibilities do in fact come into view of harnessing this
‘law’ to serve the purpose in hand. To begin with, this ‘law’ can live on the
highest level of abstraction. Further, there is no question but that prosperity
periods are periods of supernormal investment and that the resulting increase in
productive capacity has an effect upon prices and profits that need not be of
causative, but must- always be of considerable, importance . 31 Finally, Marxist
accumulation leads to unemployment and tends to undermine the industrial
structure that exists at any time (destruction of smaller and less efficient firms
and so on). Marx seems to have realized, however, that none of these elements
will readily explain the cyclical form of the process of accumulation and still
less the occurrence of crises. In any case, perhaps wisely, he did not commit
himself to an explanatory hypothesis clearly based upon any or all of them . 32

29 See above, this sec., note 4. Since nobody has ever attributed to Marx an under-
consumption theory of what in the passage referred to we have called the nonspending
(Keynesian) type, it should be superfluous to insist on the fact that Marxist capitalists
are always in a hurry to invest and that hence this element of the case has no place in
his system. Since these capitalists invest because they have got to — owing to the pres-
sure of competition — the same reasoning applies to Malthusian underconsumption.

30 See on this H. Smith, op. cit. pp. 193-5. Underconsumption of workers does come
in but only in an indirect and secondary manner, not as the fundamental cause: if
wages were higher, i.e. the degree of exploitation smaller, the rate of accumulation
would also be smaller; since accumulation is responsible for the cycles, we might there-
fore expect' that these would be less pronounced in that case.

31 This fact can, of course, be expressed by the phrase Overproduction of Capital.
But this does not make Marx a sponsor of either an overproduction or a disproportion-
ality theory.

32 We have had to omit many features of Marx’s speculations on cycles, e.g. his
brief and superficial references to the existence of a self-generating mechanism that
works by virtue of its momentum; we have, however, mentioned his interest in the
replacement cycle of durable capital. This search for additional facts seems to support
the guess that the ultimate problem remained unsolved in his mind.

CHAPTER 1

Introduction and Plan

1. Coverage 753

2. Paraphernalia 754

3. Plan of the Part 757

1. Coverage

This Part is to cover the history of analytic work from about 1870 to 1914.
For justification of the first date I invoke a fact that few economists will deny,
namely, that it was around 1870 that a new interest in social reform, a new
spirit of 'historicism/ and a new activity in the field of economic 'theory’
began to assert themselves; or, that there occurred breaks with tradition as
distinct as we can ever expect to observe in what must always be fundamen-
tally a continuous process. The justification for the second date is the thesis
that the First World War was an 'external factor’ powerful enough for its
outbreak to be made a terminal point, though the influences that were to put
an end to that epoch of economic analysis and to usher in another were all
clearly visible before and though they did not conquer until another decade or
so had elapsed.

All this must be taken with the same qualifications that apply to any at-
tempt to periodize anything, and in particular with qualifications similar to
those with which we found it necessary to safeguard our conception of the
preceding period. A number of men and of works ride astride both periods
and cannot be assigned to either without much arbitrariness; and there were
many overlaps in views, attitudes, and methods. Partly because of this, some
men and works that belong chronologically to either the preceding or the fol-
lowing periods have been allocated to this Part. There is, however, also another
reason for referring, sometimes rather fully, to developments of our own period
and for carrying our story, in some matters, down to date (1949): modem de-
velopments will be but cursorily treated in Part v, and it seems desirable to
use opportunities as they arise for indicating, at least in a number of impor-
tant points, how modern work harks back to the work of 1870-1914 — how far
it is on the foundation laid by the latter that we ourselves are building.

But all the qualifications that are necessary in order to prevent periodiza-
tion from becoming misleading — or downright nonsense — should not blind us
to the fact that the period we are about to discuss actually forms a real unit,
which would have to be recognized quite irrespective of the claims of exposi-
tory convenience. The breaks with tradition around 1870 were meant to be
breaks by the men whose names are associated with them: they may have
looked to those men more abrupt and more important than they do to the
historian, but this does not mean that they were wholly imaginary. Upon these

753

754 IV: from 1870 to 1914 and later

'revolutions’ followed two decades of struggle and more or less heated discus-
sions. And from these again emerged, in the nineties, a typical classical situa-
tion in our sense, the leading works of which exhibited a large expanse of
common ground and suggest a feeling of repose, both of which created, in the
superficial observer, an impression of finality — the finality of a Greek temple
that spreads its perfect lines against a cloudless sky. But in the last decade
or so before the outbreak of the First World War, even the superficial ob-
server should have been able to discern signs of decay, of new breaks in the
offing, of revolutions that have not as yet issued into another classical situation.

2. Paraphernalia

Through 'revolution’ and consolidation, that period witnessed substantial
advance. I suggest that we are likely to underrate its achievements as much
as we are to overrate the achievements of the period from A. Smith to J. S. Mill.
In part, this is due to a fact that is the main cause of the difficulties some
readers will encounter in perusing this Part: economists began to develop
more complex techniques, which increasingly took the place of the simple
ones of old that every educated person had been able to master without spe-
cial training. As a natural and inevitable result, economics became both more
specialized and less accessible to the reading public, and because of this econo-
mists earned plenty of — entirely unreasonable — reproach not only from spokes-
men of this public but also from the less technique-minded in their own midst.
This process was slow, however, and leaders who, like Marshall, harbored the
ambition to be 'read by businessmen’ and who wrote accordingly, still se-
cured full-dress reviews in the daily press. It hardly needs pointing out that
any such success was bought at a price, and that against such advantage to
the science and the public as we may see in it, we must set a loss of analytic
efficiency.

The science grew still more in bulk than in wisdom. This was in part the
consequence of its rapid 'progress’ in professionalization and professorializa-
tion. We have noticed that even in the preceding periods economists recog-
nized each other as people possessed of a special competence and that there
had developed something like professional standards of performance. These be-
came much more definite in the period under discussion during which eco-
nomics — or even each of the recognized branches of the economic trunk —
developed into a full-time job. This induced increasing professionalization as
much as it was in turn furthered by it. In the preceding period, most of the
leading economists were not academic teachers. In the period under discussion,
practically all were. In England, the change shows still more strikingly than it
does anywhere else, because there professors of economics (or academic teach-
ers with different titles), having been very few before, increased but little in
absolute number during that period but nevertheless conquered the field. 1 In
the United States, the increase in the number of academic teachers was spec-

1 On conditions in the department of money and banking, see ch. 8 below.

INTRODUCTION AND PLAN

755

tacular after Harvard had acquired her first regular professorship in political
economy in 1871 (Columbia’s oldest chair in moral philosophy and political
economy dates from 1818) and Yale in 1872. Germany, Italy, Spain, and the
northern countries developed their economic professions on old-established
lines, but France took a big step by establishing in 1878 professorships of eco-
nomics at all the faculties of law in the country, whereas up to that year
there had not been any regular and recognized teaching in economics at all
except in Paris.

Measured by modern standards, research facilities — beyond library facilities
that were greatly extended, especially in the United States — remained ex-
tremely modest. In many places, they were entirely absent. 2 Teaching methods
improved in different ways in different countries. We must remember that
both in England and in the United States the professional study of economics
was still something new that had to fight its way and to establish its methods by
a process of trial and error, 3 and that in some other countries economics re-
mained throughout the period a very minor adjunct of the study of law. Even
in Prussia and some other German states, where economics had a much more
independent position in the faculties of arts aiid sciences ('philosophical’ fac-
ulties) that provided a curriculum and granted the Ph.D. in economics, there
were usually only two full professors in economics 4 and perhaps one or two
lecturers ( Privatdozenten ). American students will throw up their hands in
holy horror when they read that one and the same man was expected to teach
general economics, public finance, labor, money and banking, ‘agrarian policy,’
international trade, and industrial organization "and control ( Industriepolitik ),
all in three courses. But the seminar (every professor gave a general seminar,
covering indiscriminately all these subjects, as students’ papers became avail-
able), and later on the specialized seminar, developed to complement the lec-
ture courses (not all of which were exactly fascinating, I am afraid) and to
secure individual attention at least for students working on their Ph.D. theses.
Progress took different lines elsewhere, though the seminar method was widely
copied. Enough has been said, however, to convey an idea of a state of things
that explains many of the difficulties that hampered the advance of economic
analysis and reduced the level of the average economist’s competence below
what it might have been — this level of competence in turn accounts for the
frequency of pointless controversies that arose from nothing but a failure to
understand, and for a fact that still further complicates the historian’s task.
V lifelike picture is difficult to draw and an average is difficult to strike when

2 This is, however, likely to give too unfavorable an impression. In Germany, for in-
stance, very adequate (real) incomes and long vacations supplied professors, especially at
the big universities, with plenty of facilities for research.

3 In this respect, it is highly significant that in Cambridge (England) a Tripos in
Economics and associated branches of political science was not organized until 1903.
Before that economics was indeed taught but not recognized as a full-time professional
study. After that, teaching expanded but throughout the period there was nothing
like the ‘economic faculty’ of today.

4 A number of English and Scottish universities had just one teacher of economics.

756 rv: FROM 1870 TO 1914 AND LATER

there is so wide a gulf between the performance of a small number of leaders
and the rest of the profession.

The growing professions organized themselves and provided outlets for their
current production. Again, it is neither necessary nor possible to go beyond
a few important and familiar facts. The Verein fur Sozialpolitik was founded
in 1872, the American Economic Association in 1885 (the Historical Associa-
tion in 1884), and the Royal Economic Society — to use the name it eventually
adopted — in 1890: three significant dates. The Royal Economic Society pro-
vided for the profession a central body and a journal; the American Economic
Association provided, in addition, the yearly meetings we know with their
large programs of papers and discussions. The Verein took its name from a
special purpose, which was not ‘scientific 7 in itself (see below, ch. 4) 5 and
involved a definite pledge, which in the first decades of its career determined
both the topics and the spirit of the annual discussions. Eventually, however,
it tended to become what the other two organizations were from the first —
an association of substantially ‘scientific 7 character for the whole field of eco-
nomics. Still more important is another feature of the Verein that was absent
from the program, as well as from the practice, of the American and English
associations: from its beginnings it organized team-work research. Every mem-
ber of its central committee had the right to suggest projects. Those that were
accepted by the executive committee were entrusted to subcommittees, and
these in turn assembled groups of interested members and presented the re-
sults of their investigations for discussion in the annual meetings. The original
papers together with the discussions are published in the 188 volumes of the
Verein's Schriften . 6 There is a case against, as well as a case for, such large-
scale team work. But it is important for the reader to keep in mind this
earliest instance of it.

New outlets for scientific work were provided in the shape of new journals.
To mention but a few of outstanding importance, the Revue d’economie poli-
tique, the Giornale degli Economisti, the Economic Journal, the Quarterly
Journal of Economics, the Journal of Political Economy, the American Eco-
nomic Review, the E konomisk Tidskrift, Schmoller’s Jahrbuch, the Archiv fur
Sozialwissenschaft und Sozialpolitik, the Zeitschrift fiir Volkswirtschaft, Sozial-
politik, und Venvaltung (predecessor of the Zeitschrift fiir Nationalokonomie )
all date from that period. Comprehensive dictionaries of economics were, of
course, no more of a novelty than were professional journals. Nevertheless, such

5 The opginal statutes of the American Economic Association to some extent fol-
lowed suit by virtue of Article in, which read: ‘We regard the State as an agency whose
positive assistance is one of the indispensable conditions of human progress’ — a sen-
tence that was intended to convey a principle of policy. But it was soon felt that this
did not fit the actual nature of the Association, and the article was accordingly dropped
as early as 1888.

6 The way this system worked and the results it turned out have been described by
Franz Boese — who acted as secretary for many years — in his Geschichte des Vereins
fiir Sozialpolitik, 1872-1932 (1939; last volume of the Schriften). The unassuming sim-
plicity of this report serves only to make it all the more impressive.

INTRODUCTION AND PLAN

co-operative enterprises as Palgrave’s Dictionary of Political Economy , the new
Dictionnaire d’economie politique, the Handworterbuch der Staatswissen-
schaften, all reflect the vigorous growth of a — for the time being — new age and
of 'its achievements, its undiminished controversies, its many fruits, its escape
from “orthodoxy” [really? J. A. S.], which seems to have weighed so heavily
on the previous generation/ 7 Finally new institutions were established in
which economics, in one way or another, held the place of honor. Let us sa-
lute the one that is by far the most important: the London School of Eco-
nomics (189 5). 8

One more point: those who are wont to emphasize the importance for scien-
tific achievement of professorial chairs, research funds, organizations, and the
like would have to infer that English achievement was at or near the bottom
of the international scale. As a matter of fact, it was at the top. The supremacy
in economic research that England had held during the preceding period was
indeed no longer unchallenged. Many of the decisive contributions and espe-
cially of the original ones were non-English to a much greater extent than be-
fore. England retained supremacy only in the same sense that she retained
supremacy in industry and finance. But she did retain it, especially so far as
prestige was concerned. And again, this was not only due to the performance
of her leaders; it was also and perhaps primarily due to the quality of the
‘second line’: it was not only due to the supreme competence (or more) of
Marshall and Edgeworth; it was also due to the nearly complete absence of
downright incompetence among the rest. Hence the lesson: funds and chairs
are not everything; there are things that cannot be hired or bought; and if these
things do not develop in step with funds and chairs, the latter may prove to
have been provided in vain.

3. Plan of the Part

On the whole, the plan of this Part is on the same lines as that of Part m.
No sacrifice has been made, however, on the altar of symmetry. Many things
seemed to deserve emphasis that were of no or less importance before and
vice versa; and many rearrangements seemed indicated for other reasons.

As before, we shall prepare ourselves for our main task by casting a glance
at social backgrounds — the Zeitgeist — (Chapter 2) and at such developments
in neighboring fields as did exert or might have been expected to exert some
influence upon economics (Chapter 3). The reader who finds these surveys
superficial is once more reminded that the facts to be mentioned in these two
chapters are not mentioned for their own sake. This is a history of economic
analysis, a history of the attempts of men to apply their reason to the task
of understanding things, not a history of the attempts of men to apply their

7 This is how Lord Keynes expressed himself on the occasion of the Royal Economic
Society’s Jubilee in 1940 ( Economic Journal, December 1940, p. 409). Of course, we
must make allowance for the occasion.

8 See Professor von Hayek's most instructive sketch of its career during its first fifty
years: E conomica, February 1946.

75 ^ iv : FROM 1870 TO 1914 AND later

reason — and volition — to the task of changing them. Then follow comments
on two allied groups of men and ideas that lend themselves to separate treat-
ment, the group whose work centered in the contemporaneous interest in so-
cial reform and whose leaders were with singular infelicity dubbed ‘socialists
of the chair’ ( Kathedersozialisten ); and the group that was called, and called
itself, the historical school (Chapter 4). 1 The much-debated question of econo-
mists’ value-judgments will be touched upon in connection with the former,
and the famous ‘battle of methods’ (and its American counterpart, the institu-
tionalist controversy) in connection with the latter. To some extent, this ar-
rangement impairs our picture, because when we go on to a brief survey of
the men, groups, and developments in ‘general economics’ (Chapters 5 and 6),
we shall have already eliminated two of the most important influences upon
this ‘general economics.’ Let me hence entreat the reader to peruse these chap-
ters in their order. The last two chapters of the Part deal with sets of topics
that it has seemed best to reserve for separate treatment. Chapter 7 (Equi-
librium Analysis) corresponds 2 to Chapter 6 of Part in and assigns the same
piloting function to Walras that was assigned to Senior in Part m. It aims at
presenting the emergence of the elements of modern pure theory in a man-
ner that will, I am afraid, prove as unsatisfactory to the modern theorist as it
will seem overloaded to the non-theorist. The latter may be right in content-
ing himself with what he will have read on these matters in Chapters 5 and 6.
The Appendix to Chapter 7, on the fortunes of utility theory and its successors
to the present day, stands by itself, or almost so, and should only be read by
those who take special interest in the matter. 3 Segregation of the topics of
money, credit, saving and investment, and business cycles in the last chapter
(8) calls but for this remark: segregation imposed itself for reasons of exposi-
tion as it did in Part in; but in submitting to this necessity, I do not wish to
convey the impression that I accept the current views about the monetary
theory of this period. This will be made abundantly clear as we proceed.

1 [Originally, J. A. S. intended to treat these subjects in two separate chapters, but
later combined them. The consolidated chapter was left unfinished hut is presented
below (ch. 4) in the condition in which it was found.]

2 [J. A. S. had some doubts about this statement. He left a note in pencil: ‘Can this
stay?’]

3 [At the time of writing this Note on Utility, J. A. S. intended to make it a separate
chapter but later made it an appendix to Chapter 7. The original plan called for 10
chapters, subsequently reduced to 8.]

CHAPTER 2

Background and Patterns

1. Economic Development

2. The Defeat of Liberalism

3. Policies

(a) Free Trade and Foreign Policy

(b) Domestic Policy and Sozialpolitik
(e) Fiscal Policy

(d) Money

4. Art and Thought

(a) Bourgeois Civilization and Its Recalcitrant Offspring

(b) Bourgeois Civilization and Its Philosophy

The nearer an epoch is to us, the less we understand it: our own we under-
stand least of all. For this reason alone, the sketch of the cultural pattern of
the period to be surveyed must be drawn with greater care than was required
in the case of the preceding period. Moreover, the cultural pattern actually
grew everywhere more complex as the bourgeois era wore on. The reader will
please recall what has been said in Part hi (ch. 3) on the subject of the lack
of uniformity in the cultural pattern or Zeitgeist of any epoch: to speak of a
single dominant Zeitgeist at all spells distortion of the facts — in most cases
ideological distortion. But this fundamental truth of cultural sociology applies
to the period under discussion with a vengeance. However severely we must
simplify things, the following comments will make this abundantly clear.

1. Economic Development

The period we are about to survey was again one of rapid economic devel-
opment. It was then that Germany and the United States acquired the status
of front-rank industrial powers. But elsewhere, for instance in Austria, Italy,
Japan, and Russia, industrialization proceeded at a rate (though not of course
in terms of absolute figures) that was not less remarkable. After 1900, England
failed to keep in step, but up to about that year she experienced an increase
in wealth that may be characterized by the fact that, from 1880 to 1900, Eng-
lish real wages per earner increased by nearly 50 per cent. 1 This created an en-
tirely new standard of life for the masses.

But until almost the end of the century expansion in physical output was
accompanied by falling prices, widespread unemployment of labor, and busi-
ness losses. The spells of 'prosperity’ were shorter and weaker than were the

1 A. L. Bowley, Wages and Income in the U. K. since i860 (1937), Table xiv, p. 94.
Of course, this means only that the total wage bill kept its percentage position in total
national income.

759 *

760 IV : FROM 1870 TO 1914 AND LATER

'depressions/ In fact, the whole span between 1873 and 1898 has been dubbed
the Great Depression. 2 This particular edition of the 'paradox of poverty in
plenty’ is not difficult to explain. All the observable phenomena can be satis-
factorily accounted for by the impact of the products pouring forth from a
productive apparatus that the two previous decades had greatly expanded. In a
socialist society, such periods might be hailed as periods of harvest. In capi-
talist society, they do not cease to be that. But this aspect is entirely lost in the
fears, sufferings, and resentments generated by the dislocation of existing in-
dustrial structures that is the first consequence of technological or commercial
progress. An example will illustrate this. In the seventies and eighties, im-
proved land and sea transportation brought greatly increased quantities of
cheap American wheat to Europe, which meant severe depression to European
agriculture. Of course, this was an essential element in the 50 per cent in-
crease in the real wages of English labor that we have noticed above. But
European farmers and their spokesmen did not look at it in this light. And if
they had, they would have derived very little comfort from it. Agrarian sectors
were everywhere important enough to spread their depression to others. But,
though this would take more space to show, the industrial sectors had analo-
gous troubles of their own. In a sense, these were surface troubles incident
to a process t)f adaptation that led from one long-run spell of prosperity to
another. But for many individuals and groups the only available method of
adaptation was bankruptcy. For labor it meant unemployment or the ever-
present threat of it.

The reader will find it easy to visualize the practical problems that resulted
from this and the reactions to them of groups, classes, parties, and govern-
ments. It is on this background that we shall have to paint for the rest of
this chapter. So obvious is this that there is less danger of forgetting it than
there is of exaggerating the extent to which the facts alluded to — both the
'progress’ and its vicissitudes — determined political and cultural history. For
instance, those facts do explain much of the radicalization of the masses we
observe: the rising standard of life and a novel sense of power contributed to
that result not less than did the threat of unemployment. They also explain
much of the general zest for social reform, of the tendencies toward industrial
organization (especially of the cartel type), of the increasing government activi-
ties, of the dissatisfaction with the results produced by free trade, even of
renascent militarism. But the further fact that none of these tendencies showed
any signs of weakening during the fifteen years before the war, years that
were of quite different economic complexion — most of them in fact gathered
further momentum — should warn us not to trust such explanations too much.
There are deeper things. . . [J. A. S. intended to expand this section.]

2 For a historian’s protest against this phrase, see H. L. Beales’s article, The Great
Depression in Industry and Trade,’ Economic History Review, October 1934. The au-
thor makes it last only to 1886. But all the symptoms that this phrase is to indicate
persisted for about another decade.

2 . The Defeat of Liberalism

On the whole, the business class still had its way throughout the period,
at least up to the beginning of this century, though much more so in the
United States than in Europe. But its serene confidence in the virtues of lais-
sez-faire was gone and its good conscience was going. Hostile forces were slowly
gathering with which it had to compromise. Still more significant, it grew in-
creasingly willing to compromise and to adopt its enemies’ views. 1 Economic
liberalism 2 thus became riddled with qualifications that sometimes implied
surrender of its principles. Political liberalism, from the eighties on, lost its
hold upon electorates much more rapidly than appears on the surface: only in
a few countries, such as Germany and Austria, did genuinely liberal parties —
in the sense in which this term is used in this book — meet with open defeat
at the polls; in others, especially in England, the strength of existing political
organizations and their leadership was so great as to make it possible for
them to win victories on radicalized programs. 3 The reasons why, and the ex-
tent to which, all this was different in the United States need not, it is hoped,
be explained. What would have to be a lengthy analysis may be summed up
by saying that, barring a number of groups and movements, none of which
was strong enough to influence national politics perceptibly, all the average
American’s radicalism amounted to — and this also goes for economists — was
hostility to Big Business (‘curbing monopoly').

Before trying to see how all this mirrored itself in those departments of
public policy in which we are primarily interested (section 3) we must briefly

1 This statement involves a distinction between enforced and voluntary retreat that
a popular theory of political behavior refuses to accept. According to this theory, no
class ever retreats voluntarily. Any facts that I might adduce in support of my distinc-
tion would by the sponsors of this theory be interpreted as ‘strategical’ retreat. But if
the occurrence of such strategical retreats be admitted, the theory in question ceases
to be meaningful — any ‘concession’ that is not directly enforced is then strategical by
definition — unless the strategical purpose of each ‘concession’ is established. I maintain,
though I cannot prove here, that this is possible in some cases but not in others — e.g.
not in the cases of ‘paternalistic’ employers or in the cases of groups that are covered
by the label of bourgeois radicalism.

2 On the meaning that this term and the term Political Liberalism carry in this
book, see Part in, ch. 2.

3 This resolves an apparent paradox that might puzzle the reader. It does seem para-
doxical to speak of decline of English liberalism in a period that covers the sweeping
victories of Gladstone in 1880 and of Sir Henry Campbell-Bannerman in. 1906. The
paradox disappears, however, when it is remembered that we are not concerned with
party labels even where the continuity of a political organization is reinforced by (sub-
stantial) continuity of personal leadership, as was the case with the Gladstonian party.
In the latter case, the point I wish to make is illustrated by the split of the liberal
party that occurred in the eighties. Viewed superficially, it occurred on the question of
Irish Home Rule; but most of those who renounced allegiance on this issue had also
other reasons for doing so: they did not wish any longer to be towed along by the
radical wing.

762 iv: FROM 1870 TO 1914 AND LATER

glance at what we have described above as political forces hostile to bourgeois
laissez-faire that were gathering momentum during that period. Orthodox so-
cialism is the most obvious one. But it was not, during that period, the most
important one. In any case, its career may be assumed to be so familiar to the
reader that very few comments will suffice for our purpose. 4 First, the period
saw the rise of Marxist parties in almost all countries. But even the most suc-
cessful of these, the German Social Democratic Party, which by weight of
talent and numbers was an important factor in politics, kept on principle aloof
from political responsibility 5 and thus reduced its practical influence, even on
matters of social legislation, far below what it might have been. None of the
other Marxist parties was numerically significant except the Austrian one. The
non-Marxist socialist parties, which shaded off into non-socialist labor groups
and which felt no qualms about political co-operation with bourgeois parties,
did get near or into political office here and there. These events— which raised
the much-debated issue of Millerandism 6 — and the appearance, in 1906, of a
Labour party in the English Parliament are, of course, tremendously important.
But for the time being their importance was symptomatic only. For those who
had their ear to the ground another symptom was still more significant — and
much more so than were the most flamboyant revolutionary speeches. To be
sure, there were many bourgeois who habitually exploded at the mere sound
of the word Socialism. But there were others who were in sympathy with so-
cialist ideas and, to an extent much greater than is commonly realized, lent
practical support to them in one way or another, though not always openly.
Of course, the non-socialist vote of the socialist parties was in many cases
nothing but the manifestation of temporary resentments. But the number
was on the increase of those who approved of the ultimate ends of socialism
or who approved of the immediate aims of socialist parties — or who did both
and still professed that they were not socialists.

The growth of bourgeois radical groups and parties was immediately of
greater practical importance. They varied greatly in type and program — from
liberal groups of the old type that had taken aboard more or less important
items of social' reform, to groups of intellectuals that descended from the

4 Readers who feel this assumption to be unwarranted will do well to compare, e.g.,
the relevant parts of H. W. Laidler's Social-Economic Movements (1944).

5 We cannot go into the reasons for this attitude. But it was not altogether a mat-
ter of sour grapes.

6 Alexandre Millerand, later on President of the French Republic, rose into notoriety
as a labor lawyer and entered the Chambre as a radical-socialiste. The radicaux-social-
istes were not socialists as a party but formed the left wing of bourgeois radicalism:
the party label expresses very well the social situation of latter-day capitalism that I
am trying to describe. However, Millerand made his position more definitely socialist
later on; and he had become the leader of a group of 60 deputies of more or less
socialist persuasion when, in 1899, he accepted office in the Waldeck-Rousseau admin-
istration. He thus was the first and for some time the only socialist to take office in a
bourgeois cabinet in one of the great nations. Hence his name came to denote this
practice which, however, caused no difficulties in the northern countries.

BACKGROUND AND PATTERNS

763

philosophical radicals of old and differed little, if at all, from 'reformist’ social-
ists such as Eduard Bernstein (eh. 5, sec. 8, below). The reason why radicals
of the more advanced type carried political weight out of all proportion to
their voting power — or, like the English Fabians, 7 without having any voting
power at all — was that their support was often needed by governments in pre-
carious positions, both where radicals formed parties of their own and where
they formed the left wing of a bigger party of different complexion. This very
situation characterizes the epoch.

Bourgeois radicalism might be considered as a mere by-product of the growth
of socialism. And the latter was without doubt the product of laissez-faire so-
ciety: one need not be a Marxist in order to realize that the. private enterprise
system tends to develop toward a socialist form of organization. The facts we
have been discussing so far, however ominous they may have been for the
bourgeois order of things, were therefore part and parcel of this very order
and in this sense perfectly ‘natural.’ But there were others that did not fit into
the schema or logic of capitalist evolution. Some of these do not present any
difficulties of analysis either, but some others do.

As regards the first category, we shall in fact have no difficulty in understand-
ing that rapid capitalist evolution will evoke resistance from strata that are
threatened by it and cannot adapt themselves to a new form of existence. This
was the case with the European peasantry — also with English and especially
Irish farmers — and, on the continent of Europe, with the independent artisans.
Landlords were, of course, in the same boat. Very naturally, they clamored for
protective legislation — that was bound to violate the creed of economic liberal-
ism — and lent support to groups and parties that were anti-capitalist though
not socialist. 8 Even within the range of these phenomena, however, we cannot
be sure that this was all. Many of the spokesmen of these groups did not feel
that they were concerned with a particularly difficult economic situation — they
felt, unlike the bourgeois radicals, that the whole liberalistic schema, includ-
ing its legal and moral aspects, was fundamentally wrong.

The second category consists of cases where the same attitude stands out
better and presents much more of a problem because it does not link up so
obviously with a definite economic plight. In countries where the bureaucracy
was a powerful factor and where, as in Germany, it had sponsored economic
liberalism in the preceding period, a significant change occurred: without as
yet becoming definitely hostile, the bureaucracy began to look upon the busi-
ness class in a different way — to consider it as something to be controlled and
managed rather than to be left alone, much as the American bureaucracy does
today. The white collar class that increased rapidly in numbers and the other
groups that were beginning to be called the ‘new middle class’ — the ‘old’
consisting of farmers, artisans, and small traders — displayed a remarkably

7 On the Fabians, see below. [J. A. S. intended to discuss the Fabians in ch. 4, sec. 1,
but this chapter and section were not completed.]

8 In England, things did not work out in this way or at least did so much less
markedly. The reasons for this, extremely interesting though they are, must not de-
tain us.

764 IV : FROM 1870 TO 1914 AND LATER

strong resistance to socialist propaganda. But the minority that embraced eco-
nomic or political liberalism in our sense was not much greater, if at all, than
the minority that went socialist. The rest evolved attitudes and reform pro-
grams of their own. Finally, individuals and subgroups of all classes broke
loose from economic and political liberalism — though often retaining the label
— to do likewise. And they had one thing in common in spite of all the dif-
ferences in interests and cultural preconceptions that no doubt existed between
them: the central or controlling position that they allocated to the State and
the Nation — the National State. Accordingly, these tendencies are commonly
referred to as 'nationalistic’ or 'neo-mercantilist’ or 'imperialist,’ but though
these and other phrases do express individual aspects of an attitude that is as
difficult to define as it is to explain, they do not express the whole of it. Marx-
ists have simple formulae to offer that will fit these phenomena into their
scheme — the simplest being perhaps that 'imperialism’ is the last stage (or
'last card’) of capitalism. Popular social psychology has other simple formulae
to offer. I have none and must content myself with pointing out that we have
been looking at the roots of modern totalitarianism.

Quite different from this in nature, but equally hostile to economic and po-
litical liberalism in our sense, was another movement that is much easier to
define because it defined itself. We adopt, for brevity’s sake, the usual but mis-
leading name for it: Christian Socialism. Also for brevity’s sake, we confine
ourselves to the Roman Catholic branch of it, which was the only one to
form great independent parties (like the German Center party) that present a
unique feature: they are held together exclusively by the religious allegiance
of their members, who for the rest differ in economic interests and political
attitudes as much as it is possible to differ — through the whole range from
extreme conservatism to extreme radicalism — and yet co-operate effectively.

Throughout the period, the Catholic Church was on the continent of Eu-
rope the object of legislative and administrative attacks from hostile govern-
ments and parliaments — in England hostility did not go beyond violent talk
about 'Vaticanism’ — which is what might have been expected in a predomi-
nantly 'liberalistic’ world. What could not have been expected is that these
attacks everywhere ended in retreat and that they left the Catholic Church
stronger than it had been for centuries. Political Catholicism arose from a
renascence of religious Catholicism. Looking back, we see not merely reasser-
tion of the Catholic standpoint by people who had never abandoned it; we see
also a change of attitudes among people who had: around 1900 it was a com-
mon observation to make that in a Catholic family the old and elderly were
laicist and liberal and the youngsters believers and 'clerical.’ This is one of the
most significant patches of color in our picture. But for the purposes of this
book another fact is of still greater importance. Political Catholicism from the
first stood for social reform. I cannot do more than mention the names of de
Mun, von Ketteler, von Vogelsang. 9 This concern of the Catholic Church with

9 The reader will find a survey in F. S. Nitti, Catholic Socialism (English trans.,

1895).

BACKGROUND AND PATTERNS

765

the conditions of labor was nothing new and only adapted an old tradition to
the problems of the epoch. 10 But something that was new developed toward
the end of the century, namely, a definite scheme of social organization that,
making use of the existing elements of groupwise co-operation, visualized a so-
ciety — and a state — operating by means of self-governing vocational associa-
tions within a framework of ethical precepts. This is the ‘corporative’ state
adumbrated in the encyclical Quadragesimo Anrio (1931). Since it is a norma-
tive program and not a piece of analysis, no more will be said about it in this
book. I merely add the name of the man who has done more than any other
for this conception of society, Heinrich Pesch, S.J. 11

Finally, what was the attitude of economists? This question is difficult to
answer because the republic of economists was torn by the same dissensions
that agitated the political bodies. Individuals were still fairly numerous who
clung to the liberalist faith in its integrity — particularly numerous in the
United States. And there were also strictly liberalist groups — in Europe, the
Paris group (see below, ch. 5, sec. 3) being the outstanding instance. But
Marshall professed himself in sympathy with the aims of socialism and spoke
without explanation and qualification of the ‘evils of inequality’; also he was
the first theorist to prove theoretically that laissez-faire, even with perfect com-
petition and independently of those evils of inequality, did not assure a maxi-
mum of welfare to society as a whole; and he favored high taxation more than
is compatible with simon-pure liberalism. This goes for most of the English
economists. If we class them as ‘liberals/ it is owing to the strong stand they
made for free trade and also, perhaps, to the fact that we do not sufficiently
attend to the metamorphosis of the creed of the English liberal party dis-
cussed above. Most German economists were pillars of Sozialpolitik and thor-
oughly averse to ‘Smithianism’ or ‘Manchester ism.’ 12 On the whole, the eco-
nomic professions of all countries were politically supporters of the counter-

10 Official recognition was extended to the Catholic sponsors of the cause of labor by
several encyclicals, especially Rerum Novarum (1891).

11 That great man (1854-1926) was not particularly proficient in analytic economics,
which is why his treatise, L ehrbuch der Nationalokonomie (1905-23) will not be men-
tioned again though, so far as scholarship is concerned, it has few equals. Other works
of his bring out his doctrine still better, e.g. Liberalismus, Sozialismus, und christliche
Gesellschaftsordnung (1896-9). The reader is referred to the work of a man who may,
I believe, be considered his pupil: O. von Nell-Breuning, The Reorganization of the
Social Economy (English trans., 1936). The understanding of Pesch’s doctrine is ren-
dered more difficult by both Marxist and liberalist misinterpretations, and also by a
tendency — common to friends and foes alike — to link it too closely with scholastic
views. There is, of course, the same background of social and moral philosophy, but
there is little affinity between the problems visualized by, say, Molina and Pesch.

12 There were always some thoroughgoing liberals in the Gladstonian sense, even in
Germany. But they were few and distinctly unpopular among they: brethren. Schmoller
once asserted publicly that a ‘Smithian’ was unfit to occupy a professorial chair. Even
American ‘New Dealers’ did not go quite so far as this. The career of a more than
competent economist of that type, Julius Wolf, illustrates the point. He was strongly
pro-capitalist — and was ‘cold-shouldered’ in consequence.

766 IV: FROM 1870 TO 1914 AND LATER

tendencies to liberalism rather than of the still dominating liberal ones. In
this sense, we can say that the alliance between economics and liberalism — and,
with exceptions, between economics and utilitarianism — was broken.

3. Policies

In all departments of public policy, events reflected both the still dominant
current of laissez-faire liberalism and the counter-currents that were indicative
of the redistribution of political weights and of the new attitudes adumbrated
in the preceding section.

(a) Free Trade and Foreign Policy. Around 1870, many observers — M.
Chevalier among them — predicted confidently that universal and perfect free
trade would prevail before the century was out. Implicitly and explicitly they
also expected the victory of those principles and practices of foreign policy
that are associated with free trade, such as the settlement of disputes by mutual
concessions or arbitration, reduction of armaments, international gold mono-
metallism, and the like. Such expectations were not so absurd as they seem
to us now. For all those things are, in fact, among the essentials of economic
and political liberalism in our sense, and expectations cannot be called ab-
surd that follow from the logic of a dominant system. Moreover, until the turn
of the century, there was more than logical deduction to support them. Eng-
land upheld free trade, and other powers 1 kept their deviations from it within
reasonable bounds. There were several major wars. But allowance must be
made for survivals and for inherited situations. Moreover, peace was con-
cluded in each case by consent and without display of vindictiveness. The In-
ternational Court at The Hague and several cases of settlement of disputes by
arbitration seemed to promise further advance toward a pacific if not pacifist
state of affairs. Until (roughly) 1900, military expenditure remained com-
paratively moderate everywhere * and was not unsuccessfully fought by min-

1 France returned to her protectionist tradition — but in s mild form — as soon as she
was free to do so after the fall of Napoleon III. Germany at first continued her nearly
free-trade policy. Bismarck’s tariff reforms were in the protectionist direction but, com-
pared with modern standards, very moderately so. The treaty policy of his successor,
Caprivi, was an attempt to return to a regime not substantially differing from free
trade. The pressure of the agrarian interests and those of the heavy industries account
for a more purposeful but still moderate protectionist policy later on. The United States
re-emphasized protectionist tradition in the nineties. Russia and Spain continued their
protectionist policy. But all in all and compared with what was to happen in and since
the First World War, it is approximately correct to say that, in principle and actual
practice, the world was 'substantially free trade.’ It is only in comparison to the prin-
ciples professed by extreme free traders that it can be called aggressively protectionist,
at least, if we exclude the United States, Russia, and Spain. This applies also to the use
of tools of foreign-trade policy other than tariffs. The most important exception, the
continental sugar subsidies, was abolished within the period.

2 Comparison is with national incomes as well as with budgetary totals.

BACKGROUND AND PATTERNS

767

isters of finance. 3 England and France greatly expanded their colonial empires,
and Germany and Italy made a beginning in colonial enterprise, by means of
the unblushing use of force. But even here the contemporaneous 'liberal’ ob-
server might have taken comfort from certain facts. The significance of so
strong a display of the ‘imperialist’ attitude as was England’s treatment of the
Boer republics, for instance, is materially reduced by the facts that this pol-
icy was strongly opposed throughout by part of the Liberal party and that
the leader of this party (Sir Henry Campbell-Bannerman) scored a resound-
ing victory at the polls very shortly after (1906).

It is only our knowledge of the outcome that induces us to place a different
interpretation upon those ‘exceptions’ and ‘backslidings’ and also upon such
things as the increase of the German fleet, the military preparations of the
Balfour government, Germany’s blustering, and England’s efficient entente
policy. All the same, it is true that all of this, these ‘exceptions’ included, her-
alded a new attitude that developed against the resistance of Gladstonian lib-
eralism and got the better of it 4 toward the end of the period, witness the
armament race and other unmistakable symptoms. This ‘imperialist’ or ‘neo-
mercantilist’ attitude was general. But it stood out in classic purity in the pro-
tectionist (‘Tariff Reform’) campaign in England that was associated with the
brilliant leadership of Joseph Chamberlain, though it ended, for the time be-
ing, in failure. The essential element in the program was Imperial Preference,
not protection per se: economists’ arguments about the economic merits or
demerits of protective duties thus failed entirely to meet the real — the im-
perialist — issue.

(b) Domestic Policy and Sozialpolitik. Toward the end of the preceding
period, extension to new strata of the right to vote had ceased to be a patent
in which liberal parties had a proprietary interest. The period under discus-
sion brought further extensions which clearly presaged, though they did not
reach, universal suffrage. This was, of course, in keeping with the liberal cur-
rent; but it was a potent factor in producing the counter-currents. The rest of
domestic policy was in keeping with this — on the whole and with exceptions
that must not detain us. In the field of industrial policy, the first measures
of regulation or control put in an appearance — the Interstate Commerce Act,

3 When the atmosphere changed, most of these ministers gave in. A notable excep-
tion was Bohm-Bawerk (see below, ch. 5, sec. 4a), who resigned on army estimates in
1904.

4 Once more, let me advert to the fact that this attitude is open to two different
interpretations: the one that may be summed up in the proposition that ‘imperialism
is the last stage of capitalism’ and amounts to holding that capitalist interests turned
‘imperialist’ under the new conditions of large-scale production — dumping, rising wage
costs, and so on; and the other that may be summed up in the proposition that the
bourgeoisie, losing hold, accepted ‘imperialist’ policies as it accepted other things —
making, of course, the best of them — that were not in its own line. But for our present
purpose it does not greatly matter which of these theories we accept. The fact of the
emergence of a new attitude, at variance with the liberal creed, is beyond doubt and
this suffices.

768

iv: FROM 1870 TO 1914 and LATER

regulation subject to judicial revision of the prices charged by utilities, and the
Sherman Anti-Trust Act are American examples. 5 But public regulation or
control still remained 'interference/ a term that does not necessarily imply
disapproval but seems to indicate an opinion to the effect that legislative or
administrative activity in the field of industry requires special justification in
every individual case or class of cases. Much more important, however, was
the new attitude toward social reforms in the interest of labor — Sozialpolitik.

The reforms actually carried out consisted chiefly in (a) legislation enabling
governments to take a different attitude toward organized labor and strikes (in
England the decisive steps were taken in the late seventies, by the Disraeli
government); (b) legislation about hours and other conditions of work (an
English instance is the introduction of the 8-hour day for miners, 1908); (c)
social insurance (accident, sickness, old age, and eventually unemployment).
Here Germany led (the acts of 1884 and 1887, expanded by legislation in the
nineties) but the English non-contributory old-age pensions of the Campbell-
Bannerman government and the further steps taken under the Asquith gov-
ernment marked important advances beyond the German example. Barring
some enactments in individual states, there was practically nothing of the kind
in the United States. In Europe, however, all countries advanced on these lines
though at different rates of speed.

For us, however, the important thing is not what was actually done. Nor are
we primarily interested in the questions how far the measures actually carried
may be fitted into the liberalist schema and how far they mean only continua-
tion of older policies — older policies of the liberalist or else the paternalistic
state. To some extent both questions may certainly be answered in the af-
firmative; there was less of a new departure than either friends or foes of
Sozialpolitik were inclined to believe. It is the new spirit in which they were
taken that is important to us, the new attitude toward them by a large part
of the bourgeois public, and the fact that they were understood — again; by
friends as well as foes — to be the first installments of a much wider scheme
of reconstruction. It is this relation to future fundamental reconstruction which
places Sozialpolitik in the counter-current, even where it enjoyed the support
of the new species of reforming liberals as distinct from the support of radicals
on the one hand and conservatives on the other. Finally, it is important to
notice the relation in which Sozialpolitik stood to imperialism or nationalism
or neo-mercantilism. This relation was not universal, that is to say, it was not
present in the scheme of one type of supporters, the bourgeois radicals. Where
these furnished the principal contingent of supporters, as they did in Eng-
land, the relation fails to show on the surface. But with men of the type of
Joseph Chamberlain, social reform and imperialism were complements even
there. In Germany, this shows much more clearly. The age is not understood

5 Interpretation often presents difficulties. Thus, the Sherman Anti-Trust Act may be
interpreted as a measure in defense of competition, one of the essential elements of the
liberalist schema of things. This was indeed its ideology. But it will also bear interpreta-
tion in a sense that puts it in the counter-current, viz. as an expression of a novel atti-
tude toward business interests.

BACKGROUND AND PATTERNS 769

so long as account is not taken of those to whom national self-assertion and
Sozialpolitik were but two sides of the same medal.

(c) Fiscal Policy. Since nothing shows so clearly the character of a society
and of a civilization as does the fiscal policy that its political sector adopts,
we shall expect current and counter-current to show particularly clearly in
this field. They do.

On the one hand, the balanced budget — in fact the budget that shows some
surplus to be applied to the reduction of debt — remained a fundamental ar-
ticle of financial faith, although practice often failed to conform to it; further,
taxation was for raising revenue only and was not to exert any other effects
beyond what was inevitable; and in order to keep taxes as low as possible, ex-
penditure was to be confined to 'necessary’ purposes. Gladstone (and his chan-
cellors of the exchequer) kept to these principles throughout. So did Goschen,
the Chancellor of the Exchequer of the second Salisbury administration
(1886-92), and, so far as they were able to do so, all the continental minis-
ters of finance whose names are likely to go down in history, such as Raymond
Poincare, Witte, Pierson, Bohm-Bawerk, 6 and Miquel. The three last names
may be used to exemplify an advance beyond Gladstonian finance — an ad-
vance partly paralleled in England by the introduction of the super-tax in 1909
— that may yet be said to fit the scheme of laissez-faire liberalism: the intro-
duction of the progressive income tax on the total income of individuals as
ascertained from their declarations, which was, of course, something quite dif-
ferent from the income tax in the English acceptance of the term. We are
so familiar with it that we have lost the sense for the boldness of this innova-
tion. But if the reader reflects that at the time (early nineties) no great coun-
try had introduced anything like it and that the English system then carried
well-earned prestige owing to its economic and administrative success, he will
realize the greatness of the achievement that is primarily associated with the
names of the Prussian minister of finance, Johannes von Miquel (1891-3), and
of the Austrian minister of finance, Eugen von Bohm-Bawerk. 7

On the other hand, the counter-current asserted itself victoriously: all the
three principles mentioned were violated. The first, the balanced-budget, or
rather the budget-in-surplus, principle was never, so far as I know, violated in-
tentionally, unless we so interpret the Freycinet program of reconstruction after
the Franco-German War and the Japanese program of development after the
Sino-Japanese War. 8 Deficit financing, on the whole, remained stigmatized as
frivolous and unworthy of respectable governments. But the other two princi-

6 With reference to Pierson, see below, ch. 5, sec. 6.

7 Bohm-Bawerk was minister of finance three times, but not when the great Austrian
reform of direct taxation was actually carried (1896). The political credit goes to other
men. But he had resigned his professorship and entered the ministry of finance as a
senior permanent officer in 1889 in order to prepare that reform, which was mainly
his work. Another famous theorist shared in it, however, viz., R. Auspitz (see below,
ch. 5, sec. 4a),' who was then in parliament.

8 For the purpose of alleviating depressions, public works were repeatedly resorted to,
e.g. in Austria in the eighties.

77 ° IV: FROM 1870 TO 1914 and LATER

pies gradually lost their hold upon political consciences: Sir William Har-
court’s progressive estate duty (1894) and Lloyd George’s 'people’s budget’
(1909), for instance, aimed at other goals than mere revenue raising; and the
third principle broke down on the side of expenditure for social purposes, de-
sire for which put an end, toward the close of the period, to the popularity
of low taxation of the higher incomes and of ‘retrenchment/

(d) Money. Substantially the credo of economic and political liberalism pre-
vailed in the field of monetary policy throughout the period. In fact, it pre-
vailed longer than that, as the English Cunliffe report of 1918 (final report,
1919) and the English Gold Standard Act of 1925 suffice to prove: of all the
articles of that credo, the gold standard was the last to go.

Silver remained the monetary metal of the greater part of mankind and,
as we shall see more fully in Chapter 8, enjoyed support of one kind or an-
other everywhere. 9 But all ‘advanced’ nations stayed on, or established, the gold
standard, in some instances at considerable sacrifice. Most modem economists
will feel that even England could have done with a little monetary stimulation
during the eighties. Also they may wonder why the German Empire was so keen
on adopting the gold standard after 1871. But they will be quite unable to un-
derstand why countries such as Austria-Hungary, Italy, and Russia, which had
entered the period with paper currencies that were depreciated in terms of sil-
ver, should have retarded their growth and imposed hardships upon themselves
in order to raise their monetary units to a largely arbitrary gold parity. These
countries could just as well have stayed ‘off gold’ or, if they had to have it,
could have introduced the gold standard at the gold value (of their currencies)
that happened to prevail when it occurred to them to take this action. The
riddle becomes still more baffling when we reflect that there was no political
pressure to enforce that policy: for all the interests that really count politi-
cally — farmers, landowners, manufacturers, workmen — all suffered by it and
even the benefit to creditors was by no means beyond doubt; only govern-
ment employees were clear gainers. We cannot go into the question how far,
in the conditions of the times and particularly from the standpoint of each
individual country, an economic case may be made out for it all the same.
It must suffice to point to certain extra-economic and extra-national consider-
ations that were without doubt decisive: past experience with depreciated cur-
rencies had invested the gold standard with a prestige that was for the time
being unchallengeable; the unfettered or ‘automatic’ gold currency had be-
come the symbol of sound practice and the badge of honor and decency; and
there was the admired example of England, whose creditor position, moreover,
added further weight to it. Perhaps this explanation raises more problems than
it solves. That it is true is certain.

But the counter-currents asserted themselves also in monetary policy. We
observe a growing awareness of the necessity to control money markets by
central bank action other than the ‘classic’ discount policy. As the period wore

9 It is not without interest to note that A. J. Balfour was in favor of bimetallism,
though his cabinet colleagues would not hear of the slightest concession to it.

BACKGROUND AND PATTERNS

77 1

on, we also observe a growing reluctance in all countries to play the gold
standard game, as witnessed by resort to the gold exchange standard and, even
in England and Germany, to ‘gold devices/ Perhaps the gold standard was
never ‘automatic'; by the end of the period, it certainly had ceased to be so
if it ever was (see below, eh. 8). The reasons for this were more political than
purely economic: they link up with neo-mercantilist attitudes and with the
increasing strain in international relations that began to be felt around 1900,
also with increasing public expenditure. Arguments against the unfettered gold
standard multiplied. It was losing its popularity like a naughty child that
tells embarrassing truths.

4. Art and Thought

So far, whenever we probed below the surface of routine activities, which
almost everywhere ran on bourgeois lines, we have discovered new patterns in
process of formation, counter-currents indicative of impending fundamental
change. We get the same impression when we cast a glance on the manifesta-
tions of that period's Zeitgeist in the Arts and in Philosophy.

(a) Bourgeois Civilization and Its Recalcitrant Offspring. According to a
common saying, that period had no style. There is some truth in this: no
doubt, the business and professional classes lived, as a rule, uninspired lives in
ugly homes that dishonored the elements of past styles they combined; bought
ugly furniture of similar type and nondescript pictures; supported a theatrical
and a musical tradition of which the glories were inherited from the past; and
read a literature that was largely commonplace in all varieties except the pro-
fessionally scientific one. This style of life in all its manifestations — in Eng-
land it came to be called Victorian — is now a byword of stodginess or dreari-
ness and in fact testifies to the bourgeoisie's lack of capacity for cultural leader-
ship, which is as pronounced as is its lack of capacity for political leadership.

Nevertheless, diagnosticians who leave it at that are wrong, and it is easy to
indicate the point at which they go wrong: they fail to credit the bourgeois
civilization of that period with all its great creations; and they fail to see that
parents' lack of ability to lead may turn their children against them but does
not alter the fact that they are their children. The period saw the emergence,
through a succession of stages, of a new music; of a new style of painting; of
a new novel, a new drama, and a new poetry; and, in the midst of Victorian
horror, of a new architecture. To be sure, the bourgeois public looked with
amazement on most of these creations and did its best to smother them.
Equally sure is it that many of the creations were by nature hostile to the
social structure from which they sprang; and that many of the creative indi-
viduals were enemies of the social world they beheld, and felt themselves to
be the demiurgos of another. But this does not alter the facts that both the
works and the men did spring from that structure; that most of the men were
bourgeois by birth and upbringing; and that their works were as much the
products of the bourgeois, mind as were the railroads and the power plants.

77 2 IV: FROM 1870 TO 1914 AND LATER

Thus, capitalist society was on its way toward a new civilization all its own
when it was overtaken by the meaningless catastrophe of 1914-18 that put its
world out of gear.

(b) Bourgeois Civilization and Its Philosophy., We have had glimpses of
that period’s religious and political schemes of thought — and of certain changes
that occurred in both — that should suffice to convince us that the Weltan-
schauung of laicist liberalism did not prevail unchallenged. However, so far
as it did prevail, we have as little difficulty in describing the bourgeois public’s
mental furniture as we have in visualizing the physical furniture of its homes.

If we discard various sublimations and evasions we find utilitarian ethics

centering upon social service in the utilitarian sense — and, as a ‘philosophy/
an evolutionary rather than mechanistic materialism. 1 Religion, in most cases
dropped tacitly rather than renounced explicitly, was replaced by an ‘attitude’
— a word that we have all the more reason to record because it was used by
one of the leading economists of the period, A. Marshall 2 — that preserved the
ethical inheritance of Christianity and was in general not actively hostile to
the abandoned beliefs and to the churches that taught them though, as we
know, there also was militant laicism.

This made for historical reading: for some it was the means of completing
a work of destruction; for others it was the means of satisfying cultural and
ethical sympathies that survived dogmatic allegiance. This seems to be the
secret of the huge success with the general public of such works as Ernest
Renan’s Life of Jesus, which was laicist in import yet completely free from
any explicit hostility to Christianity. But the preference for historical reading
extended beyond the sphere of theology and for a similar reason: uncritical
liberalism was meeting with many disappointments (as we have seen) and
hence was losing its superficial optimism; outside of the strongholds of
Catholicism and Marxist socialism, the period was one of faltering beliefs all
round, particularly as regards political democracy; and history and historical
criticism appeal to such a frame of mind. Nowhere was this so much the
case as it was in France. The success with the public of Hippolyte Taine’s
Origins of Modern France (English trans., 1876-94) will therefore be our only

1 These terms, I trust, are self-explanatory. But it should be emphasized that evolu-
tionary materialism took two distinct forms: the prevailing tendency was Darwinian
but the evolutionism of the Condorcet-Comte type (see above, Part in, ch. 3, sec. 4d)
was widely adopted by people who had never heard of either Condorcet or Comte.

2 See J. M. Keynes, Essays in Biography , p. 162. The masterly pages of the Marshall
biography that center in that passage are by far the most instructive ever written about
the process, as observed in the Cambridge milieu, by which Christian belief, gently and
without any acerbities, was dropped by the English intelligentsia. This development is
paralleled by similar ones elsewhere. The cases of Marshall and of other Cambridge
men such as Sidgwick differ from those of similarly conditioned men on the Conti-
nent, so far as I can make out, only by the fact that the former, having started their
intellectual travels with a thorough grounding in Anglican theology (and, owing to the
constitutions of Cambridge and Oxford colleges, with definite obligations toward it),
arrived at their final positions by way of conscious wrestling rather than by growing
agnostic through indifference, as did many of the latter.

BACKGROUND AND PATTERNS 773

illustrative example . 3 History of art, history of literature, history of philosophy
all appealed for the same reason. Classical education, which was as yet almost
intact, fostered these habits.

Of course, this was not all. Equally in accord with the spirit of the age
was the widespread interest in the physical sciences, which in response pro-
duced a large popularizing literature: there was not as yet 'science for the
millions’ but there was what might be termed 'science for the tens of thou-
sands.’ All that it is necessary to mention for our purposes, however, is the
prominence, within the total demand for this literature, of demand for books
and periodical articles on biological evolution, mainly of the Darwinian type.
After what has been said above, we shall understand this and in consequence
the popular success of even the professional writings of such men as Haeckel . 4
Where a writer combined evolutionism with sponsorship of naive laissez-faire,
we shall understand still better. This combination accounts for the vogue of
the writings of Herbert Spencer . 5 At this point we might stop were it not

3 But the success of literary criticism of a similar pessimistic type would illustrate
our point still better. It must suffice to mention a man and a book that were much in
fashion: Emile Faguet (professor of poetry), Le Culte de V incompetence (English trans.,
1911) — a highly characteristic performance.

4 Ernst Haeckel (1834-1919), see, e.g., his Anthropogenic (1874; English trans.,
1879). He invited lay interest by his highly militant attitude (see his Kampf uni den
Entwicklungsgedanken, 1905; English trans., 1906) and by his attempt to expand the
theory of evolution into a general philosophical scheme (see his Weltratsel, 1899; Eng-
lish trans.. Riddles of the Universe, 1900). The reader will understand that I am men-
tioning Haeckel as a representative instance. I might mention just as well a dozen of
other more definitely ‘popular’ writers.

5 Herbert Spencer (1820-1903) — trained in physics and mathematics, railroad engi-
neer, inventor, writer on current economic topics, sometimes on the staff of newspapers
(which included subeditorship for five years of the London Economist ) — was a genuine
philosopher in the particular sense of being by nature made for a life of thought, to
which in fact he settled down in i860 in order to produce, from 1862 to 1896, his
Synthetic Philosophy that comprised, besides the introductory First Principles, the
Principles of Biology, Psychology, Sociology, Ethics. His eight volumes of Descriptive
Sociology — an impressive collection of facts compiled by the sweat of the brows of his
research assistants — is the only other work that need be mentioned here (though some
of his most characteristic utterances occur in parerga, such as The Man versus the
State, 1884). Spencer was a man of representative eminence who, to an amazing de-
gree, was at the same time profound, clever, and silly. The man who rediscovered
Buffon’s idea of the evolution of higher (complex) organisms from lower (simpler)
before Darwin’s paper had thrilled the scientific world may justly be called profound.
And the man who invented the velocimeter (for locomotives) and a dozen of other
gadgets was all that the phrase ‘clever’ conveys. But no other word but ‘silly’ will fit
the man who failed to see that, by carrying laissez-faire liberalism to the extent of
disapproving of sanitary regulations, public education, public postal service, and the *
like, he made his ideal ridiculous and that in fact he wrote what would have served
very well as a satire on the policy he advocated. Neither his economics nor his ethics
(normative as well as analytic) are worth our while. What is worth our while to note

is the argument that any policy aiming at social betterment stands condemned on the

774 IV: FROM 1870 TO 1914 AND LATER

necessary to advert to the surprisingly favorable reception accorded by the
bourgeois reading public to the first products of a spirit contemptuously hos-
tile to its civilization.

I do not mean the revival of Thomistic thought, which cannot be described
as contemptuously hostile to bourgeois civilization as a whole — but only to
its specifically laicist edition — and which was, in any case, not yet a live power
in the general public's thought . 6 Nor do I mean the increasing popularity,
among non-socialist readers, of Marxist writings, for these, though hostile
enough to the economic arrangements of the capitalist world, cannot be de-
scribed as hostile to the bourgeoisie’s cult of utilitarian rationality or to its
laicism or even (so far as Marxist orthodoxy is concerned) to its democratic
humanitarianism . 7 What I do mean is a current of thought that turned pre-
cisely against this liberal cult of rationality and ‘progress’ and this liberal
and democratic humanitarianism. On the political plane, it may be called
anti-democratic, on the philosophical plane, anti-intellectualist. Nietzsche
would make a bad example both because his teaching does not constitute
a sufficiently pure form of this line of thought and because its influence was
— and is to this day — smaller than we are sometimes invited to believe. Berg-
son’s name had better be reserved for our list of the currents in the profes-
sional philosophy of that age. But there was one man who represented ideally
what we are trying to visualize: that man was Georges Sorel . 8

ground that it interferes with natural selection and therefore with the progress of hu-
manity. The reader should observe, however, that the almost pathetic nonsense could
have been avoided and that the sound element in his argument could have been partly
salvaged by adding ‘unless methods more humane and more scientific than natural se-
lection can be found in order to achieve what survival of the fittest is supposed to
achieve.’

6 It was in this period that the teaching of St. Thomas Aquinas was declared to be
official teaching of the Roman Catholic Church (encyclical Aeterni Patris, 1879). But
this only sanctioned an existing state of things and did not exert influence beyond the
Catholic clergy. The vogue of Thomism among the laymen of all countries — many
Protestants and Jews among them — that was to make him one of the most influential
of ‘modern’ authors dates from the twenties only. The vogue in the United States
came a little later still.

7 Marx was often read vicariously in as much as the ideas of many a bourgeois in-
tellectual hailed from him. But he was also read directly, outside of the camp of ortho-
dox socialists, particularly by intellectuals without training in economics. There is a
curious explanation for this. Marx is, for the economist, one of the most difficult au-
thors. But it is a fact that the layman who reads him never discovers that he does not
understand him.

8 Georges Sorel (1847-1922) was the author of a great many works that are held
together by his antagonism toward bourgeois intellectualism: although in every other
respect they present a curious assortment of topics, and (sometimes irreconcilable) views
that are extremely difficult to interpret, they all assert both the negative and positive
implications of the anti-intellectualist principle and display in all its extent the range
of economic, political, and cultural problems that this principle puts into new light.
His (temporary) sympathies with revolutionary syndicalism, Italian fascism, and Lenin-
ist bolshevism exemplify but one aspect of his thought and are of secondary impor-

BACKGROUND AND PATTERNS

775

On the theory that the work of professional philosophers stands in a
closer relation to a period's Zeitgeist than does the scientists' work in the
various ‘sciences/ I shall now append a desperately brief survey of some
— to be precise ten, to be numbered i-x — of the many currents in the
period’s philosophical thought. Philosophy is to be defined strictly,
though the philosophers’ concern with questions of epistemology and
logic will be included. Our selection must not be understood to imply
evaluation: we are interested in currents that are characteristic for the
period whatever our opinion of their merits. This is why I do not touch
upon Thomism again. The purely philosophical aspects of Marxism —
Engels carried on Marx’s philosophical interests and the German party
had, as it were, an official party philosopher, Dietzgen — are in line with
the German classic philosophy of the preceding period and therefore
implicitly noticed with it. Our keynote is: we are about to glance at the
philosophy of an essentially unphilosophic and anti-metaphysical age in
which the proposal to strike out the word Philosophy from university
catalogues was actually made.

Accordingly, we shall expect professional (and professorial) philos-
ophers to interest themselves intensively in the history of philosophy.
This is what we find (i). Excellent histories of the philosophies of all
ages and nations appeared in numbers. I shall name but one name, that
of the man whose work seems to me to have been the peak achievement
of the ‘historical philosophy’ of that or any other age: Wilhelm Win-
delband . 8

Similarly, we shall understand that declining fervor of philosophical
creation should have facilitated the survival or renascence of philosophical •
creations of the past. This we also find. Provided we call utilitarianism
a philosophy at all, it affords an instance, for it certainly was taught
throughout the period, especially, under the influence of J. S. Mill, in
England (n). Elsewhere we find, for example, Neo-Kantians and Neo-
Hegelians and other ‘Neo’s’; and there were always some adherents of
Herbart and Schopenhauer (hi).

Next, we notice another body of thought, the emergence of which
conforms not less to expectation. Whoever believes that experimental
science has effectively destroyed the bases not only of religious belief but
also of metaphysical speculation may, in case he experiences a void or,

tance in the whole of it. His most characteristic utterances are perhaps his Proces de
Socrate (1889) and his Illusions du progres (1908), but of all, his works the Keflexions
sur la violence (1908; English trans., 1914) is the best known by far. The bourgeois
found in them, among other things, feelings of admiration for industrial leadership and
of contempt for parliamentary democracy. From our standpoint, it is relevant to note
the affinity of some of Sorel’s ideas with some of one of the greatest economists of the
period, Pareto. Other affinities do not interest us here.

9 To save space, no references to individual books are given in this survey except in
cases in which there is a special reason for drawing attention to a particular work — -
the interested reader can supply them without trouble.

77 ^ IV: FROM 1870 TO 1914 AND LATER

being a philosopher, wishes for employment, conceive the idea — or take
it from Comte — that a picture of the universe ( Weltbild ) might be
pieced together from the most general results of the individual sciences.
The substitute for philosophy may take many forms and does not neces-
sarily constitute philosophy as the universal science, scientia scientiarum ,
though the idea sometimes has been expressed in ways that suggest
analogy with a holding company.

Philosophy in this sense will look very different according to the
individual philosopher’s training. One type emerged from the hands of
philosophers grounded in the physical sciences — a type of positivism or
monism that does not differ in any matter of principle from the 'em-
pirio-criticism’ of Avenarius and Mach (iv ). 10 Another type which
emerged from the hands of philosophers who were psychologists or
sociologists by training later on came to be called Philosophical An-
thropology (v) and is not always easy to distinguish from parts of Social
Philosophy or straight Sociology . 11

Both types invited misunderstandings of the specialist’s theories 12
and trespassed upon his preserves, and they were not unnaturally re-
sented . 13 The resulting atmosphere impaired the success of enterprises
such as the Unity-of-Science movement of later days or, at any rate, the
philosopher’s influence on them. It also impaired the authority of yet
another type of research, which will be mentioned here, though it does
not belong to the domain of philosophy in the strict sense — the type of
research that continued the efforts of Whewell and Mill and of the
German Wissenschaftslehre or general methodology of scientific pro-
cedure in the preceding period. For examples, I choose the works of

10 Let us note the strong affinity of Mach’s views with those of W. K. Clifford,
K. Pearson, and J. H. Poincare. Pearson’s Grammar of Science (1892) and J. H.
Poincare’s La Valeur de la science (1904) are the two books I should recommend to
readers desiring an easy guide to empirio-criticism.

11 Georg Simmel’s Soziologie (1908) illustrates the latter point.

12 An amusing — or sad?— example of the occurrence of such misunderstandings even
in the domain of physical sciences is the following: philosophers use the term Relativ-
ism frequently and in several different senses. It so happened that one of the most
important novelties in the physics of the period was dubbed relativity theory, a term
that has, of course, nothing whatever to do with historical or philosophical relativism
in any sense. Nevertheless, a number of instances can be adduced of writers who made
themselves ridiculous by interpreting the Einstein theory as a manifestation of the
latter. I owe this fact (which at first I refused to believe) to Professor Philipp Frank.

13 Economics, not sheltered like physics by age-old prestige, was frequently victim-
ized. As an example, I mention G. Simmel’s Philosophic des Geldes (1900), which
treats of topics nearly all of which belong to the economist’s sphere. Matters were not
improved by Simmel’s declaration that no proposition of the book was intended to
be understood in the specialist’s sense (ist einzelwissenschaftlich gemeint ) — which was,
of course, interpreted to mean that he would not accept criticism from the only people
who understand, or should understand, the subject.

BACKGROUND AND PATTERNS

111

Jevons, Sigwart, and Wundt. 14 The methodologies of the social sciences
and particularly of economics by Carl Menger, (}. N.) Keynes, and
Simiand will be mentioned in another connection (see below, ch. 4,
sec. 2). But the contributions by Dilthey, Windelband, and Rickert
must be mentioned here, both because of the influence they exerted
(though, so far as I know, only in Germany) and because of a typical
shortcoming that illustrates what has been said above. 15 We return to
the high road. As we walk along it, we shall shut our eyes to everything
except the following pieces of the scenery.

A historian who insists on forcing thought into unique correlation
with the structural changes in the social organism would assuredly hold

14 The three works differ widely from one another. Jevons’ Principles of Science
(1874) is of course of particular importance to us since the author was one of the
leading economists of that period. It is not concerned with the practice of any or all
of the individual sciences but is what may be called a theory of scientific thinking.
Two strikingly original features stand out that anticipate later tendencies: (1) the
central position assigned to the idea that all analysis (whether 'deductive' or 'inductive’)
reduces ultimately to statements of identities; (2) the basic position assigned to prob-
ability — to the idea that scientific truth is basically stochastic. Christoph von Sigwart’s
Logik (1st ed., 1873-8), less original, more comprehensive than Jevons’ Principles , is
also an analysis of fundamentals. Wilhelm Wundt’s (see below, ch. 3, sec. 3) Logik . . .
(1st ed., 1880-83) is the only one of the three to analyze, and to start from, the actual
practice of individual sciences. Here, therefore, the difficulty arose that, in the present
state of individual sciences or even in their state as it was in 1880, no man can have
that intimate knowledge of actual procedure that comes only from personal experience
of detailed research. Wundt realized his limitations and tried to solve the problem by
calling in the aid of specialists, but this course, obviously, had disadvantages of its
own and results were distinctly indifferent.

15 Wilhelm Windelband (1848-1915), Geschichte und Naturwissenschaft (History
and Physics; a rectorial address that attracted great attention, 1894; 3rd ed., 1904);
Heinrich Rickert (1863-1936), Kulturwissenschaft und Naturwissenschaft; eine Vor-
trag (Cultural and Natural Science; 1899; see also Grenzen der naturwissenschaftlichen
Begriffsbildung, 1902; 2nd ed., 1913); Wilhelm Dilthey (1833-1911), Einleitung in die
Geisteswissenschaften (the term is best rendered by 'sciences of mind and society ex-
cluding physiological psychology’; 1883). I mean no disrespect to those eminent men,
who were sovereign masters of wide domains. But their minds had been formed by the
tasks and the training of the philosopher, historian, and philologist. So when they pro-
ceeded, with enviable confidence, to lay down the law for us, they drew an entirely
unrealistic dividing line between the 'laws of nature’ and 'the laws of cultural develop-
ment’ or the 'formulation of laws’ (nomothesis) and 'historical description’ (idiography),
forgetting that great parts of the social sciences ride astride this dividing line, which
fact seriously impairs its usefulness (though, for the truly philologico-historical disci-
plines it does retain validity). They were simply strangers to the problems and the
epistemological nature of those parts of the social sciences, yet failed to add the proper
qualifications to their arguments. That this was apt to mislead the many economists
who listened to them — Max Weber, e.g., was strongly influenced by Rickert — was as
inevitable as it was regrettable. But let us note the striking saying of Dilthey that reads
like a motto of Max Weber’s methodology: 'We explain the phenomena of nature,
we understand the phenomena of the mind (or of culture).’

778 IV: FROM 1870 TO 1914 AND LATER

that his theory is admirably verified by the emergence at that time of
a philosophy that found the criterion — or even the definition — of truth
in the value for our individual and social life of the beliefs that are to
be accepted as true — Pragmatism (vi). But the elements of this philos-
ophy are as old as is philosophy itself, and the manner in which it was
formulated by William James amounts to little more than systematic
elaboration of ideas that have never quite been absent from any kind of
human action or thought and were bound to assert themselves sooner or
later through the mechanism of filiation of philosophic thought alone.

Whereas pragmatism at least did not clash with the main currents in
the Zeitgeist of thq period, Henri Bergson’s L’ Evolution crdatrice (1907 )
did (vn). His anti-rationalist and anti-intellectual philosophy is some-
thing entirely different from the anti-rationalism of pragmatism, which
merely meant the negative of the existence of ‘pure’ truth, the product
of a pure reason that is unconnected with the purposes and values of
life: Bergson meant that the new truth or, more generally, the new crea-
tion is not worked out by logical processes at all. This involves indeed
— which James’s philosophy did not — an entirely new Weltanschauung
wholly at variance, among other things, with the views then current (the
Marxist one included) about cultural development. Not equally novel,
but still more influential owing to the personal force of its great teacher,
was the philosophy of Benedetto Croce (vm), which is of particular in-
terest for us because Croce himself is something of an economist and
because he is associated, more than is the case with any other philos-
opher, with some aspects of the professional work of Italian economists.
Though it is impossible to convey in a few sentences an idea of his work
as a whole — and, unfortunately, precisely of the most original elements
in it — it is possible to reduce to a single sentence the basic philosophical
principle involved: a Hegelian spirit embodies itself in the actual course
of universal history so that the subject of philosophy becomes identical
with the metaphysics of the historical process. 16

No survey of the philosophical currents of that time can afford to
omit the name of Edmund Husserl and the beginnings of Phenome-
nology (ix), though no attempt at brief characterization seems to me to
promise anything but confusion. Therefore, I prefer to resort to a refer-
ence. 17 But I may say that of all the philosophies of our time, Husserl’s
is the most autonomous with respect to social or socio-psychological facts:
nothing but the filiation of philosophical ideas can account for it and,
apart from what it owes to preceding philosophies beyond which it tries
to advance, it could have been written just as well in scholastic times.
This also holds for a body of philosophic thought that in other respects

16 Disciples of Croce sometimes resent the imputation of Hegelianism , and declare it
to rest upon misunderstanding. The ‘emanatistic’ nature of the principle above is, how-
ever, undeniable.

1 ? Marvin Farber, The Foundation of Phenomenology (1943). Of course, this book
discusses mainly the fullfledged phenomenology of the subsequent period.

BACKGROUND AND PATTERNS 779

seems to — though 'seems' more than 'does’ — involve a wholly different
approach to problems that are not problems of any ‘other’ science. I am
referring to Cambridge philosophy of the pre-Wittgenstein days which
in the last years of that period may be said to have been dominated by
Bertrand Russell and G. E. Moore (x). As the last sentence but one sug-
gests, this conception makes philosophy a non-speculative special science
that like any other science has its special task, the task in this case being
to analyze the meanings of terms (such as number) or propositions that
are used with confidence, but uncritically, in those other sciences or in
everyday life. But, treated in this spirit, even topics such as the analysis
of mind and the analysis of matter seem to me to pass from the domain
of philosophy into the domain of epistemology or logic. And this is the
fundamental reason why there is a path from the philosophy to the new
logic and, in particular, to Bertrand Russell’s and A. N. Whitehead’s
Principia Mathematica (1911-13). But here we must stop. No -history of
any kind of analysis, economic or other, should ever be published that
does not take account of the developments for which the term New
Logic is intended to stand. But this is precisely what this history cannot
do.

Finally, we must ask the question: what did any of this mean to the
period’s leading economists? With the utmost confidence I answer: very
little indeed — still less than it meant in the two preceding epochs and
that, we know, was not much. But, in view of the fact that a different
opinion is frequently expressed, we must go into the matter a little more
deeply. In doing so, we must divide our question into two parts. First:
what influence did philosophy — or any particular philosophy — exert upon
the analytic work of economists or, more precisely, did they arrive at
any results that may be shown to depend upon philosophic influences?
Second: what did philosophy, or a particular philosophy, mean to them
as men and citizens; how far did it influence their general attitudes and
horizons? This distinction, as we have had occasion to observe, is im-
portant for all times and places. But it acquires additional importance
for a period in which economics grew more specialized and more tech-
nical.

As regards the first question, it has been answered elsewhere for Marx
and the Marxists. That answer will not, however, greatly differ from the
one I am about to return for the rest of the economists: no philosophy
can be proved to have influenced the economists of the period in the
sense that they arrived at or failed to arrive at any analytic conclusions
which they would not have arrived at or failed to arrive at without guid-
ance from any philosopher — except in their methodological investiga-
tions and squabbles. It is natural that, when trying to clarify their ideas
about their own methods of procedure or when engaged in controversy
about them, economists should invoke not indeed philosophical teaching
in the strict sense but the teaching of methodologies written by philos-
ophers — Max Weber affords a conspicuous instance. But it would be

780 iv: FROM 1870 TO 1914 and LATER

nothing short of ridiculous to aver that economists allowed philosophers
to teach them their business when they were investigating the conditions
in domestic industry, or railroad rates or trust problems of their time,
or merchants’ guilds in the twelfth century, or, for that matter, the
validity or otherwise of Bohm-Bawerk’s theory of interest. Edgeworth
professed utilitarianism in season and out of season. Yet analysis shows
that these professions may be struck out from his economic propositions
without being missed. 18

As regards the second question, the answer is different. Practically all
the economists of the period sprang from bourgeois families and were
the beneficiaries or victims of an elaborate education that in most coun-
tries included philosophy even in its secondary (that is, pre-university)
stage. As youngsters they could not have avoided some grounding in
philosophy, even if they had hated philosophy like poison. The pre-
sumption is, however, that they did not hate it. The kinds of philosophy
they got were mostly of the types that have been numbered 1, 11, in, v,
and, in Italy and toward the end of the period, perhaps vm. And this
means overwhelming emphasis, direct or indirect, upon the German
classics, particularly Kant. It is interesting to note that Marshall, in the
preface to his Principles, mentioned Hegel’s Philosophy of History —
and the writings of Herbert Spencer (!) — as among the chief influences
that affected the 'substance’ of his views. 19 And many economists of that
time might have expressed themselves similarly; their study of philosophy
certainly made more civilized beings of them. Many readers will, no
doubt, disagree with me if I go on to say that this was all, and that
ethical and cultural attitudes are influenced but little by philosophies,
and a man’s social sympathies and political preferences not at all. Since
in this book we are concerned only with methods and results of analysis,
this difference does not greatly signify.

18 They could not, of course, be struck out from his speculations on ethics.

19 If this were to be taken seriously, then our answer to the first question asked above
would, of course, be wrong. But it is not to be taken seriously. No Hegelian or Spen-
cerian influences can be traced in Marshallian analysis. If he really thought that his
preoccupation with das 'Werden as against das Sein (he used these German words) had
anything to do with Hegelianism, the only possible inference would have to be that
he had never understood Hegel. Marshall was still more enthusiastic about Kant, whom
he described as his guide and the only man he ever worshipped (J. M. Keynes, Essays
in Biography, p. 167). But the fact remains well established that he made a serious
study of both.

CHAPTER 3

Some Developments in Neighboring Fields

1. History 781

2. Sociology 783

[(a) Historical Sociology] 783

[(b) Prehistorical-Ethnological Sociology] 786
[(c) Biological Schools ] 788

[(d) Autonomous Sociology ] 792

3. Psychology 796

(a) Experimental Psychology 796

(b) Behaviorism 797

(d) Freudian Psychology 798

(e) Social Psychology 799

The facts about developments in neighboring fields that will be assembled in
this chapter are of necessity fragmentary. They are, to repeat it once more,
impressionist patches of color which any other writer — according to his ideas
about what has been or could have been relevant to the development of eco-
nomic analysis — would have chosen in a different way. In fact, had I been
writing histories of these fields for their own sake, I should have chosen differ-
ently myself. This inevitable arbitrariness — reinforced by the inevitable arbi-
trariness that comes from my personal limitations^ — is much more serious for
this period than it was before, for it is in this period that the wealth of spe-
cialized work became unmanageable and that any attempt at neat logical tec-
tonics becomes futile. Another point of view that influenced selection must
also be kept in mind, namely, the ease or difficulty with which the reader can
himself supply the necessary information. For economics, sociology is a most
important neighbor. But at the same time, owing to its immature state, its his-
torical development is the most difficult to get at. Psychology and, still more,
historiography, however important they are for us, need less comment because
their developments have been more satisfactorily described. And though sta-
tistics is for us the closest of all neighbors, its development during that period
is so well known to the student of economics that we can pass it by entirely
in this chapter, on the understanding that a few facts that must be recalled
will be mentioned in the section on Econometrics below . 1

1. History

As regards historiography, the great event, from our standpoint, was the
close alliance with economics implied in the program of the Historical School

1 [Part iv, ch. 7, sec. 2. J. A. S. intended to write more at length on econometrics
in the recent period in Part v but completed only a few preliminary pages.]

781

782 IV : FROM 1870 TO 1914 AND LATER

of Economics. But precisely because this event will have to be discussed in
some detail in Chapter 4, little needs to be said about historiography in gen-
eral. The historian's partial conquest of the economic field was of course not
his only one — all social sciences, including jurisprudence (where the conquest
had taken place in the preceding period) and sociology, came partially under
his sway. This, in turn, made him a student of social states and processes to
an extent to which he had not been one before: the impersonal facts of
social history (leavened, sometimes, by biological and psychological theo-
ries of less than unquestionable standing x ) gained ground at the expense
of the romance of battles and intrigues. And even within social histori-
ography, work geared to problems — such as the emergence of the feudal do-
mains in the sixth and seventh centuries, the origin and function of towns,
the organization of medieval trade, the rise of capitalism, and the like — gained
ground at the expense of work defined by country and period. Of course, his-
torians of legal institutions — who were mostly lawyers by training — had always
done work of the former kind and, so far as they are concerned, all we have
to note is the greatly enlarged scope and the greatly improved methods of
their work. But the important thing is that the tendency became general. 2 An-
other tendency that is much in evidence in modern economic historiography,
the tendency to emphasize quantitative aspects, was of course not entirely ab-
sent — it never had been — but it was not yet a universally recognized item of
the economic historian’s program. Some topics that are statistical in nature
did, however, attract interest. 3 And the important question — How much? —

1 This may be illustrated by the imposing work of Karl Lamprecht (1856-1915), who
was, in the first instance, an original and indefatigable research worker in economic
history (see, especially, his Deutsches VFirtschaftsleben im Mittelalter, 1885-6), but
who adopted an evolutionary schema (with stages, like Comte's) for which he claimed
all but universal validity and which he cast into terms of a social psychology of his
own (see his monumental Deutsche Geschichte, 1891-1909). This social psychology
was a curious mixture of original ideas — one was, e.g., the study of an extensive col-
lection of children’s drawings — and something very like irresponsible dilettantism. But
he valiantly stood by his guns in the face of not unnatural criticism (see his M odeme
Geschichtswissenschaft, 1905; English trans., 1905).

2 Representative figures in the host of legal historians were, e.g., Brunner, Gierke,
Maitland, Maine, Vinogradoff. In order to illustrate the type of work to which I
meant to refer when speaking of a general tendency toward problem-history writing,
I shall mention but two names; one, which has been mentioned already, is Hippolyte
Taine (1828-93). The work that matters in the present connection is: Les Origines de
la France contemporaine (1876-93; English trans., 1876-94). The other is Georg von
Below (1858-1927, .especially: Territorium und Stadt, 1st ed., 1900-1902). These two
names have probably never before been put into juxtaposition.

3 See, e.g., the inevitably imperfect exploratory work in the history of prices that
was done by Thorold Rogers ( History of Agriculture and Prices in England, 1259-1793;
7 vols., 1866-1902) and G. d’Avenel ( Histoire . . . de tous les prix ... 7 vols., 1894-
1926), neither of whom seems to me to receive today all the credit he deserves. In ad-
dition, d’Avenel had an eye for the wider implications for social and political history
of prolonged and pronounced price changes.

DEVELOPMENTS IN NEIGHBORING FIELDS

turns up where we should hardly have expected it. 4 Finally, ‘general’ history
grew increasingly institutionalized and increasingly inclined to emphasize eco-
nomic conditioning of historical process. Economists are apt to attribute this
to Marxist influence. This influence did assert itself toward the end of the cen-
tury. But the tendency in question was in full swing before, and to hold that
Marx influenced historians, other than professional economists or professed so-
cialists, in the seventies and eighties is to exaggerate greatly the specialist’s
speed of reaction to factors external to his field. As an outstanding example, I
mention Karl W. Nitzsch (1818-80), 5 a man who is particularly important
for us owing to -his close relations to some historical economists, especially
Schmoller.

Remark. The reader will please remember the warning at the head of this chapter
about disconnected patches of color. Even so, I cannot leave the subject without
having pointed out the importance for the progress of historiography during that period
of entirely new sources of material. The most important single instance is afforded by
the Egyptian papyri: papyrology revolutionized the science of Roman Law. J. A. S.

2. Sociology

During the period under survey, Sociology more or less struggled into aca-
demic recognition, not as a universal science of man in society — as Comte had
conceived it — but as one of the social sciences, though one that was not too
sure of what its subject matter really was. All social sciences run up against
certain fundamental problems of society, and none of them can afford to sur-
render its claims to some competence in matters of motors and mechanisms of
social life — witness the necessity under which we have found ourselves of rec-
ognizing an Economic Sociology. But room and need for the study of society
and social processes per se are bound to emerge as soon as the growth of ma-
terials and the development of techniques enforce increasing specialization.
The social science of Aristotle and the scholastic doctors formed a single unit —
and one that was no full-time job, even as a whole. The philosophy of natural
law was in the same case. Hume or A. Smith or Turgot or Beccaria had no
difficulty in embracing sociology as well as economics and much besides. But
this changed in the course of the nineteenth century: width of scope then
became increasingly inimical to quality of work. More and more, writers who
inquired into the nature of society as such or who asked such questions as
what it is that determines the social structure or produces revolutions and the
like ceased to be writers on such topics as money or interest or employment.
This defines one type of sociology by subject though not by method. In addi-

4 I have been much struck by the quantitative spirit, as it were, that pervades the
works of one of the greatest economic historians of that period, Alfons Dopsch, whose
material was certainly not propitious. See his Wirtschaftsentwicklung der Karolinger-
zeit (1912-13) and also his later work, W irtschaftliche und soziale Grundlagen der
Europaischen Kulturentwicklung . . . von Cdsar bis auf Karl den Grossen (1918-20).

5 See, in particular, his posthumous work, Geschichte des deutschen Volkes bis zum
Augsburger Religionsfrieden (1883-5).

784 IV: FROM 1870 TO 1914 and LATER

tion, ethics, religious law, and many other topics that, as we have seen, had
been made the subject of positive — non-metaphysical — analysis before, then
naturally fell into the province of the student of society as such. Finally, there
were groups of social problems, such as sex relations, that all but lacked ac-
credited specialists, and others, such as education, that presented aspects in
which the accredited specialists were not primarily interested.

Thus an imperfectly autonomous sociology grew and expanded in spite of a
reception that was not conspicuous for cordiality. Of course, there were good
as well as bad reasons for this grudging welcome. It was not all a matter of
trade unionism. The serious workers in the field that came to be known as
sociology were flanked by swarms of litterateurs whose presence discredited a
fundamentally good cause and this is the reason for a fact that greatly in-
creases our difficulties of exposition: many of the best sociologists preferred to
call themselves something else, for example, lawyers, geographers, ethnologists,
anthropologists, historians, economists, if they were in a position to do so, in
order to stress the element of professional competence in the face of the in-
dictment of dilettantism. The case for the two last categories was particularly
strong. Historiography was raising itself to a new level of technical efficiency:
historians who were justly proud of this achievement cannot have viewed with
pleasure the activities of writers who used their results in ways that habitually
violated their new standard of scholarship. Similarly, economics was also climb-
ing a long, steep, stony path toward a new level of technical efficiency: econo-
mists had enough to do in defending their work against the laggards in their
own ranks and against a public that always misunderstood; they did not relish
being teased by semi-philosophical and semi-literary irregulars. That some of
these irregulars, who were at one time justly condemned for professional in-
competence, proved to have been fundamentally right at another time is
neither paradoxical nor in itself proof of the incompetence of those who were
responsible for the condemnatory sentence . 1

The surface was troubled still further by the internecine warfare between
the various groups of sociologists who, like psychologists and economists, al-
ways claimed too much for their own methods or materials. But below the
surface, there was both healthy achievement and promise for the future. The
reader can easily satisfy himself from what has been said in the last but one
paragraph that a science of society was in the making that included indeed
many semi-independent or wholly independent provinces, yet was much more
definite than was then believed. There was a sort of headquarters — headquar-
ters without power to command, to be sure — in a region held by the problems
of society, social relations, social processes as such . 2 And there were, steadily

1 Incompetence of professional leaders may of course be the cause of the phenome-
non alluded to. The history of thermodynamics presents a well-known case (Robert
Mayer). But each case must be judged on its merits.

2 Society may be defined so as to mean an entity. But it may just as well be de-
fined as a term that is to stand for the total of relations between groups or individuals
or the total of a set of processes — -just as the soul may be defined as a 'thing' as well
as a term that denotes all 'psychic phenomena.’ The relational concept of society was

DEVELOPMENTS IN NEIGHBORING FIELDS

785

expanding, the 'applied’ or ‘special’ fields such as the sociology of religion
(hierology)-, of ethics, of all the arts — more recently also of knowledge, W issens-
soziologie — politics, economic institutions, and many others. Most of these
served two kinds of masters: the practical lawyer or the practical educator, for
instance, would be but ill served by treatises on the sociology of law or the
sociology of education and both need another type of work. This division does
not, however, depend entirely upon the needs of practical life but extends to
purely scientific pursuits: the scientific economist, quite independently of any
practical applications of his work, needs complete autonomy in part of his
field — no sociological considerations would improve Professor Hicks’s Value
and Capital. But between the sociologies of law, education, and economic be-
havior, as well as of all those other subjects, and that headquarters sociology,
there is lively give and take, which in a sense unifies the whole of them. Head-
quarters cannot stay purely speculative — at the very least they need exempli-
fying and verifying materials — and thus are forced to draw upon all those ‘ap-
plied’ or ‘special’ fields; and these in turn use concepts and imply propositions
that are drawn from, or else contributed to, headquarters. And to some ex-
tent all this was done, though with much ungraciousness and in* the midst of
many unnecessary quarrels. All this, however, tells us but little about methods
and approaches which are largely determined by the materials used . 3 We turn
to a brief and highly selective examination of this aspect.

[(a) Historical Sociology .] Remembering both the vigorous advance of his-
toriography and also its salient features, we shall not be surprised to learn
that much of the best work done during that period in sociology was histor-
ical in nature. First, much of the work done by historians was sociological: a

expounded with particular energy by Georg Simmel (1858-1918), Soziologie (1908) and
earlier in Die Probleme der Geschichtsphilosophie (1892) — mark the highly significant
implications of the title. This makes of sociology the theory of human relations ( Bezieh -
ungslehre is the word used, in our own time, by Professor Leopold von Wiese). The
opposite view that postulates existence for society per se is the one taken by ‘uni-
versalists’ (Othmar Spann and his school) although it is found also in non-universalist
writings: in the former case society is a frankly metaphysical entity; in the latter, a
methodological constmct.

8 That the nature of a worker’s material is the chief element in determining the
approach, method, and methodological creed, including the militant attitudes this
creed may imply, is a fact of great importance for understanding the history of the
social sciences, though it grew less important in the last quarter of a century or so.
It will stand out in its full importance when we consider the further fact that the
choice of material was not in all cases free — perhaps not even in the majority of
cases. For during that period a man was often — perhaps as a rule — first a philos-
opher, historian, ethnologist, lawyer, etc., and then turned this equipment to socio-
logical use. But whenever this was the case, the man was prisoner of his material
and methods and could not change over to others at a moment’s notice: the ma-
terials and methods that he had learned to master in his formative years were the
materials and methods that he really understood. These facts must never be forgotten
if we are to diagnose correctly the group antagonisms in sociology (and elsewhere) and
their influence upon its history.

y86

IV : FROM 1870 TO 1914 AND LATER

historian who writes what for a lack of a better term we have called 'problem
history’ is hard to distinguish from a sociologist. Second, many of the best so-
ciologists drew primarily on historical material and understood this material
better than any other. Third, going beyond this, some sociologists defined so-
ciology as the analysis of the historical process . 4 I hope I have made it. suffi-
ciently clear that the important thing is not the general 'theories of history,’
that is, the comprehensive hypotheses about the prime movers, if any, of the
historical process of which the so-called materialistic interpretation of history
discussed above is by far the most successful. Much more important in the
long run were the contributions toward the solution of those more restricted
problems of which examples have been given in the preceding section . 5 The
attempts to schematize economic history by defining successive stages (e.g., vil-
lage economy, town economy, territorial economy, national and international
economy — Schmoller's schema) present but little interest and need not de-
tain us.

[(b) Prehistorical-Ethnological Sociology .] But the term Historical Method
in Sociology should really be extended to cover the use of logically contiguous
material such*as prehistoric archaeology — of which only beginnings had existed
before the period under discussion — and of ethnology — which then experi-
enced its decisive development. For however .much the fact-finding methods
of historical, prehistorical, and ethnological research differ, the method by
which the sociologist draws inferences from these different materials is funda-
mentally the same. We may therefore speak of a historical-prehistorical-ethno-
logical sociology that definitely established itself during that period.

Within my very limited range of knowledge, the most impressive example of pre-
historic sociology is Oswald Menghin’s W eltgeschichte der Steinzeit (1931). The term
ethnology I use in the sense which is perhaps more often expressed by the term cul-
tural anthropology. The term anthropology is reserved for physical anthropology. I
hope I am not misled by affection for a teacher of mine, if I call the two great works
of the Finnish sociologist, Edward ; Westermarck (1862-1939), who taught sociology
at the London School of Economics, 1906-30, the peak achievements of ethnological
sociology during that period (History of Human Marriage, 1889, and Origin and De-
velopment of Moral Ideas, 1906), though in details neither has stood the test of time.
But the formation of the period’s most important 'school’ of ethnology (to. which, in
a sense, Westermarck belonged) is associated with the research and teaching of Sir
Edward B. Tylor (1832-1917); see especially: Primitive Culture (1st ed., 1871, many

4 This was the case, e.g., with Marx and Croce; only the latter said 'philosophy’
rather than ‘sociology.’ A history of sociology written from this standpoint is Paul
Barth’s Philosophic der Geschichte als Soziologie (1897), a very successful book, a
fourth edition of which appeared as late as 1922. In spite of its misleading title, it is
essentially a (still useful) history of sociology, written from the standpoint above, except
that it exaggerated the role of general theories about historical causation. Let us note
a saying of von Wieser’s to the effect that ‘sociology is history without names’ — one
of those exaggerations that are the means of inculcating important truths.

5 I shall mention a masterpiece to illustrate the kind of work I mean: Rene Maunier,
UOrigine et la fonction economique des villes (1910), which must stand for a large
literature.

DEVELOPMENTS IN NEIGHBORING FIELDS

787

later ones). This school, though not averse to bold construction (Tylor himself, e.g.,
sponsored the idea that animistic beliefs were the embryos of religion) always re-
tained a firm foundation in actual ethnographic work: by this it may perhaps be dis-
tinguished from the ethnological branch of social psychology (see below, sec. 3e)
into which it otherwise tends to shade off. Methodologically, it presents several points
of interest, for example, the application of statistical procedure (see Tylor: ‘On a
Method of Investigating the Development of Institutions,’ Journal of the Anthro-
pological Institute, 1888-9). Methodological superiority and extensive ethnographic re-
search are also its distinctive traits as against the continental body of work in which
J. J. Bachofen (1815-87; Mutterrecht [matriarchate], 1861) was perhaps the best-known
figure. We cannot go much further — though it seems incongruous not to mention
Frazer’s Golden Bough (1890) and many other equally famous works, such as L. H.
Morgan’s Ancient Society (1877) — but we have a special motive for adverting particu-
larly to a school which followed and follows Fritz Graebner’s teaching (M ethode der
Ethnologie, 1911). Among other things, a prominent member of it, M. G. Schmidt,
wrote the only treatise on ethnological economics we possess ( Grundriss der ethno-
logischen Volkswirtschaftslehre, 1920-21); see also Wilhelm Koppers, ‘Die ethnologische
Wirtschaftsforschung,’ Anthropos, 1915-16. But still more important for us is the
theory of cultural areas ( Kulturkreistheorie ) that is characteristic of this school. The
salient point is briefly this. Any investigation into primitive forms of civilization, of
course, runs up against the problem of 'origins’— for example, of observed types of
tools or articles of adornment and the like; or of observed types of behavior, such
as the domestication of animals — and also against the problem of the factors respon-
sible for observed changes in time (‘progress’). Ethnologists or cultural anthropologists
proffered widely different explanations in individual cases. 6 But the great majority of
them agreed — or rather took it as a matter of course — that observed behavior or the
observed types of physical things that reflect behavior must, on principle at least, be
explained in terms of the conditions of the group or tribe to which each finding is to
be attributed: that is to say, most ethnologists adhered to what may be called a theory
of ‘independent origins' and 'autonomous development.’ Now, Graebner and his fol-
lowers challenged this theory. On the strength of the fact that primitive cultural pat-
terns are very stable over long periods, they denied the independent origins and the
autonomous development of such things as similar tools but took the occurrence of
similarities as an indication — if not proof — of a common source from which the use
of, say, a particular type of button would spread by diffusion instead of being autono-
mously invented. Hence the existence of areas of culture — Kulturkreise. Whether or
not we accept this theory to its full extent — its very logic makes it difficult to do so —
its fundamental importance for the whole of sociology is evident. Even limited accept-
ance imparts a serious shock to the evolutionary views of that period and makes quite
a difference to what we have called headquarters sociology.

6 On ‘theories’ about the Origins of Invention, see, e.g., the book of this title by
Otis T. Mason (1895), which it is interesting to compare with modern work on the
subject, such as Usher’s or Gilfillan’s. But the most fascinating work of the period
in the field of origins is to be found in the books and articles of Eduard Hahn. See
especially Die Haustiere . . . (1896) and Die Entstehung der wirtschaftlichen Arbeit
(1908). I am in no position to appraise the validity of the criticisms leveled at Hahn’s
work. But there is no doubt that in perusing it an economist must, for the time being,
turn into an institutionalist whatever his views on the scope and method of economics
may be at other times: for surely these things are infinitely more important and en-
lightening than anything a mere economist can say.

788 iv: FROM 1870 TO 1914 AND LATER

We conclude this part of our survey with a reference to Friedrich Ratzel’s Anthropo-
geographie (1882-91; 4th ed. 1921-2), a performance of formative influence and espe-
cially the forerunner, if not the basis, of increased work on human geography. Perhaps
it means stretching a point if we include this type of research among the bases of
historical sociology. 7 It is certainly more related to that specialty which has come to
be denoted by the term Ecology, the study of spatial relations of groups and institu-
tions, which is now being intensively cultivated in the United States. But, potentially
at least, human geography complements the material of historical sociology — as Ibn
Khaldun had realized — and the outstanding contribution of that period had therefore
to be mentioned.

[(c) Biological Schools .] Application to social phenomena of the results of
biological research loomed too large in the thought of that period to be passed
by entirely. We might wish to do so because the field is infested by ideolog-
ical bias and by dilettantism to an extent that surpasses anything that even we
economists are accustomed to. But we cannot do so, among other reasons, be- f
cause biological considerations, though they touched the work actually done
by economists only peripherically, hovered around it all the time. No attempt
will be made to describe the development of professional biological work: 8 it
must suffice to state that none of it exerted any influence upon sociological
or economic thought except the work done on the lines of Darwinism and the
work done by its Mendelian and other critics. Of these, the most important for
us is August Weismann (1834-1914). 9 And the points at issue that are most
important for us were the importance of innate and the inheritance of ac-
quired characteristics.

There is, of course, no such thing as a biological sociology in the sense in
■which there is a historical sociology. Biological considerations may come in to
furnish more or less important explanatory hypotheses — just as may economic
considerations or any others — but the sociology they enter remains what it is
by virtue of its own methods and materials. Emphasis upon biological factors
or aspects is therefore all that can be meant by the loose phrase Biological
Schools. We shall deal with them under four headings.

In the first place, we notice the idea that society, being an ‘organic’ system
and not a ‘mechanical’ one, can be fruitfully analyzed in terms of an analogy
with biological organisms such as the human body. As an example that stands
in the name of an economist I mention a work by Schaffle. 10 But the obvious
puerility of this idea must not blind us to the fact that emphasis upon the
‘organic nature’ of the economic process may be but the means of conveying
an eminently sound methodological principle — as it was, for instance, with
Marshall. Theorists — especially of the ‘planning’ type — often indulge in the

7 Readers familiar with Professor A. P. Usher’s teaching will not think so, however.

8 There are many sources from which this lacuna may be filled, e.g. the History of
Biology (English trans., 1928), by Erik Nordenskiold.

9 All of his writings that matter for us are available in English translations.

10 Albert E. F. Schaffle (see below, ch. 5, sec. 4), Bau und Lebert des sozialen Korpers
(1st ed., 1875-8). Fortunately, the work is not entirely spoilt by its author’s attempts to
discover in the social body nerves and digestive organs.

'M-M:

DEVELOPMENTS IN NEIGHBORING FIELDS 789

deplorable practice of deriving 'practical’ results from a few functional rela-
tions between a few economic aggregates in utter disregard of the fact that
such analytic set-ups are congenitally incapable of taking account of deeper
things, the more subtle relations that cannot be weighed and measured but
may be more important to a nation’s cultural life than the things that can . 11
'Organic’ considerations are perhaps the most obvious antidote — though in
themselves hardly an adequate one — against such uncivilized procedure.

In the second place, we notice the attempts that were made to apply the
Darwinian concepts of Struggle for Existence and Survival of the Fittest to
the facts of industrial and professional life in capitalist society. Two things
must be carefully distinguished. On the one hand, it may be — we cannot argue
the case here — that certain aspects of the individual-enterprise system are cor-
rectly described as a struggle for existence, and that a concept of survival of
the fittest in this struggle can be defined in a non-tautological manner . 12 But if
this be so, then these aspects would have to be analyzed with reference to
economic facts alone and no appeal to biology would be of the slightest use;
vice versa, any opinions that biologists may entertain on the subject would be
ruled out as laymen’s talk. On the other hand, there may be genuine appeal to
biological facts and theories; this is the case whenever the question of inher-
itance of physical or mental qualities of the human material is brought in.
The relevance of this question for an appraisal of the effects of certain institu-
tions and policies is manifest, or should be.

Then, as later, these two things were but imperfectly distinguished . 13 Here
we are concerned with the second question only and in particular with its rela-
tion to the period's discussion on social reform. The arguriient that measures
in favor of the lowest strata of the population may have the effect of deterio-
rating the average quality of the human stock is, of course, much older than
Darwinism . 14 During the period under discussion, it found many supporters,
the most important being Herbert Spencer, who added, however, nothing but

11 An example will illustrate this. We have already referred to the fact that Russia,
in the last decades of the nineteenth century, pursued a policy of monetary restriction
that may have retarded her economic development. At the same time, I hinted at the
possibility of making out an economic case for this policy. This was no contradiction.
The opinion that that policy was simply foolish rests on nothing but rather obvious
mechanics of the monetary and credit system and fails entirely to take account of the
fact that a given monetary policy is the result of all the factors that constitute the
economic, political, and moral pattern of a nation and influences them all in some ob-
vious, and in other not so obvious, ways. Appraisal of the effects of a policy that neg-
lects this is, from a practical standpoint, simply valueless. And it is precisely this which
may be meant by him who urges ‘organic considerations.’

12 To define those who survive as the ‘fit,’ that is to say, to define fitness by sur-
vival, would, of course, be tautological (meaningless).

13 Correct practice in this respect is one of the many merits of an author who was
never recognized by the economic profession and seems to be entirely forgotten now,
perhaps because he had the courage to tell unpopular truth: William H. Mallock
(1849-1923). See his Social Equality (1882) and Aristocracy and Evolution (1898),

14 For an example, see above, Part 11, ch. 5, sec. ic.

79° IV: FROM 1870 TO 1914 AND LATER

an elaboration, based upon research into biological selection, of the old idea.
Critics objected not so much to the biology involved — in most cases they were
in no position to do so — as to the application of the concept of natural se-
lection to the facts of social selection, to the practice of identifying the ‘fitness’
that makes for survival with ‘socially desirable’ characteristics, and so on in
what is by now a well-worn and familiar way. Two points about this discussion
must be regretfully reported. Economists entirely failed to bestow on these
problems the amount of attention they deserve: flippant phrases pro or con
form the bulk of their contribution; the only one of the leading men to take
more trouble was Pigou; and to him I refer the reader who wishes more in-
formation. 15 Worse still, in taking sides, economists revealed to a deplorable
degree the influence of ideological bias. 16 And this is as true, if not more so,
of those who pooh-poohed the idea of possible danger to the quality of the
human stock as it is of those who uncritically affirmed it. Thus the question
of Nature versus Nurture has remained in a most unsatisfactory state to this
day.

In the third place, we notice work that belongs under the second heading
but which will be segregated for the sake of emphasis, namely, the work in
statistical biology, biometrics, to which we also owe important methodological
help. Two great names will suffice: Karl Pearson and Sir Francis Galton.

Karl Pearson (1857-1936) surely does not need an introduction, any more
than he needs a monument other than Biometrika. Therefore, let us merely
recall his two famous adages that are so pregnant with significance: ‘ability
runs in stocks’ and ‘the nation is being recruited from its failures.’ Sir Francis
Galton (1822-1911) is the man whom I should choose as an illustrative ex-
ample if I were asked to define the specifically English type of great man of
science and the specifically English type of scientific creation. His training was
medical, but apart from this he roamed in utmost freedom and informality
over all parts of the world of thought that happened to attract him. Uncon-
nected with universities and teaching, positing his own problems and going
about treating them with an untutored originality that is perfectly fascinating
— he was the most genuine yet the most unacademic of scientists, much like
his kinsman Darwin. Of his many exploits, the following are relevant for us:
he was the man who may be said to have independently discovered correlation
as an effective tool of analysis; the man who set eugenics on its feet (in 1905
he founded the Eugenics Laboratory); the man who realized the importance
of, and initiated, a new branch of psychology, the psychology of individual dif-
ferences; and the man who tackled, although by an entirely inadequate

15 This was in 1912. I refer, however, to Economics of Welfare, 3rd rev. ed., 1929,
Part 1, ch. 10. The happy as well as famous phrase — ‘environments, as well as people,
have children’ — occurs on p. 115.

16 It is interesting to note that the ideology involved is not necessarily class ideology.
It often is, of course. But a man may he quite unable to see the element of truth in
the selective argument simply because it does not go well with some cherished scheme
or ideal of his. And these schemes or ideals are not uniquely correlated with location
in the class structure.

DEVELOPMENTS IN NEIGHBORING FIELDS 79 1

method, the problems of Nature and Nurture ( Hereditary Genius , 1869; In-
quiries into Human Faculty and Its Development, 1883; Natural Inheritance,
1889) — all of which makes him in my humble opinion one of the three great-
est sociologists, the other two being Vico, and Marx.

In the fourth place,' we notice the racial theories. As here understood, 17 they
are a subgroup of the biological theories. It is, of course, perfectly possible to
believe that the range of individual variation is very great — think for instance
of the immense differences we observe in mathematical or musical talent — and
even that an individual’s position in the statistical distribution is primarily a
matter of inheritance without believing that the sociologically relevant charac-
teristics differ racewise. To believe the latter constitutes, then, the special fea-
ture of the racial theories. Extra -scientifically, this ‘racialist’ belief is as old as
humanity and its towering monument is the Old Testament. Attempts to es-
tablish it by scientific methods do not, however, antedate the period under
discussion to a significant extent. This is why I refrained from mentioning the
strongest performance in this field (that of Gobineau) in Part hi, where it
chronologically belongs. The only other name that will be mentioned is Am-
mon’s. The other side is represented, at its highest, by Boas. 18 This extreme

17 Symbiosis in a territory, especially if its effects be reinforced by political union,
will in general suffice to produce a certain number of common interests and habits
and also consciousniess of them. These facts have, of course, never been called into
question. Nor has the importance for sociology been questioned of the further fact
that they are apt to create relatively durable — e.g. 'national’ — types of behavior. By
racial theories, we mean only theories that associate these types of behavior with phys-
ical characteristics that are common to groups. It should be observed that, since those
'psychological’ or 'cultural’ types possess some degree of durability and since the phys-
ical types are not absolutely stable, these two types of differentiation tend to shade
off into one another. Just now, however, it is important to emphasize their conceptual
distinctness.

18 Joseph Arthur Comte de Gobineau (1816-82) earned immortality by the superla-
tive power of his novels and historical sketches (e.g. Renaissance, 1877), which should
rank high as sociological performances. Here we are interested in his Essai sur Vinegalite
des races humaines (1853-5), a work, like his novels, of impressive personal power,
which is why our text emphasizes the element of 'strength,’ using the word in a sense
different from that in which we speak, e.g. of a strong, that is, convincing, piece of
criticism. A great vision is all but spoiled by faulty — in fact dilettantic — methods and
obvious absurdities, although he who condemns Gobineau on these grounds could
never, if he were fair and logical, admire Marx. As to material and method, Alfred O.
Ammon (1842-1916) is vastly superior, although still open to a formidable number of
objections (see his Gesellschaftsordnung . . . 1895). Scientific conscientiousness and
high competence have induced Professor Franz Boas, 1858-1942 (see especially, The
Mind of Primitive Man, 1911; the German original uses the word kulturarm instead of
primitive) to make, especially between the lines, concessions that cut more deeply than
he seems to realize: not all of his — sweepingly adverse — conclusions follow from the
facts presented. I am afraid I have to conclude this note with a piece of advice that
unfortunately imposes itself often in sociological and economic matters: read the ene-
mies of the racial theory in order to see its strong points; read the exponents of the racial
theory in order to see its weak ones.

79 2 IV: FROM 1870 TO 1914 AND LATER

brevity is justified by the fact that economists, who are or should be vitally in-
terested in the range of variation of individual 'abilities 7 and in the question
of their inheritance, are but mildly interested in the specifically racialist aspect
of the latter. In fact, so far as I know, Werner Sombart is the only economist
of note that ever made significant use of the element of race. 19 The only com-
ment I feel it necessary to make is that here we have a case in which research
into a real problem has been made all but impossible by what can only be de-
scribed as warring infantilisms — infantilism of both parties to the controversy.
For the problem is a real one and not merely an excrescence of overheated
imaginations. It is important for sociology in many respects, of which the
theory of social classes is but one instance. 20

[(d) Autonomous Sociology .] Seeing how widely we have defined Histor-
ical Sociology, the reader might well wonder whether there can be any non-
historical sociology. For every sociologist or economist, however speculative his
bent of mind, must use some facts, most of which are bound to be of a his-
torical nature in our sense of the term. But this is not what I meant. We de-
fine a man as a historical sociologist only if he does serious historical or ethno-
logical work himself or if at least he arrives at his results by analysis based
upon such work done by others. Desultory use of historical facts for purposes
of illustration or even verification of a theory does not make a man a histor-
ical sociologist. By the same token, the reader who wonders whether there
can be any non-psychological sociology, because it is indeed difficult to imag-
ine any piece of sociological analysis that does not use 'psychic 7 facts of one
kind or another, has missed the essential point. It is the use of the methods
and results of professional psychology that will, in this book, define psycholog-
ical sociology or Social Psychology (see below, sec. 3c) and not the use of the
facts of common experience observed and conceptualized by the sociologist
himself, however psychological these facts may be by nature. In Chapter 7
below, we shall study in some detail an economic example of this distinction
which will teach us that this is not merely a matter of words but a point of
considerable methodological importance and a source of many misunderstand-

19 In his book, Die Juden und das 'Wirtschaftsleben (1911; English trans. 1951),
which can hardly be described as a model of analysis. But incidental references to race
are all the more frequent in economic writings. We have noticed an instance in Mill’s
Principles.

20 The teaching of the Cambridge ethnologist, A. C. Haddon, was a shining ex-
ample of a scientific attitude toward the problem and of effective use of ethnological
material in dealing with it. But this was in lectures; I cannot find it in his published
work. Another author (once famous, now almost forgotten) should be mentioned,
whose treatment of the matter is free from the particular element that causes all the
trouble now and shows how the explanatory value of racial differences may be ex-
ploited without implying anything about unique correlation between racial and cul-
tural characteristics and, above all, without implying anything about all-round 'superior-
ity' or ‘‘inferiority 7 of one racial type as compared with others. This is Ludwik Gump-
lowicz, 1838-1909 (professor of public law at the University of Graz), Rassenkampf
(1883), and Grundriss der Soziologie (1885) — though his (physical) anthropology left
something to desire.

DEVELOPMENTS IN NEIGHBORING FIELDS

793

ings. The latter were fostered by the fact that sociologists and economists who
never seriously applied professional psychology and never did any work that
called for any of its methods, nevertheless, described their own procedure as
psychological, thus exposing quite needlessly their pseudo-psychological con-
structs to professional criticism.

We shall therefore recognize the growth during that period of an autono-
mous sociology, which groped for its own problems and methods, even though
the products of this sociology were full of pseudo-psychological and pseudo-
historical concepts and propositions. Society, class, group, structure, domina-
tion and subordination, leadership, assimilation, and adjustment are examples
of the items which entered that part of this autonomous sociology that we
have above described as ‘headquarters' or ‘pure sociology.' Cooley , 21 Giddings,
Hobhouse, Ross, Simmel, Spann, Steffen , 22 Tarde, Tonnies are names that
represent widely different approaches to it though we could, had we space,
reduce many of these differences to far less than those authors themselves — all
of whom still repay perusal — would have thought possible or desirable . 23 The
efforts of these and other men did not indeed produce any ‘general sociology'
that was at all as widely accepted as was the ‘general economics' of the pre-
ceding period. Such a general sociology was adumbrated rather than created.
Perhaps that was only natural in a science that then struggled into existence.
But the fact that the subsequent period did not complete this task requires
explanation. Evidently, this was or is because sufficiently important sociolo-
gists did not bestow sufficient work on it. And this in turn was due not only
to the fact that in postwar times sociologists grew increasingly absorbed in

21 Charles H. Cooley (1864-1929)5 let us mention a characteristic work of this au-
thor: Social Organization (1909) and add one by John Dewey: Human Nature and
Conduct (1922).

22 G. F. Steffen (1864-1929), the Swedish socialist leader; his Sociologi (1910-11)
must not go unmentioned.

23 The names mentioned — selected with much injustice to others — have been written
down to indicate the types of sociological literature to which I meant to refer and
also to provide suggestions for the reader that will automatically lead him further. It is
not without regret that I omit the comments by which I might have tried to charac-
terize the work of each of these men. One comment, however, cannot be omitted:
to throw together such antipodes as, e.g., Simmel and Spann will seem to the critic
to be explainable by nothing less than complete ignorance or lack of understanding on
my part; and no other explanation may occur to him of my listing with non-psycho-
logical sociologists an author (E. A. Ross) who wrote a Social Psychology (1908) and
another (Gabriel Tarde) who wrote La Psychologie economique (1901). I shall, there-
fore, indicate the two lines on which that attempt to reduce differences would proceed:
on the one hand, I could show that these differences, to a surprising degree, result from
philosophies and methodological creeds that affected language more than substance;
on the other hand, I could show that the differences of the latter type produced propo-
sitions that are complementary rather than antagonistic. An author who traces canni-
balism to certain spiritual ambitions will in general think that he has said something
that is quite incompatible with the theory that bases explanation of cannibalism on
the fact that human flesh tastes like pork and is, in the circumstances in which canni-
balism occurs, a recherche delicacy. But that is not so.

794 IV: FROM 1870 TO 1914 AND LATER

special and very ‘factual’ problems but also to another: pure theory really
thrives only in quantitative fields; where problems are of necessity non-mathe-
matical, its scope is fatally limited and it soon fails to attract. We proceed to
mention a few examples of the period’s performances in special fields that,
however, belonged to autonomous sociology — to sociology that did not bor-
row methods and results from outside. We choose Durkheim to represent
hierology, Ehrlich to represent the sociology of law, Le Bon to represent the
sociology of politics.

Durkheim’s name must not be omitted from these pages for reasons other
than that he was one of the leading sociologists of religion. Besides contrib-
uting to several other special fields, he formed a school of sociology that fol-
lowed a method based upon a principle that was anything but new but as-
sumed a particular form in his hand. He realized that individual behavior can
never be explained exclusively from the facts that pertain to the individual
himself and that it is necessary to fall back upon the influences of his social
environment. This can be done in many ways. Durkheim’s way was to con-
struct a group mind — or, since his method was to explain things by means of
material about primitive civilizations, a tribal mind — that feels and thinks and
acts as such: since this idea itself is of romantic origin, we may describe Durk-
heim’s position as a sort of positivist romanticism. The fundamental explana-
tion of the phenomenon of religion, for example, that was derived from this
principle may be conveyed by the phrase: religion is the group’s worship of
itself. No attempt was made to buttress this theory by anything that resembles
professional psychology, social or other. This is why Durkheim’s 24 methods
should not be confused with Levy-Bruhl’s.

The time-honored ‘philosophy’ of law, of course, always contained genu-
inely sociological elements. It survived during the period — in part, thanks to
required courses on ‘history of philosophy of law’ — but independently of this,
there evolved a strictly scientific research into legal phenomena. One of the
most important lines of advance consisted in studying the actual legal ideas
and habits of the people (‘live law,’ lebendes Recht) and in making generali-
zations from these, rather than the abstractions of jurisprudence, the basis of
the theory of legal practice. This was Ehrlich’s idea which, produced in a
small Austrian university under the most unfavorable circumstances imag-
inable, attracted world-wide, if sporadic, attention by its sheer weight . 25

No other department of social life stood more sorely in need of research
guided by scientific interest than did politics, where the dreams of the phi-
losopher had produced ideological issues in utter disregard of the most ob-

24 See, especially, Emile Durkheim (1858-1917), Les Formes elementaires de la vie
religieuse (1912; English trans., 1915); hut also De la Division du travail social (1893),
and Les R&gles de la methode sociologique (1895). There is quite a Durkheim litera-
ture. Professor Pitirim Sorokin deals with him in Contemporary Sociological Theories
(1928), a work which I take this opportunity to recommend.

Levy-Bruhl is discussed below, sec. 3e.

25 Eugen Ehrlich (1862-1922), Grundlegung der Soziologie des Rechts (1913); see
Roscoe Pound, ‘Scope and Purpose of Sociological Jurisprudence,’ Harvard Law Re-
view (1911-2).

DEVELOPMENTS IN NEIGHBORING FIELDS

795

vious facts. Political scientists and economists alike, when talking about public
policy, kept on constructing pleasant vistas of a public good, which it was the
high destiny of ‘statesmen 7 to pursue, and of a state that floated in the clouds
very much like a beneficent deity. 26 The facts of group warfare, machines,
bosses, pressure -group propaganda, mass psychosis, and corruption were looked
upon as aberrations — ‘party politics’ was looked upon as something that really
should not exist — instead of as essentials. But during that period there began
something like an awakening of the scientific conscience, and political sociol-
ogy — the study of political institutions as they actually work — put in an ap-
pearance. As a symptom we might choose the delightful book of a delightful
man that everyone will read with pleasure as well as profit. 27 But instead I
choose the books — successful at the time but smothered by hostile criticism by
now — of a man whose merit it was to drive home, with unsurpassable energy,
one point that is of fundamental importance in the analysis not only of politi-
cal, but of any, groupwise action. Le Bon’s performance is one of a large
class: the class of performances that make stand out before our eyes, and
thus ‘discover’ for analysis, what everyone always knew to be true in every-
day life. Everyone knows from experience that in a crowd, no matter whether
this crowd is a raging mob in the streets of a non-English town (for English
mobs do not ‘rage’) or a faculty committee of elderly professors, we immedi-
ately drop to a level of intelligence, morality, and responsibility that is lower
than the one we habitually move on when thinking and acting by ourselves.
And the merit of having presented this phenomenon with all its implications
is great indeed, in spite of everything that might be urged against Le Bon’s
material and method. 28

Finally, we must mention three works of considerable importance which
had economists as authors — Veblen, Wieser, and Pareto. Appraisal or even
characterization is, however, impossible in the space at our command. Max
Weber’s sociological work will be noticed in Chapter 4 below. 29

26 We have noticed that A. Smith was remarkably free from that sort of thing. But
James Mill was not. He was no ‘statist’ of course, but the ‘grand principles’ of his
ideal of a democracy were all the more free from analytic scruple.

27 Human Nature in Politics (1908; 3rd ed., 1914) by Graham Wallas.

28 Gustave Le Bon (1841-1931), La Psychologie des foules (1895; English trans.,
T he Crowd ; A Study of the Popular Mind, 1896, 16th impression, 1926). From this
book stems a considerable literature that has largely succeeded in removing technical
objections. But an unpopular idea or fact will never be rescued by rational argument
in its defense.

29 Thorstein Veblen’s work was practically all in economic sociology, but I refer spe-
cifically to his Theory of the Leisure Class (1899). Friedrich von Wieser’s Gesetz der
Macht (best rendered by Sociology of Power) appeared in extenso in 1926 but the
fundamental idea was already presented in Recht und Macht (1910). Vilfredo Pareto’s
Trattato di sociologia generate (1916), in its English translation under the title Mind
and Society (1935), enjoyed considerable success in the United States during the thir-
ties: I have never been able to make out whether this was on account of its interest-
ing analytic schema or on account of the profusion of home truths that Pareto ex-
pressed about the mortality of decadent liberalism.

j}:

796

IV : FROM 1870 TO 1914 AND LATER

3. Psychology

The wealth of the period’s developments in professional psychology — as dis-
tinguished from work of more or less psychological nature that was done in
other fields — defies description, though most of them grew from older roots
and few only spelled new departures. For our purpose, however, we can re-
duce this wealth to five items: (a) experimental psychology, (b) behaviorism,
(c) gestalt psychology, (d) Freudian psychology, (e) social psychology. None of
these exerted during that period any real, as distinguished from phraseological,
influence upon economic research. But they must be mentioned because of
the light their development sheds upon that period’s Zeitgeist and because of
their potential importance, which will be indicated in each case.

(a) Experimental Psychology. The quest for measurable facts or at least for
facts observable by methods other than introspection was, of course, nothing
new. Psychology had always been observational in this sense, and many of its
votaries had always professed allegiance to the method of physics. But the
'empiricism’ of Hobbes, Locke, Hume, and Mill had been, so far as psychol-
ogy is concerned, merely programmatic and did not induce actual experiment
and measurement. These developed in the preceding period and gathered mo-
mentum in the one under survey. The most telling symptom was the advent
of the psychological laboratory. Wundt’s Leipzig laboratory may serve as a
landmark . 1 Its methods and its spirit exerted formative influence far and wide,
even on men like William James and G. Stanley Hall, who quickly outgrew
both the narrow scope of experimental psychology in this sense and Wundt’s
personal message. The statistical complement of this type of work was much
improved later on in the United States (Edward L. Thorndike). One of the
many offshoots of it that should, but does not, interest economists intensely
is noticed in the footnote below . 2

1 Wilhelm Wundt (1832-1920) was one of the outstanding and most influential
men of science of that age. Not of first-rank originality, but a worker, leader, teacher,
writer of almost unbelievable energy and fertility, he left his mark also on other lines
of advance (see, e.g., above, ch. 2, sec. 4b). The Leipzig laboratory has a long history
and was the ripe fruit of a long line of previous efforts. Wundt was a medical man
by training and approached psychology from physiology in a way that makes him a
direct descendant of R. H. Lotze ( Medicinische Psychologie, 1852). Other names that
may serve as stepping stones for readers who wish to follow up the origins of what
on occasion has looked in the past, and possibly may look again at some future time,
like an important ally of economic theory are these: Johannes Peter Muller, E. H.
Weber, G. T. Fechner, Ewald Hering, H. von Helmholtz — physiological psychologists
all of them, whose work centers in the problem of Measurement of Sensation (psycho-
physics). It is very interesting to note that it has not so far occurred to economists
to explore the opportunities this line of research might conceivably offer (see on this
ch. 7 below).

2 This is the study of differences among individuals of characteristics and especially
of abilities. Many roots and lines should be distinguished, but I mention only one
that links up with Wundt’s teaching and is represented by William Stem’s Differen-

DEVELOPMENTS IN NEIGHBORING PIELDS 797

Wundt’s laboratory work found a curious complement in bis ten volumes
of Volkerpsychologie (1900-1920). This is a study of language, myths, and
mores that seems to have more to do with the ideas of Hobbes and Vico than
with the Leipzig laboratory. It is mentioned here, instead of under ethno-
logical sociology to which it really belongs, 3 because from Wundt’s own stand-
point and within his scheme of thought this type of research in fact comple-
ments the material that the laboratory produced, though it does so over a
wide gap and will not do so at all from any other standpoint than his. It was
only much later that genuine psychometrics displayed any tendency to enter
the field of social phenomena.

(b) Behaviorism. In a sense Comparative Psychology (mainly animal psy-
chology) 4 and, through comparative psychology, Behaviorism, 5 though new
departures both of them, may be said to stem from Wundt’s experimental psy-
chology. Since some American economists have shown more interest in the
programmatic pronouncements of behaviorists than they have in any other of
the developments in psychology, 6 it is important for the reader to realize the
severe limitations to which the application of behaviorist principles is subject
in the social sciences. Fundamentally, the behaviorist method amounts to a
resolution of behavior into objectively observable responses — that is, reactions
that we can observe without resorting to introspection or any other psycholog-
ical interpretation of 'meanings’ — to objectively controllable stimuli: the
method accepts the reacting organism as a perfect blank without any propensi-
ties of its own (much as Locke had done with the 'mind’) and (going beyond
Locke) avoids the whole complex of concepts and interpretations that is indi-
cated by words like consciousness, sensation, perception, will, urge, or instinct.
This is why the behavior of the lower animals and the simplest reactions of
man in early childhood are the stronghold of the behaviorist method. Any
step beyond the precincts of this stronghold is an achievement that helps us
to do without certain tools, the validity of which it is possible to challenge.

tielle Psychologie (1911), and another that hails rather from Galton — inasmuch as it
implements an idea of his — and will be represented by Charles Spearman’s theory of
the Central Factor (see the latter’s Abilities of Man, 1927, with general survey of the
field). Both books should be required reading for all economists. Of course, this par-
ticular aspect of child psychology and pedagogics is also of obvious importance to us
(see, e.g., E. L. Thorndike, Educational Psychology, 1913-14, vol. in).

3 This is also why I mention here the names of Lazarus and Steinthal (to whom is
due the phrase Volkerpsychologie, usually translated as 'folk psychology’ though tribal
psychology would express the meaning better), who may be considered as Wundt’s im-
mediate predecessors in this field.

4 See C. L. Morgan, Introduction to Comparative Psychology (1894).

5 The word and the most radical formulation of the program are John Broadus
Watson’s; see his Behavior: an Introduction to Comparative Psychology (1914); also
Behaviorism (1925).

6 The frequent occurrence of the word Behavior in modern economic literature may
be due to this.

798 IV : FROM 1870 TO 1914 AND LATER

But beyond the range within which it is operational, that is to say, beyond the
range within which it is actually, possible to produce uniquely determined re-
sponses by controllable conditioning, the method itself becomes invalid. A
generalization to the effect that man’s behavior is uniquely determined by his
environment that cannot be established experimentally is not so much wrong
as meaningless. But precisely this generalization is the goal of some behavior-
ists’ argument: it marks the frontier that separates a fundamentally sound
method of research from an ideology, the popularity of which is not difficult
to understand. The support it lends to extreme environmentalism is obvious.

(c) Gestalt Psychology (Ehrenfels, Kbhler, Koffka, Wertheimer, Riezler).
develops from a single basic fact: no individual element of any set of ele-
ments is perceived or appraised or interpreted individually — a sound in a
song, a color in a carpet, or even a glass of wine that is part of a dinner is
never ‘experienced’ in isolation and, if it were, it would mean to, us something
quite different from what it does mean actually, that is, as part of the definite
set in which it occurs. All we need to say about this evidently highly impor-
tant discovery — for it was nothing less, though my formulations sound trivial
enough — is, first, that its development belongs mainly to the subsequent period
and only the beginnings of it to the one under discussion; and, second, that
among the many possible uses to which gestalt psychology may be put in the
social sciences, there is at least one of considerable importance. Gestalt psy-
chology may be used in order to arrive at a sensible and non-metaphysical
concept of psycho-sociological collectives — such as society itself.

(d) Freudian Psychology. Before the end of the century psychoanalysis was
a therapeutic method — to be traced to the teaching of J. M. Charcot in Paris
— that had scored remarkable successes, especially in cases of ‘hysterical’ inhi-
bition of motion, in the hands of Josef Breuer and Sigmund Freud. But about
1900, though it always remained a therapeutic method, it began to reveal a
very much wider aspect — it began to develop into a general theory of the work-
ing of the human mind. The old idea of a subconscious personality and its
struggles with the conscious ego was elaborated and made operational with
unsurpassable effectiveness by Freud. 7 Again I cannot — and perhaps need not
— do more than point to the vast possibilities of application to sociology-
political sociology especially — and economics that seem to me to loom in the
future: a Freudian sociology of politics (including economic policies) may
some day surpass in importance any other application of Freudism, though so
far only a small beginning has been made (W. H. R. Rivers). Nor can I go
into certain other currents of thought that display important parallelisms with

7 Freud’s writings are now available in a cheap American edition to which the reader
is referred. It occurs to me that my few sentences on Freud might be interpreted in a
derogatory sense. Nothing could be further from my intention. All great achievements
are but final acts of birth that are preceded by long prenatal histories. Freud had a
large number of pupils who split up, however, into different groups,' some of which
cannot be called Freudian any more. But potential fertility for the social sciences is a
feature of all of them (all of them I know, that is).

developments in neighboring fields 799

Freud’s, however different in method and aim they may be in other respects.
But I will mention T. Ribot . 8

(e) Social Psychology. This branch of psychology is usually defined very
widely so as to include all types of research that have anything at all to do
with psychic facts relevant to social phenomena and, in particular, all types of
research that are based on the concept of a group or national mind or other
collectives of this kind. This practice may be useful for the purpose of co-
ordinating all conceivable sources of conceivably relevant facts or suggestions.
But we cannot adopt it because it makes social psychology useless as a pigeon-
hole (the only use we have for the term here): for our purposes there is no
point at all in throwing together men and methods that differ as widely as
Herder and romanticist philosophy and history, Westermarck or Tylor and
cultural anthropology, Ross and 'autonomous' sociology, and so on. Thus we
are left with a very restricted field in which, during that period, McDougall
was the most important figure . 9 He was a professional psychologist and tried to
block out a special psychology that would account for phenomena of inter-
action between individuals or groups and for the shaping influence a group
mind, once formed, exerts upon the individuals that are born into it. The
fact that he emphasized the creative element and reasoned in terms of in-
stincts and emotion explains why his teaching, after a strong initial success,
lost favor in a time that was rapidly becoming behaviorist and environmen-
talist. Less of a professional psychologist was Levy-Bruhl . 10 But he was still
primarily interested in mind and only secondarily in society. Not many names
would have to be added in order to draw up a fairly complete list. Psycholog-
ical investigations (mostly of a statistical nature) were carried out in the serv-
ice of several practical specialties — child psychology, I think, coming nearest
to relevance for problems of general sociology — that cannot be noticed here.

8 See, especially, Theodule Ribot (1839-1916), Maladies de la personnalite (1885;
English trans., 1895), another book that I should make required reading for econo-
mists if I could. The parallelism above mentioned is evident not so much from com-
parison with Freud’s own writings as it is from comparison with the writings of some
men who began as followers of Freud, notably, of Alfred Adler. One more book of
Ribot’s should be mentioned: Evolution of General Ideas (English trans., 1899).

9 See, especially, William McDougall, Introduction to Social Psychology (1908).

10 Of Lucien Levy-Bruhl’s (1857-1939) many works it will suffice to mention Les
Fonctions mentales dans les societes infdrieures (1910; English trans., 1926).

CHAPTER 4

[Sozialpolitik and the Historical Method 1

[x. Sozialpolitik] goo

[(a) Influence upon Analytic Work] 8 01

[(b) Verein fur Sozialpolitik] 803

[(c) The Problem of ‘Value Judgments’] 804

[2. Historism] 807

[(a) The ‘Older’ Historical School] 808

[(b) The ‘Younger’ Historical School] 809

[(c) The Methodenstreit] 814

[(d) The ‘Youngest’ Historical School: Spiethoff, Sombart, and M. Weber] 815

[(e) Economic History and Historical Economics in England] 821

[1. Sozialpolitik]

Economists experienced the influence of the new atmosphere as they had
experienced that of early liberalism and as they were to experience, in our
day, that of socialism. In all these cases this meant not only or even primarily

1 [Editor's Note. This chapter was in an unfinished and unsatisfactory state. It had
no titles and no sub titles; these were inserted by the editor. My knowledge about it is
gleaned from what J. A. S. said in the introduction to Part iv and from a folder which
I found containing two sections of typescript clipped to their respective manuscripts.
This folder also contained a great many notes and pamphlets and reprints which J. A. S.
apparently intended to use in his work of revision. On the outside of the folder was
written ‘Part IV/4.' Originally, it had been Tart IV/4, 5’ but the 5 had been erased
when the author decided to incorporate the material in a single chapter instead of in
two separate chapters.

In Part iv, Chapter 1, Section 3, Plan of the Part, J. A. S. has this to say: ‘Then
follow comments on two allied groups of men and ideas that lend themselves to sep-
arate treatment, the group whose work centered in the contemporaneous interest in
social reform and whose leaders were with singular infelicity dubbed “socialists of the
chair” (Kathedersozialisten) : and the group that was called, and called itself, the his-
torical school (Chapters 4 and 5). The much-debated question of economists’ value-
judgments will be touched upon in connection with the former and the famous “battle
of methods” (and its American counterpart, the institutionalist controversy) in connec-
tion with the latter.’

The treatment of the socialists of the chair is very incomplete. In fact, it looks as
though a whole section on these people in Germany had been omitted. It is obvious
that the treatment of people of this type in France has been omitted. The carbon of
this particular section is dated December 17, 1943. The carbon of the section on the
historical school is dated January xo, 1943. These were undoubtedly preliminary studies
and would have been completely rewritten. The section on the socialists of the chair
and value judgments is especially unsatisfactory, but it is published here because
Schumpeter felt so keenly that the work of many economists has been and is im-

800

SOZIALPOLITIK AND THE HISTORICAL METHOD 8oi

new facts and problems but also new attitudes and (extra-scientific) creeds 2 and
hence, for a time at least, revolt against those restraints which in each epoch,
as it wears on and as initial enthusiasms cool, the men who are engaged in the
work of analysis find it necessary to impose upon themselves. The ‘mercantilist’
writers had not discovered that there was anything for an economist to do ex-
cept to propose measures and fight for them; the economists of the ‘liberal’
age were at first in no better state, though they eventually did discover the
difference between a theorem and a recommendation; and the economists of
the period under discussion, yielding to what the reader may call either temp-
tation or the call of duty, similarly deviated from the stony path that leads
to scientific conquest.

[(a) Influence upon Analytic Wor£.] The manner in which and the degree
to which the economists of that time allowed their analytic work to be in-
fluenced by the new spirit of economic policy differed greatly, however, as be-
tween countries and groups. In England, continuity in research and teaching
was never in serious danger. The small body of English economists moved with
the times, of course — which was not difficult for pupils of J. S. Mill — but did
not jettison pieces of scientific apparatus along with old value judgments. In
part this was due to the fact that the average member of that body understood
economic theory much better than did the average economist in any other
country, and hence he was in a position to realize the full extent of the lati-
tude it left for any social creed he might choose to embrace. For the rest, that
singularly happy state of things was simply an instance of the genuine freedom
guaranteed by the English environment that removed many sources of irrita-
tion. Opposition to what many people believed to be an alliance between eco-
nomics and laissez-faire policy existed both within and without the small
group of orthodox socialists. But it did not amount to much. In particular it
did not amount to a new ‘School of Thought.’ [A note indicated that J. A. S.
intended to write a paragraph on the Fabians at this point.]

In the United States scientific tradition was not anything like as strong.
But the ‘radicalism’ of the typical member of the economic profession did
not go beyond the points covered by old doctrine: antagonism to protection
and to ‘monopolistic’ big business, which then developed into the typical
American economist’s pet aversion. The processes, of competitive capitalism
were also under fire — some economists were sympathetic with the ‘popula-

paired by their value judgments, and also that this need not be so with respect to their
analysis. This belief of his is obvious in all his writings.

The treatment of the historical school is also incomplete. After some discussion of the
older and younger historical schools and the Methodenstreit, there follows a discussion
of historical economics outside Germany, especially in France and England. But there
is nothing at all about the United States and American institutionalism, which had
been promised in the Plan of the Part.]

2 [At top of this page a great many shorthand notes and the following statement in
the hand of J. A. S.: ‘I do not see what more I could say in order to protect from mis-
understanding the following piece of plain speaking.’]

802

iv: FROM 1870 TO 1914 AND LATER

tionist’ movement, others lent qualified support to the ideas of Henry George, 3
and views indicative of hostility to the capitalist order as such were not absent
though very few voiced them as candidly as did Thorstein Veblen. But that
fire was weak. The large majority -of economists conformed to the bluff con-
victions of businessmen who did not as yet share the misgivings of their
European peers. No economist whom anyone would care to call ‘leading/ in
any sense whatsoever, identified himself with any radical scheme of social
reform.

[Not completed: J. A. S. evidently intended to sketch the development of social re-
form in France and Germany before going on to the paragraphs which follow.]

I do' not hesitate to say that this achievement was one of the most impor-
tant in the records of the economic profession. Having made this quite clear
I hope that what follows will not be misunderstood. That achievement, great
as it was, evidently did not belong to the sphere of scientific analysis. And
since this is a history of scientific analysis, it does not in itself concern us
here. What does concern us is another aspect of it — which I readily concede
is a less important one — namely its influences on teaching and research. Ap-
praisal of this influence will then offer an opportunity to touch upon, so far
as it is necessary to do so, the problem of the economist’s value judgments.

The efficiency of teaching indubitably suffered. I have emphasized above
the share that the academic lecture hall had in spreading the spirit of social
reform. The German ‘socialists of the chair’ certainly fulfilled the ideal of
progressive politicians and laymen — the ideal of the professor who preaches
reform and denounces obstructing interests. Lujo Brentano addressed his
classes as he would have political meetings, and they responded with cheers
and countercheers. Adolf Wagner 4 shouted and stamped and shook his fists
at imaginary opponents, at least before the lethargy of old age quieted him
down. Others were less spirited and effective but not less hortatory in intent. 5
Such lectures need not necessarily be weak in the technical instruction they
impart, but as a rule they are. He who thinks this a cheap price to pay for
ethics and ardor will please consider for a moment where, say, internal medi-
cine would be if its teachers, instead of developing the analytic .powers of
their pupils, indulged in rhetoric about the glories of healing. An increasing
number of students left the universities and entered the practical vocations

3 [The note on Henry George intended at this point was not written. For a discus-
sion of this writer, see below, ch. 5, sec. 7.]

4 On A. Wagner, see below, ch. 5, sec. 4 and ch. 8, sec. 2.

5 I do not mean to assert that German lectures or seminars were exactly fascinating.
The two examples adduced were exceptional. As a rule, the professor read from a
manuscript that was often yellow with age, or presided languidly over seminar meet-
ings at which candidates for the Ph.D. read preliminary drafts of their theses. This is
the scene American visitors beheld and their experience may be one of the causes of
irreconcilable — and I think, exaggerated — hostility to the lecture method of teaching
which we observe in many American universities.

SOZIALPOLITIK AND THE HISTORICAL METHOD 803

open to economists with an equipment that was nothing short of lamentable,
and some of the best of them left thoroughly disgusted. 6

[(b) Verein fiir Sozialpolitik .] As regards research, a credit item first claims
recognition. It has been pointed out above that the German economists’ zeal
for reform concentrated upon individual problems or measures much as did
that of the Fabians in England: fundamental reconstruction of society was
to come about in time, as a by-product rather than as the result of efforts
directly aimed at it. This procedure involves accumulation of facts on a large
scale, and the impressive series of the Schriften des V ereins fur Sozialpolitik
— a 88 'volumes’ most of which actually consisted of several volumes — testi-
fies to a relentless will to dig, to which we are indebted for an invaluable
extension of our factual knowledge. Much additional work of the same type
was done by individuals and groups either in connection with or outside that
corporate effort of the profession. 7 If, because of considerations of space, the
Schriften are allowed to stand as the only example of this kind of analysis,
it must be understood that this instance is to illustrate what constituted the
greater part of the work done by the economists of all countries — in England,
as before, it was done partly for Royal Commissions. 8

6 However repugnant to scientific etiquette jokes and anecdotes may be, there are
cases in which they illustrate a situation better than could anything else. So I will
risk offering two such illustrations. The one is a definition of economics that obtained
some currency at the time: 'economics, what is that? Oh, yes, I know . . . you are
an economist if you measure workmen’s dwellings and say that they are too small.’
The other is a dictum I once heard from a very intelligent and accomplished German
woman: 'I have taken courses and examinations in economics, but I know nothing
and care less about it. You see, I felt I had to comply with the fashion of "studying”
at a university, but I did not mean serious work. So I chose economics because all that
is required there in order to satisfy examiners is the ability to chat a little about ethics,
reform, control, and that sort of thing/ Of course, I do not mean to say that these
were the standards of most or even many teachers. The significance of the anecdote
should not be overrated. But neither should it be equated to zero, not at least for the
last three decades of the nineteenth century.

7 The importance of that effort, which as an effort of a national group of profes-
sional economists has no equal, makes it desirable to say a few words about its organi-
zation. It was essentially a team-work arrangement. Every member, especially every
member of the large council, was free to suggest a project of research. The Verein de-
cided which were to be taken up and then entrusted individuals or small committees
with the direction of the research involved. These in turn parceled out the work among
a number of collaborators and integrated the results that were to be published in the
Schriften. Moreover, they arranged for discussions of those results at the meetings of
the Verein, appointing 'reporters’ (usually two) and other participants. Success at these
meetings was of some importance in a man’s academic career. [Some of this informa-
tion has already been presented in Chapter 1 of this Part.]

8 To mention a few of those Commissions whose reports are particularly interesting
from the standpoint of economic analysis: Shipping Dues (1853), Coal Supply (1866),
Agriculture (1881), Housing (1885), Depression of Trade (1886, particularly the 3rd
report), Gold and Silver (1887), Poor Laws (1909 — especially the famous minority
report).

804 IV: FROM 1870 TO 1914 AND LATER

Many of the volumes presented work of a high grade that was not only
exemplary in its minute attention to detail but also analytically significant and
inspired by considerations of scientific as well as practical urgency. The Verein’s
comprehensive price studies (begun in 1910) may serve as an example. Most
of them, however, were no better and no worse than such investigations were
and are at all times and in all countries. But an investigation into the in-
fluence of gold production, directed by Arthur Spiethoff ( Der EinBuss der Gold-
erzeugung auf die Preisbildung, 1890-1913, vol. 149 of the Schriften ), that
was a part of them, rose far above the general level. On the whole, however,
the economists responsible for the reports that fill those volumes of the
Schriften, cared little for analytic refinement. 'ITiey took no end of trouble
with their facts, but most of them went straight from their impressions of
the factual pattern to recommendations, just as would have any nonprofes-
sional worker. They neither used nor contributed to theoretical or statistical
technique, in spite of their obvious opportunities for doing so. And the analytic
apparatus of economics did not improve but even deteriorated in their hands.

Moreover, if abilities adequate to describing the trade practices of dis-
tributors of milk plus a fervent allegiance to the ideals of the Verein— glorified
no doubt by a little philosophy and other elements of German culture — were
all a man needed in order to establish himself as an economist and, in due
course, to receive academic preferment, we cannot be surprised that supply
adapted itself to the character of demand. Otherwise excellent men ceased to
care for the higher spheres of scientific invention and rigor. Men who cannot
be described as otherwise excellent threw them overboard with a sigh of relief
and prided themselves on doing so. And though there always were a few who
tried to keep the flag flying, 9 economic theory as understood in England was
in many places almost completely in abeyance for several decades, not only
as a field of research but also as a means of training students in scientific
habits of mind. When, in the first decade of this century, a reaction began
to set in, under Austrian and foreign influence, against ‘economics without
thinking/ the full extent of the damage done revealed itself in the fact that
people hardly knew what economic theory meant: many thought that it was
a sort of philosophy of economic life or else simply methodology. Many for-
eign observers laid all the blame for this state of things at the door of the
historical school. But the historical school, though cultivating another purely
scientific interest, still cultivated a scientific interest; it should not be held
responsible for that substitution of convictions for performance.

[(c) The Problem of ‘ Value Judgments’] Concern about the future of eco-
nomics may have been one of the reasons why an increasing number of men
felt it desirable to shape the Verein into something more like a scientific so-
ciety and, when this had to some extent been attained, to bring forward the
question whether economists were within their rights when they took it upon
themselves to deliver judgment — moral or other — on the phenomena they
analyzed. During the first decade of the century, this problem of the Werturteil

9 [Note intended here on Diehl, Dietzel, Oppenheimer, and Lexis.]

SOZIALPOLITIK AND THE HISTORICAL METHOD 805

(value judgment) caused heated discussions which culminated in what almost
amounted to a row at the Vienna meeting of 1909. To many people it will
seem obvious a priori that this attack upon the principle of the Verein’s his-
toric practice must have come from economists who were out of sympathy
with the policies, sponsored by it. This however was not so. The enemies of
the Verein had of course always protested against its lack of scientific "ob-
jectivity.’ But within the Verein the most prominent leaders in that cam-
paign for freedom from evaluation (’ Wertfreiheit ) were M. Weber and Som-
bart, 10 both of whom belonged to the radical wing of the Verein and were
anything but exponents of capitalist interests.

Nevertheless it is abundantly clear from what has been said so far that it
was not the epistemological problem involved which accounts for the bitter-
ness. of that controversy, but considerations of a different order. One may feel
no qualms at all about the logical status of value judgments within a science
and yet hold (a) that the substitution of a creed for analytic ability as a cri-
terion of selection of the personnel of a science will impede advance; (b) that
those who profess to be engaged in the task of widening, deepening, and
‘tooling’ humanity’s stock of knowledge and who claim the privileges that
civilized societies are in the habit of granting to the votaries of this particular
pursuit, fail to fulfil their contract if, in the sheltering garb of the scientist,
they devote themselves to what really is a particular kind of political propa-
ganda. And it is easy to see that those who thought differently were bound
to realize that what was at stake was not a point of scientific logic but their
professional standing and all that was dearest to them in their professional
activity.

The epistemological problem in itself is neither very difficult nor very in-
teresting and can be disposed of in a few words. It will be convenient to do
so with reference to the English environment in which the problem arose in
the natural course of things — as a science comes of age, the critical search-
lights are turned on all its habitual attitudes and practices — and in which
those political acerbities that elsewhere affected the handling of the question
were much less important. We have seen how awareness of the problem came
about and how it was dealt with by the succession of economists between
Senior and Cairnes. The distinction between reasoning about ‘what is’ and
about ‘what ought to be’ having been well established before, the correct
interpretation of this distinction was formulated by Sidgwick 11 in a manner

10 [J. A. S. wrote: Leave page for note on Sombart.]

11 In the introduction to his Principles of Political Economy, 1883 (3rd ed., 1901,
pp. 7-8): ‘I have been generally careful to avoid any dogmatic statements on practical
points. It is very rarely, if ever, that the practical economic questions which are pre-
sented to the statesman can be unhesitatingly decided by abstract reasoning from ele-
mentary principles. For the right solution of them full and exact knowledge of the
facts of the particular case is commonly required; and the difficulty of ascertaining
these facts is often such as to prevent the attainment of positive conclusions by any
strictly scientific procedure.

‘At the same time the function of economic theory in relation to such problems is
none the less important and indispensable; since the practical conclusions of the most

8o6

IV : FROM 1870 TO 1914 and LATER

which left little, if anything, to be desired and which seems to have been
accepted — in principle at least — by Marshall and his immediate followers.

An ‘ought,’ that is to say, a precept or advice, can for our purpose be re-
duced to a statement about preference or ‘desirability.’ The relevant difference
between a statement of this nature — for example, ‘it is desirable to bring about
greater economic equality’ — and a statement of a relation — for example, ‘the
amount people will attempt to save out of a given national income depends,
among other things, on the way in which the income is distributed’ — reveals
itself in the fact that acceptance of the latter depends exclusively on the
logical rules of observation and inference, whereas the acceptance of the for-
mer (the ‘value judgments’) always requires, in addition, the acceptance of
other value judgments. This difference is of little moment when the ‘ultimate’
value judgments, to which we are led up as we go on asking why an. in-
dividual evaluates as he does, are common to all normal men in a given cul-
tural environment. Thus, there is no harm in the physician’s contention that
the advice he gives follows from scientific premisses, because the — strictly
speaking extra-scientific — value judgment involved is common to all normal
men in our cultural environment: we all mean pretty much the same thing
when we speak of health and find it desirable to enjoy health. But we do
not mean the same thing when we speak of the Common Good, simply be-
cause we hopelessly differ in those cultural visions with reference to which
the common good has to be defined in any particular case.

Sidgwick had his full share of the typically English confidence in the ‘ulti-
mate values’ that happen to prevail in one’s own country at one’s own time.
Therefore he recognized, beyond the frontiers of the ‘science’ of economics,
the existence of a corresponding ‘art,’ whose propositions were precepts but
precepts not much less, enforceable than are propositions of the logico-factual
kind. He saw, however, the real problem as he showed by an excellent illus-
tration which, slightly amplified, will serve to sum up the central point in
that controversy.

An indefinite number of impulses and considerations enter into the making
of a protectionist or free trader. Among them are some which link up with
a man’s tastes in national styles or ideals. Therefore no scientific argument
can compel him to embrace or abandon protectionism . 12 But his motivation

untheoretical expert are always reached implicitly or explicitly by some kind of reason-
ing from some economic principles; and if the principles or reasoning be unsound the
conclusions can only be right by accident.’

12 It should be observed that this does not mean either that an economist’s convic-
tions in the matter cannot be made the subject of scientific analysis or that they are
uninteresting. As regards the first, we may wish to explain why a given individual or
group entertains a given conviction about given economic policies. Such an analysis
is perfectly scientific. As regards the latter, an economist’s views may reflect the atti-
tude of the stratum he hails from and thus assist us in the diagnosis of a political pat-
tern; besides, the economist in question may be sufficiently interesting as an individual
to make it worth while to notice his political preferences. But none of these things has
anything to do with the problem in hand.

SOZIALPOLITIK AND THE HISTORICAL METHOD 807

may, and as a rule does, imply also propositions about causes and effects,
some or all of which may come within the province of the economic analyst.
If it should be the case, for instance, that our man is a protectionist because
he believes protection to be a remedy for unemployment, then the economist
is within his rights if he points out that this is so in some cases but not
in others and that, in this sense, the man 'ought’ not to be protectionist
unconditionally. The reader will realize that considerations of this order greatly
reduce the practical importance of the issue so far as its purely epistemological
aspect is concerned. In particular, if an economist is inspired by the typically
historical sense for environment, he may be able to proffer — from a knowl-
edge of which value judgments are associated with a given environment — his-
torically relative advice without leaving the precincts of his professional com-
petence. This goes some way, though not the whole way, toward justifying
economists’ value judgments. It also explains, in part at least, why the con-
troversy on value judgments did not produce any very important results. But
it does not alter the fact that the progress of economics — including progress
in its practical usefulness — has been and is being severely impeded by econo-
mists’ quasi-political activities.

[2. Historism]

It is one of the major aims of this book to destroy the myth that there
ever has been a time when economists as a body scorned research into his-
torical or contemporaneous fact or when economics as a whole was purely
speculative or lacked its factual complement. What, then, is the distinctive
characteristic of the group that called itself the Historical School and how
was it possible for its members to look upon its program as a new departure?
Evidently, it would not do to include everyone who recognized that eco-
nomic history is an important source of economic truth. Nor can we draw
the line around all those who displayed an extensive command of historical
facts or a sense of the historical flux of policies and of the historical relativity
of propositions: for this would still include List and Marx and Marshall. Not
even the actual performance of historical work is enough: there would be no
point in a definition that includes James Mill.

These considerations, however, point directly to what we are looking for.
The basic and distinctive article of the historical school’s methodological faith
was that the organon of scientific economics should mainly — at first it was
held that it should exclusively — consist in the results of, and in generaliza-
tions from, historical monographs. So far as the scientific part of his vocation
is concerned, the economist should first of all master historical technique. By
means of this technique, which was all the scientific equipment he needed,
he should dive into the ocean of economic history in order to investigate
particular patterns or processes in all their live details, local and temporal, the
flavor of which he should learn to relish. And the only kind of general knowl-
edge that is attainable in the social sciences would then slowly grow out of
this work. This was the original core of what became known as the Historical

8o8

IV : FROM 1870 TO 1914 AND LATER

Method in economics . 1 The resulting attitude and program is what economists
of a different persuasion meant by Historism.

Of course, the term History must be interpreted broadly so as to include
both prehistoric and contemporaneous fact and the contributions of ethnology.
Our way of defining the historical school no doubt tends to obliterate the fron-
tier line between the historical economist and the economic historian. But this
is no disadvantage. For the methodological creed of the historical school may
be summed up precisely in the proposition that the economist, considered as a
research worker, should be primarily an economic historian. The work of econ-
omists of the historical school in fact supplemented, and was supplemented by,
the work of economic historians proper, a species of the historical genus that
was by then well established and did not always welcome what it was some-
times, inclined to look upon as unfair competition . 2

As thus defined, the historical school cannot be said to have ever been domi-
nant in any country. But in German economics it was, during the last two or
three decades of the nineteenth century, by far the most important factor of a
purely scientific nature. This is why we are going to acquaint ourselves some-
what more fully with the performance of the German historical school before
dealing briefly with the parallel movements in other countries.

[(a) The ‘Older’ Historical School.] In deference to established tradition we
shall first notice the work of three writers, Bruno Hildebrand, Wilhelm
Roscher, and Karl Knies, who are usually mentioned together under the head-
ing of Older Historical School. As a matter of fact, however, they did not
form a school in our sense — the reader should remember that in this book
the term School means a definite sociological phenomenon and hence cannot
be used at will for any group of writers we may choose to select — and their
relation to economic history was neither uniform nor very different from that
of. a host of other economists of all ages. Hildebrand was an active man of
many merits who, by program and performance, emphasized the evolutionary

1 It will be seen that this meaning of historical method outlined above has nothing
to do with other meanings of the same term, such as the sum total of the historian's
techniques or a genetic method of presentation.

2 Nobody can fail to notice the trade-union aspect of that antagonism. But there
was also a more presentable reason for the hostility of some economic and — because
historical economists occasionally went beyond anything that can be called economic
history — other historians. Economists, Schmoller’s pupils in particular, did not always
take much trouble about acquiring the historian's equipment, and their work in fact
failed sometimes to meet the historian’s professional standards. Indictments of this
kind were even leveled at Schmoller himself.

However that may be, for us the fact, which our definition took into account, viz.,
that there is really no dividing line, spells a considerable difficulty. We cannot include
the historical literature of the period, yet we really ought to do so. Any history of
economics in the wide sense sponsored by the historical school would be woefully in-
complete if it did not mention such men as Georg von Below, Alphons Dopsch, or
Sir Henry Maine and many others, who contributed to our knowledge of the economic
and social institutions and processes of the Middle Ages more than economists ever
did, but I must draw the line somewhere.

SOZIALPOLITIK AND THE HISTORICAL METHOD 8 og

character of economic civilization — without renouncing belief in 'natural laws’
however — and the basic importance of historical material more than did the
majority of his contemporaries. Roscher was the incarnation of professorial
learning, mainly of a philosophico-historical nature, and must indeed be men-
tioned both on account of his scholarly labors in the field of the history of
economic thought and as a leading figure on the stage of academic economics.
On that stage he conscientiously retailed, in ponderous tomes and in lifeless
lectures, the orthodox — mainly English — doctrine of his time, simply illus-
trated by historical fact. However, this does not make a historical economist in
the term’s distinctive sense. Nor does talk about 'historical laws’ or approval
of Mangoldt’s epigram that economics is 'the philosophy of economic history’
— especially if, for the rest, one theorizes exactly as do other people. Knies
was the most eminent of the three. But his main performance was in the field
of money and credit, where he made his mark as a theorist. His only connec-
tion with the historical school consists in a programmatic book, in which he
stressed the historical relativity not only of policies but also of doctrines and
which owes to commendation, by genuinely historical economists, a promi-
nence it does not quite deserve. 3

[(b) The ' Younger ’ Historical School .] The new departure, the distinctive re-
search program, and the emergence of a genuine school must in fairness be
associated with the name of Gustav von Schmoller 4 (1838-1917). In a sketch
as short as this, we must concentrate on his work and leadership. The second-
line leaders — whom the same fairness demands we must resolutely label as
such — Brentano, Bucher, Held, and Knapp, we can only mention below. 5 And
the work of less prominent men must be passed by entirely.

Schmoller led the school — the Younger Historical School as it came to be
called — -by example as well as by word. In his early days he produced a mono-
graph on the clothiers’ and weavers’ craft of Strassburg, which, not otherwise
particularly distinguished, acquired importance in its programmatic setting and

3 [Die politische Okonomie vom Standpunkte der geschichtlichen Methode (1853; en-
larged ed. 1883). Knies is discussed in chs. 5 and 8 below.]

4 Of his writings on method, it will suffice to mention the collections: Zur Litemtur-
geschichte der Staats- und Sozialwissenschaften (1888), and Grundfragen der Sozialpoli-
tik und Volkswirtschaftslehre (1897; in the latter, especially the important address on
'Changing Theories and Established Truths in the Field of the Social Sciences’); and
the last edition of his article 'Volkswirtschaft und Volkswirtschaftslehre’ in the German
Encyclopaedia (Handworterhuch der Staatswissenschaften), which renders his ripest
thought on the subject. I take this opportunity to add that Schmoller brought to bear
on his task of leadership not only energy, fighting spirit, and a tremendous capacity for
work, but also considerable strategic and organizing ability. Among other things, he
founded a periodical — which became known as Schmoller’s Jahrbuch — and edited a
series of monographs — the F orschungen — which served the cause and provided facilities
for the publication of the school’s work. He was a typical 'scholarch.’

[See also long article by J. A. S., 'Gustav v. Schmoller und die Probleme von heute,’
Schmoller’s Jahrbuch r vol. l, 192 6, pp. 337-88.]

5 [The note planned on these men was not written but Brentano, Held, and Knapp
are mentioned elsewhere.]

8io

IV: FROM 1870 TO 1914 AND LATER

became the model of the work of a host of pupils and of followers who were
not pupils. His concern with historic work, however, went much further than
that instance would suggest. He also did work not usually done by anyone who
is not a professed historian; for instance, he took a leading part in the great
edition of documents relating to the history of the public administration of
Prussia, and always spoke of this achievement with loving pride. Thus, though
historical work done by economists was not in itself a novelty, it was then
undertaken on an unprecedented scale and in a new spirit. To those critics
who felt that the thing was being overdone — and who spoke of Historism in a
derogatory sense — it can fairly be replied, first, that all human achievement is
of necessity one-sided, and, second, that in spite of all that was accomplished
it is impossible to indicate a single field — at least I cannot indicate one — in
which the work of the period went as far as we could wish.

Much of this work was no doubt rather pedestrian. 6 But the sum total of it
meant a tremendous advance in accuracy of knowledge about the social process.
It must suffice to list the main headings : economic (especially fiscal) policy and
administration; the class structure of society; medieval and later forms of in-
dustry, especially of craft guilds and merchant guilds; the growth, functions,
and structures of cities; the evolution of individual industries; of bank credit;
and (one of the finest pieces of Schmoller’s work) of government and private
enterprise.

Schmoller’s own circle did not do much in the field of agriculture. But it
was sedulously cultivated by others and produced some of the best work of
historical economics; the outstanding names are Hanssen, Meitzen, and
Knapp. 7

6 The following fact will be appreciated by admirers of Henrik Ibsen’s stupendous
ability to delineate his characters by a few traits pregnant with significance. In his
Hedda Gabler, Ibsen wishes to create, as quickly as possible, the impression that one
of the two male characters, Hedda’s husband, is a thoroughly mediocre academic
drudge, not to say a dunce. And what is the first thing about him that Ibsen conveys
to readers or audiences? That Dr. Tessman has just completed a work on the linen
industry of Brabant in the sixteenth century! This no doubt was done by a layman
for laymen. But still . . .

7 Georg Hanssen’s (1809-94) work — it will be enough to mention his Agrarhis-
torische Abhandlungen (1880-84) — and teaching (in Gottingen) were methodologically
original in two respects: on the one hand, he taught his many pupils to start, in re-
constructing agrarian history, from the conditions they had before their eyes, and thus
brought out the analytic or explanatory value of past conditions with a liveliness and
force all his own; on the other hand, he opened up a new source of material — maps and
other topographical documents, reflecting the earlier forms of peasant holdings and
casting new light on the structure of the manorial economy.

This material was fully exploited by August Meitzen (1822-1910), who brought the
experience of the statistician to bear upon the task. His Siedelung und Agrarwesen der
~Westgermanen und Ostgermanen, der Kelten, Romer, Finnen und Slawen (1895) is,
in the first instance, an attempt to depict and compare the ways in which those peoples
settled on their land, built their villages, and planned their economy. But for our pur-
pose still more important are the analytic uses made of the results of this monumental

SOZIALPOLITIK AND THE HISTORICAL METHOD 8ll

Before we glance at some attempts at synthesis, it is necessary to insist on
certain features of this work that have not always received the attention they
deserve.

First, we have noticed that Schmoller himself and most of his pupils threw
themselves into the fight for social reform, asserting their personal value judg-
ments with the utmost vigor . 8 This has obliterated the fact that their scientific
credo was extremely critical of value judgments and of the practice of econo-
mists to identify themselves with political parties and to recommend measures.
One of Schmoller’s objections to what he called ‘Smithianism’ was precisely
that these Smithians were so bent on producing political ‘recipes.’ In part, no
doubt, he took this stand because he did not like the particular recipes that
were proffered by economic liberalism. But this was not all of it. Beyond his
allegiance to different principles of economic policy there was the respect for
the economic fact and the will to let it speak for itself.

Second, the same truly scientific spirit of criticism- made the school look
askance at the broad generalizations that are in the nature of philosophies of
history. Schmoller realized, of course, the inevitability of theories in the sense
of explanatory hypotheses, and he was less cautious in framing them than it
is usual for professional historians to be. But he stopped far short of any at-
tempt at reducing the whole historical process to the action of one or two
factors. A single hypothesis of the Comte-Buckle-Marx kind he did not even
visualize as an ultimate goal — the very idea of a simple theory of historical
evolution seemed to him a mistaken one, in fact unscientific.

This point is essential in order to understand his scheme of thought and in
particular in ordeT to distinguish it from all those schemes that have nothing

piece of research. Meitzen tried to infer from them the early geographical distributions
of those peoples, their agricultural technique, their customs, and their racial descent;
and ventured into bold theories, that did not remain unchallenged, about the factors
that shaped their social organization.

Georg Friedrich Knapp (1842-1926) stayed in this field — which has nothing to do
with the two others in which he also left his mark — for about fifteen years, during
which he produced two masterpieces — ‘classics’ in the eulogistic sense of the word —
Die Bauernbefreiung und der XJrsprung der Landarbeiter (1887) and Grundherrschaft
und Ritter gut (1897), which describe the metamorphosis of the German agrarian world
that occurred at the threshold of the capitalist era and was both the consequence of,
and a potent factor in shaping, the social evolution of Germany. Knapp’s analysis has
not only created the standard pattern for quite a literature, but its main results have
passed into the common stream of economic teaching. It is a pity that it is impossible
to convey in a sketch like this what might be termed the general message of a per-
formance of this kind. Knapp’s marvelous equilibrium of comprehensive vision and
detailed research, for instance, is something that can be felt and, by being felt, even
learned from him, but it cannot be described in a few sentences. It stands to reason
that a man, so long as he is engaged in work of this kind, would rarely if ever feel
the need of theoretical training, lack of which was bound to prove a serious handicap
in the field of money.

8 [J. A. S. apparently intended to go into this subject at greater length in the early
pages of section 1 of this chapter but did not do so.]

8l2

IV: FROM 1870 TO 1914 AND LATER

in common with his except the reference to history, which, as has been stated
above, is too general to be of use. For instance, the view that history is our
source of facts might be called Comtist. But Comte turned to this source
(or told us to do so) in order to discover — by a procedure which he believed
to be the same as that used in the physical sciences — ^historical laws.’ Schmol-
ler’s scientific intent was quite different. For him, Comte’s suggestion was the
very incarnation of the 'naturalist error’ and Comtist historical laws were shams.
In fact there is no trace whatever of Comtist influence in his work. This should
be clear from our sketch of it and of the program behind it. And it should
also be clear that the roots of both the work done and of the program are to
be found exclusively in the German past: the high level of historiography; the
widespread respect for the historical fact; the low level of theoretical econom-
ics; the lack of respect for its values; the supreme importance attributed to the
state; the small importance attributed to everything else — these points indi-
vidualize the school and they were all of them typically German, in their
strengths as well as in their weaknesses.

Third, Schmoller always protested against an ‘isolating’ analysis of economic
phenomena — he and his followers spoke of a ‘method of isolation’ — and held
that we lose their essence as soon as we isolate them. This view, of course,
was simply the consequence of his resolve to feed economics exclusively on
historical monographs. For their materials as well as their results are ob-
viously refractory to any attempt at isolating — in most cases, in fact, they be-
come meaningless if isolated. Though perfectly understandable — and, for all
economists who have no bent for ‘theory,’ perfectly acceptable — this conse-
quence indicates a limitation of the scope of economic analysis of the Schmol-
lerian type to which corresponds an almost illimited extension of its subject
matter. Nothing in the social cosmos or chaos is really outside of Schmollerian
economics. In principle, if not quite in practice, the Schmollerian economist
was in fact a historically minded sociologist in the latter term’s widest mean-
ing. On this level, specialization would indeed impose itself again if decent
work is to be turned out. But the divisions would be enforced by the material
and would be of the same kind as those that must exist between medievalists
and, say, Romanists.

This is the scientific meaning of the label that Schmoller affixed to his
school. He did not call it historical simply, but historico-ethical. The label
also carried a different meaning — it was to express protest against the wholly
imaginary advocacy of the hunt for private profit of which the English ‘classics’
were supposed to have been guilty. But below this surface meaning, which
no doubt served well enough with the public, there was one that was less
suggestive of salesmanship: the school professed to study all the facets of an
economic phenomenon; hence all the facets of economic behavior and not
merely the economic logic of it; hence the whole of human motivations as
historically displayed, the specifically economic ones not more than the rest
for which the term ‘ethical’ was made to serve, presumably because it seems
to stress hyper individual components.

Fourth, it is of course a delusion to hope that the results of monographic

SOZIALP OLITIK AND THE HISTORICAL METHOD 813

historical research will weld into ‘general economics’ merely by being co-ordi-
nated and without the aid of mental operations other than those that pro-
duced the monographs. But we must not overlook that, though such research
plus a co-ordinating study of its results will never produce articulate theorems,
they may produce, in a mind appropriately conditioned, something else that is
much more valuable. They may exude a subtle message, convey an intimate
understanding of social or of specifically economic processes, a sense of his-
torical perspective or, if you prefer, of the organic coherence of things, which
is extremely difficult, perhaps impossible, to formulate. Perhaps the analogy
with a physician’s clinical experience — or part of it — will prove more helpful
than misleading.

These considerations will go a long way toward clarifying the possibilities of
synthesis that were within the reach of the Schmoller school. The most ob-
vious one is of course a comprehensive economic history; and the outstanding
example, for the German Middle Ages, is Inama-Sternegg’s Deutsche Wirt-
schaftsgeschichte (1879-1901). 9 But Schmoller himself visualized a different
possibility. When the shadows lengthened, he endeavored to take stock of
what he and his groups had achieved or intended and to show the world what
a systematic treatise of the historical school would look like. An ‘Outline’
( Grundriss ) 10 of two volumes was the result. But by that time he had si-
lently unlearned the lessons of extreme ‘historism.’ Into a' framework that did
not depart fundamentally from oldest tradition, he fitted the rich materials
of social history, giving for every type or institution a sketch (in some cases, a
masterly sketch) of its historical evolution on the lines of his personal theory
of it — in the chapter on social classes, for instance, historical and ethnological
material is arranged around a division-of-labor theory of the phenomenon. Of
course he had to use a conceptual apparatus, and occasionally to reason in the
same way as do economic theorists, traditionally so-called. He theorized weakly
— so weakly in fact that his theory (in this sense) is not even thoroughly bad —
but he displayed no reluctance to do so. In matters of value and price Schmol-
ler in fact adopted, or meant to adopt, the teaching of Carl Menger. I am
tempted to sum up by saying: think of J. S. Mill’s treatise; imagine another
that bestows as much emphasis and competence on the institutional aspects as

9 Karl Theodor von Inama-Sternegg (1843-1908) was an economist and statistician
who, in the later part of his career, acquired international reputation by his work at
the head of the Austrian statistical service (we should say Statistical Board) and by his
simultaneous activity as a teacher who powerfully influenced a generation of statisti-
cians and economists. But the illustrative value of the scientific career of this eminent
man is in the fact that his own personal research was purely historical. He edited his-
torical documents. He published two purely historical monographs in which he ex-
pounded the so-called Manorial Theory, i.e. the theory that the organization of the
manor was the primary factor in shaping markets, towns, and industrial life in the
dawn of capitalism. The history mentioned in our text was the result -of his way of
synthesizing, and it is this synthesis by an economist which is significant here: it did
not differ in principle from a professional historian’s idea of a synthesis.

10 Grundriss der allgemeinen V olkswirtschaftslehre (1900-1904).

814 IV: FROM 1870 TO 1914 AND LATER

Mill bestowed upon theory in the traditional sense, and reduce correspondingly
the space and thought allotted to the latter; and you have Schmoller's Grund-
riss, barring of course politico-philosophical backgrounds, which do not con-
cern us here.

[(c) The Methodenstreit.] Thus, the leader had sheathed the sword. More
important still, the flood of 'historism’ had begun to ebb and a feeling of
neighborly tolerance had begun to prevail all round. Comfortably assured of
the survival of both parties, we may therefore turn back for a moment to con-
sider the famous clash between theoretical and historical economists that has
come down to posterity as the Battle of Methods ( Methodenstreit ). The main
facts were these. When Tistorism’ was nearing high tide, Carl Menger, in
1883, published a book on methodology 11 that dealt on a broad front with
Hie fundamental problems of procedure in the social sciences but was very ob-
viously intended to vindicate the rights of theoretical analysis and to put the
Schmoller school in its place — and a very secondary place it was! 12 Schmoller
reviewed the book unfavorably in his Jahrbuch, and Menger replied in a
pamphlet entitled the Errors of Historism , 13 which fairly steamed with wrath
and of course elicited rebuttal. This not only created a lot of bad feeling but
also set running a stream of literature, both of which took decades to subside.
In spite of some contributions toward clarification of logical backgrounds, the
history of this literature is substantially a history of wasted energies, which
could have been put to better use.

Since there cannot be any serious question either about the basic impor-
tance of historical research in a science that deals with a historical process or
about the necessity of developing a set of analytic tools by which to handle
the material, the controversy, like all such controversies, might well seem to
us to have been wholly pointless. This impression is strengthened by the sur-
prising fact, which stands out clearly enough if one cares -to look below the
ruffled surface of polemical arguments and slogans, that neither party really
did question its opponent’s position outright. The quarrel was about prece-
dence and relative importance and might have been settled by allowing every
type of work to find the place to which its weight entitled it. The reasons why,
for a time, neither party felt able to adopt this standpoint are important

11 Untersuchungen iiber die Methode der Socialwissenschaften und der Politischen-
okonomie insbesondere. Since our interest in methodology per se is but a limited one,
justice cannot be done here to this book, which is no doubt one of the significant per-
formances in its field although, so far as logical fundaments are concerned, it hardly
goes beyond Mill’s Logic. I take the opportunity to refer readers interested in method-
ology to Professor Felix Kaufmann’s excellent treatise, M ethodenlehre der Sozialwissen-
schaften (1936); [English trans., Methodology of the Social Sciences, 1944].

12 A little later, substantially the same ground was taken by Menger’s followers
headed by Bohm-Bawerk ('The Historical vs. the Deductive Method in Political Econ-
omy,' Annals of the American Academy of Political and Social Science, 1890) and by
German theorists who were not followers but opponents of Menger’s theoretical teach-
ing, especially H. Dietzel (‘Beitrage zur Methodik der Wirtschaftswissenschaften,’ fahr-
biicher fur Nationalokonomie, 1884, and other publications).

is Die Irrthumer des Historismns in der deutschen Nationalokonomie (1884).

SOZIALPOLITIK AND THE HISTORICAL METHOD bl 5

enough for the sociology and history of science — of any science — to require ex-
plicit statement.

The first thing to be observed about all controversies between scientific
parties is the large amount of mutual misunderstanding that enters into
them. This element is not absent even in the most advanced sciences where
homogeneous training, habits of exact statement, and a high level of general
competence could be expected to exclude it. But where, as in economics, con-
ditions in all these respects are immensely less favorable than they are in
mathematics or physics, men frequently have but an inadequate notion of what
the other fellow really worries about. Hence a great part of the fighting is
directed against positions which are indeed hostile fortresses in the imagina-
tion of the warrior but which on inspection turn out to be harmless windmills.

Secondly, this situation is made worse by the fact that methodological
clashes often are clashes ,of temperaments and of intellectual bents. This was
so in our case. There are such things as historical and theoretical tempera-
ments. That is to say, there are types of mind that take delight in all the colors
of historical processes and of individual cultural patterns. There are other
types that prefer a neat theorem to everything else. We have use for both.
But they are not made to appreciate one another. There is a parallel for this
in the physical sciences: experimenters and theorists are not always the best of
friends. But again, things will be more difficult where neither party can boast
of spectacular successes that conciliate and impress. Moreover, every decent
workman loves his work. And this alone, for some of us, implies dislike for
other ‘methods’ in a perfectly irrational and impulsive way.

Third, we must never forget that genuine schools are sociological realities —
living beings. They have their structures — relations between leaders and fol-
lowers — their flags, their battle cries, their moods, their all-too-human inter-
ests. Their antagonisms come within the general sociology of group antag-
onisms and of party warfare. Victory and conquest, defeat and loss of ground,
are in themselves values for such schools and part of their very existence. They
will try to appropriate labels that are considered honorific — in our case, both
parties laid claim to such epithets as ‘empiric,’ ‘realistic,’ ‘modern,’ ‘exact’ —
and to affix derogatory labels — ‘speculative,’ ‘futile,’ ‘subordinate’ — to the work
of the enemy. These labels may mean little or nothing in themselves,' but they
acquire a life of their own and in turn keep controversy alive. All this gives
scope to personal vanities, interests, and propensities to fight that may, as
they do in national and international politics, count for more than any real
issues — in fact to the point of obliterating the real issues.

[(d) The ‘ Youngest ' Historical School: Spiethoff , Somber t, and M. Weber.]
The controversy petered out as all controversies of this type do and the zeal
for the historical monograph returned to normal. But the work of the Schmol-
ler school was carried on under the leadership of new men who hailed from
Schmoller; had experienced the influence of his message in their formative
years; and, though they differed from him and from one another in aims,
methods of research, and performance, remained faithful to the fundamental
principles he had been foremost in asserting. We might almost speak of a

8l6 iv: FROM 1870 TO 1914 AND LATER

youngest’ historical school. By far the most eminent members of it are Spiet-
hoff, Sombart, and M. Weber . 14

So far as technical training is concerned, Spiethoff is no historian at all. But
Schmoller’s fundamental precepts came into his approach to a problem in
this way: at the beginning of each of his great research projects mentioned
above stood a simple conceptual apparatus, constructed with care but with a
view to adequacy for the particular investigation rather than with a view to
refinement per se; with this apparatus and a provisional analytic idea or hy-
pothesis, he attacked in detail selected sets of facts that the apparatus and the
idea indicated as relevant, sometimes going so far as to analyze the economics
of an individual apartment house or of a particular firm; finally, he described
the general features of the pattern that emerged without the help of any
elaborate method, and these general features, properly adapted to the questions
to be answered, were his 'theoretical’ results. I daresay that the reader is not

14 For the sake of convenience I mention them here, although their work, and still
more their influence, belongs in part to the next period.

The international reputation of Arthur Spiethoff — for a long time assistant to
Schmoller (and also for a long time de facto editor of the latter’s quarterly journal, the
Jahrbuch, before Spiethoff edited it under his own name), later on professor in Bonn —
rests upon his outstanding performance in the field of business cycle research. Neglect-
ing earlier papers of a purely theoretical nature on this and cognate subjects, capital
theory in particular, we shall content ourselves with mentioning the article ‘Krisen’ in
the 4th ed. of the Handworterbuch der Staatswissenschaften (vol. vi, 1925), which
presents in a compressed form what really amounts to an extensive treatise. His highly
interesting scientific credo — recognition of a large number of historical 'styles’ of eco-
nomic life, each requiring its own theory in addition to a common fund of concepts
and propositions belonging to 'timeless theory’ — is contained in his paper 'Die All-
gemeine Volkswirtschaftslehre als geschichtliche Theorie: die Wirtschaftsstile’ in
Schmollers Jahrbuch, 1932. Far removed from Schmoller’s position, Spiethoff’s will
nevertheless bear interpretation as a development of it in a particular direction. His
method of approach characterized in the text is illustrated in his book Boden und
Wohnung . . . (1934), an inquiry into the pricing of dwelling room and the rent of
urban land, and by two series of publications by his pupils which he edited and the
preparation of which he supervised with the minutest care: the Bonner Stddteunter-
suchungen and the Beitrage zur Erforschung der wirtschaftlichen W echsellagen (Con-
tributions to the Study of Business Cycles).

[While J. A. S. taught at Bonn (1925-32), he came to know Spiethoff both as a
valued colleague and as a firm friend. After the death of J. A. S., Spiethoff together
with Erich Schneider arranged for the publication in Germany (and edited) a collec-
tion of many of the earlier articles and essays of J. A. S. The first of three volumes
will appear in 1952.]

As a man and as a scholar, Werner Sombart (1863-1941) was in every respect the
opposite of Spiethoff. The difference between the fame of the two men — not only with
the public at large — provides food for thought on the subject of the sociology of sci-
ence. The only work of his that need be mentioned here, his Modern Capitalism ( Der
Moderne Kapitalismus, 1902, 2nd ed., much enlarged, 1916-27) shocked professional
historians by its often unsubstantial brilliance. They failed to see in it anything that
they would call real research — the material of the book is in fact wholly second-hand —

SOZIALPOLITIK AND THE HISTORICAL METHOD 01 7

much impressed with the novelty of this procedure, which may seem to him
nothing but obvious common sense. But it was new in its neatness, the crystal-
clear distinction of the steps, and the equal attention bestowed on all of them
— in the success with which Spiethoff did not clamor for, but actually devel-
oped, ‘realistic theories’ of a certain type. It should be observed that, though
a man of wide cultural interests, he remained a research worker strictly within
the traditional boundaries of economics. He did not care to merge economics
into an all-embracing sociology. In this respect he did not follow Schmoller’s
example.

But Sombart did; and, throwing aside all qualms about the limits of profes-
sional competence, even out-Schmollered Schmoller. His Modern Capitalism —
which title really covers a much wider area — represents a third type of his-
torical-school synthesis, to be distinguished alike from the general economic

and they entered protests against its many carelessnesses. Yet it was in a sense a peak
achievement of the historical school, and highly stimulating even in its errors.

Max Weber (1864-1920) was one of the most powerful personalities that ever en-
tered the scene of academic science. The profound influence of his leadership — in
large measure due to a chivalrous ardor for doing the right thing that sometimes verged
upon the quixotic — upon colleagues and students was something quite outside of his
performance as a scholar, yet was a vitalizing force (milieu-creating rather than school-
creating) which it was impossible not to mention. Some earlier researches of his, such
as his Romische Agrargeschichte (1891) can be passed by with the comment that, un-
like Sombart, he did some historical research in the professional’s sense. The few sen-
tences of the text to which I must unfortunately confine myself in dealing with the
purely analytic aspects of a monumental achievement will be adequately substantiated
by reference to the following works: (1) The Protestant Ethic and the Spirit of Capi-
talism (appeared in German as ‘Die protestantische Ethik und der “Geist” des Kapi-
talismus’ in Archiv fur Sozialwissenschaft und Sozialpolitik, 1904-5; republ. in Gesam-
melte Aufsdtze zur Religions-soziologie; English trans. by T. Parsons, 1930). This is the
work that advanced the famous theory, so full of far-reaching implications, that the
religious revolution from which Protestantism emerged was the dominant factor in
the molding of the capitalist mind and thus of capitalism itself. It attracted much
more attention than the studies in the sociology of the great religions that followed
(in later volumes of the Archiv ) and gave rise to a controversy in which sociologists of
all countries took part. (2) ‘Roscher und Knies und die logischen Probleme der his-
torischen Nationalokonomie,’ Schmollers Jahrbuch, 1903-5, the most important of his
many ‘methodological’ studies. (3) General Economic History, the report of a course
given at the University of Munich a year before his death, and compiled mainly from
students’ notebooks; English translation by no less an authority than Frank H. Knight.
(4) Economy and Society ( Wirtschaft und Gesellschaft) , a part of the Grundriss der
Sozialokonomik (a work of many volumes by many authors which began to appear in
1914) which Weber initiated and edited and which, though it can only be mentioned
in passing, is an important landmark on the road of German economics. (5) Adaptation
and Selection in the Labor Force (an investigation of the Verein fur Sozialpolitik sug-
gested and led by him; only fragments have appeared in the Verein’s Schriften ), which
I mention merely as an example of the freshness and originality of his ideas and as an
illustration of a type of problem that readily occurred to him. This example also will
come in usefully when we discuss American Institutionalism.

818 iv: FROM 1870 TO 1914 AND LATER

history type and from the type of Schmoller’s Grundriss. It is a vision of the
historical, process that has an artistic quality and is drawn into the sphere of
science by being nourished with historical fact and expressed by means of a
primitive analytic scheme. It is histoire raisonnee, with the accent on the rea-
soning, and systematized history with the accent on system in the sense of a
succession of frescoes of social states. The kind of historical theory that emerges
is best illustrated by Sombart’s theory — though it is traceable to Marx and
though he abandoned it in the second edition — of the early accumulation of
industrial capital from the rent of land: they are explanatory hypotheses sug-
gested by facts. However, his theories are not exclusively or even primarily eco-
nomic. An attempt such as his defies departmentalization. All factors operative
in the totality of the historical process do come in and must come in: wars
and Jews enter pari passu with saving or gold discoveries. And this is quite all
right so long as we remember (a) that such comprehensiveness is the privilege
of just that one type of scientific endeavor; (b) that this type cannot live ex-
cept on the food provided by other types of work if it is not to degenerate
into irresponsible dilettantism; and (c) that Sombartian success depends on a
combination of personal qualities not usually found together in the requisite
intensity and cannot be had by wishing for it — which it is just as well to em-
phasize in view of the wide international appeal of Sombart’s work.

Sombart’s ‘methodological’ pronouncements followed fashions too closely to
be interesting. At first he was duly contemptuous of those who ‘drilled Robin-
son Crusoe’ (see below, ch. 6, sec. 1, n. 2). When the wind changed he was
anxious to be recognized as a theorist and took credit for having used, in
spots, the ‘deductive method.’ Considering the relation of his work to Amer-
ican institutionalism this change of front is important to remember. Much
more important is it, however, to note the same absence of hostility to eco-
nomic theory (in the narrow sense of the term) in M. Weber, whose views on
the nature of the logical processes in the social sciences were much more
significant. 15

Weber did not confine himself to mere professions of methodological faith
couched in general phrases. He really went into the matter and analyzed the
forms of thought actually used within his range of comprehension, that is
mainly those used by historical economists and sociologists. And he emerged
from gigantic labors with a definite and positive doctrine. This doctrine turns
on two concepts: the Ideal Type and the Meant Meaning. In the social sci-
ences, he held, we perform operations of a kind entirely foreign to the physical
sciences. In the physical sciences explanation never means more than descrip-
tion. In the social sciences explanation involves the understanding of ‘cul-
tural contents,’ the interpretation of Meanings: hence the term Interpretative
Sociology (Verstehende Soziologie). There is no sense in asking what the fall-

15 In working his way toward his methodology, M. Weber availed himself (not al-
ways to advantage) of such help as he thought he could derive from contemporaneous
philosophic work. In particular, the influence of Rickert’s and also of Windelband’s
teaching is occasionally very noticeable.

SOZIALPOLITIK AND THE HISTORICAL METHOD 819

ing stone is about beyond stating the law of its fall. But there is sense in ask-
ing what a consuming household is about. In order to make headway with the
analysis of the latter — and of all social phenomena — the observer must under-
stand his subject of research in a sense in which he cannot and need not under-
stand the falling stone. For this purpose he must create types which, though
not necessarily pure like the economic man, are abstractions in that they pos-
sess only essential and lack non-essential properties: they are logical ideals.
And we try to get at an understanding of what such a type does, feels, says,
by asking not what his actions, feelings, utterances mean to us, the observers,
but what they mean to the type under research or, to put the same thing into
different words, we try to unearth the meanings that the types intend to at-
tach to themselves and their behavior. If this conveys something to the reader,
then he will realize that this theory of the logic of the social sciences — what-
ever its merits or limitations and its sources in professional philosophy — is
quite neutral as between the various kinds of analytic activity. In particular,
economic theory in the traditional sense is not ruled out. And it makes precious
little difference to the practical work of a theorist whether Mr. Methodologist
tells him that in investigating the conditions of a profit maximum he is in-
vestigating 'meant meanings’ of an 'ideal type’ or that he is hunting for 'laws’
or 'theorems.’ As a matter of fact, in the epoch of his ripest thought, M.
Weber was not unwilling to declare that, so far as his almost complete igno-
rance of it enabled him to judge, he saw no objection of principle to what eco-
nomic theorists actually did, though he disagreed with them on what they
thought they were doing, that is, on the epistemological interpretation of
their procedure . 16

Indeed, he was not really an economist at all. In an atmosphere not dis-
turbed by professional cross-currents, it would be the obvious thing to label
him a sociologist. His work and teaching had much to do with the emergence
of Economic Sociology in the sense of an analysis of economic institutions, the
recognition of which as a distinct field clarifies so many 'methodological’ issues.

So far we have been dealing with a specifically German phenomenon that
grew out of specifically German roots and displayed typically German strengths
and weaknesses. Of course, some of the factors that account for the rise of
the German historical school were ubiquitous. Moreover, in every country
there were other factors that favored parallel movements — Comtism was one
of the most important of these. Finally, the work of the German school was
far too important to remain without influence on the course of things in other
countries. Nevertheless, it is important to realize that these parallel move-
ments, though similar, were yet essentially different; that they owed less to

16 It was with this motivation that he invited two strong partisans of economic theory,
in the Marshallian sense, to write the 'theory' and the sketch of the history of doc-
trines and methods for his Grundriss der Sozialokonomik. Again, this is relevant in
view of the fact that he is sometimes invoked as a champion of institutional eco-
nomics. [The two strong partisans of ‘theory’ were Joseph A. Schumpeter and Friedrich
von Wieser. The sketch of the history of doctrines and methods was the E pochen der
Dogmen- und Methodengeschichte of which this History is, in a sense, an outgrowth.!

820 IV: FROM 1870 TO I914 AND LATER

the German example than one might be tempted to suppose; and that, with
the possible exception of American Institutionalism, none of them was strong
enough to cause a break in traditions and to redirect research, partly because
that tradition was stronger and more ably defended.

In Italy, the German development was sympathetically noticed by some, as
was the German Sozialpolitik. But neither influence availed to upset the exist-
ing patterns. Italian economics had always been strong on the 'factual 7 side
and continued to be so. Nobody seems to have thought of fighting over it.
Although some leaders — such as Einaudi — did some or most of their work in
the field of economic history, it would hardly occur to anyone to speak of an
Italian historical school in the sense of a distinct scientific party.

The same holds true for France. The great tradition of French historiogra-
phy continued, of course, and, following the interests of the times, economic
history received additional attention. Some economists did historical work. I
shall mention only Levasseur . 17 Later on some work was done on lines sug-
gestive of those of Sombart, for example, by Henry See. And those brilliant
historians or historical sociologists, like Hippolyte Taine or Alexis de Tocque-
ville before him, whose works have become 'required reading 7 for any culti-
vated person, painted to a considerable extent in economic colors. Nothing of
this spelled any new departure for professional economics . 18 But Simiand’s
work and methodological creed did. Though he owed nothing to German in-
fluence — if his work had any source in the past, that source was Comte — his
views of traditional theory, which his theorie experimentale was to replace,
and his arguments against it (speculative castles in the air and so on) were
pretty much those of Schmoller. Only, no group has as yet rallied to his
standard . 19

17 Pierre Emile Levasseur’s (1828-1911) most important work was: Histoire des
classes ouvrieres en France depuis la conquete de Jules Cesar jusqu’d la Revolution
(1859) and Histoire des classes ouvrieres en France depuis 1789 jusqu’d nos jours (1867;
the second editions of both works add the words et de l’ industrie) . But it did not
occur to him to secede — on methodological or any other grounds — from the group
mentioned below in Chapter 5, as is abundantly clear from his textbook.

18 Some readers might miss the name of the Belgian economist Emile de Laveleye
(1822-92), who was a man of many merits and in his time enjoyed a well-deserved in-
ternational popularity that has kept his name alive. But the only reason for making
him a member either of the German or of a non-existent French historical school is
that he wrote a book De la Propriete et de ses formes primitives (1873), a historico-
ethnological analysis of private property. His elementary textbook (Elements d’econo-
mie politique, 1882) is neither distinguished nor distinctive and shows that so far as
analytic technique is concerned he did not stray far from the beaten path (there is an
English translation with an introduction by F. W. Taussig, 1884).

19 Frangois Simiand (1873-1935) formulated his methodological creed in La Methode
positive en science economique (1912), which seems to me to come nearest of all that
has been written in Europe on questions of procedure to represent the institutionalist
view. Criticism, made less effective than it could be by the large element of misunder-
standing that enters into it, and methodological considerations, which in their positive
suggestions are often very valuable, also claim a large space in the only other work of

SOZIALPOLITIK AND THE HISTORICAL METHOD 021

[(e) Economic History and Historical Economics in England .] Turning to
England, we first notice the quality and quantity of the work done by
economic historians that rose to new levels during the period and laid the
foundations for the still greater achievements in our own time. The per-
formance of Cunningham may serve as an example. 20 He did, and felt him-
self to be doing work that was and always had been essential to 'economic
science’ which is ‘primarily analytic’ as he put it ( Growth of English Industry
and Commerce , vol. i, p. 18). He wished to see it used by theorists and he
asserted its claim to a place in the economist’s curriculum. But beyond express-
ing the belief that the conceptual apparatus of analytic economics is not read-
ily applicable to conditions anterior to the capitalist epoch, he nowhere indi-
cated a desire to see it replaced by generalizations proceeding from historical
research.

That claim on behalf of economic history did not meet any appreciable re-
sistance. Several economists, such as Rogers, 21 were primarily economic his-

his I am going to mention: Le Salaire, revolution sociale et la monnaie (3 vols., 1932).
This work shows his methods in action and is unique in the infinite care bestowed
on working out, before the reader’s eye, every step of his analysis. Though the results
are not, perhaps, wholly encouraging and could, such as they are, have been arrived at
in a less laborious manner, it is precisely to that care that the work owes its very con-
siderable significance — it should really be more widely known. Is it unfair to add, to so
short a notice, a point which may thereby acquire undue importance? Professor Simiand
(op. cit., vol. 11, pp. 544 et seq.) very properly holds up to scorn the minimum-of-
existence theory of wages, which is in fact an excellent example of bad workmanship
(though really it should not be invoked in a criticism of modern theory). But he over-
looks the fact that the faultiness of this theory proves nothing against any kind of
method except that it is not foolproof. And he further overlooks that this particular
miscarriage occurred precisely because the economists of the eighteenth and the begin-
ning of the nineteenth century followed the method that Professor Simiand advocates:
they ascertained what then was a broad fact — viz. that workmen as a rule did not earn
more than a bare subsistence — fitted a hypothesis to it, found it verified, and there
they were. Had they been better theorists, they could not possibly have put such im-
plicit faith in that fact.

20 William Cunningham (1849-1919) was a very prolific writer. For our purposes, it
suffices to mention his great work, The Growth of English Industry and Commerce
During the Early and Middle Ages (1st ed. 1882, greatly improved 5th ed. 1910-12),
An Essay on Western Civilization in its Economic Aspects (1898-1900), and his Prog-
ress of Capitalism in England (1916).

It seems unjustifiable to pass by such meritorious work as Leone Levi’s History of
British Commerce . . . (1872, 2nd ed. 1880) or Arnold Toynbee’s (1852-83) famous
Lectures on the Industrial Revolution in England (posthumously published in 1884),
which remained the standard work on the subject until they were replaced by Mantoux’s
book (La Revolution industrielle au XVIII e siecle, 1905). But it is impossible within
the compass of this sketch to do justice to historical work as such, and listing names
and titles would serve no useful purpose. This is also the reason why the reader will
find no reference to the leading economic historians of the last thirty years.

21 J. E. Thorold Rogers (1823-90), twice professor of economics in Oxford. His main
performance was his History of Agriculture and Prices in England, 1259-1793, seven

822 IV: FROM 1870 TO 1914 AND LATER

torians so far as their research was concerned. Alfred Marshall was a better
historian than most of those who later attacked his economics as unhistorical,
speculative, and so on. His Industry and Trade alone suffices to prove that,
though the whole extent of his historical acquirements was not known outside
of his circle until the publication of Keynes’s biographical essay.

Under these circumstances there was evidently no room for a historical
school in the sense of a scientific party committed to fighting for a distinctive
program. As a matter of fact there were but the merest fragments of one. There
had been a ‘forerunner/ Jones . 22 And later on, at the time of the ascendancy
of the Schmoller school in Germany, some English economists professed al-
legiance to more or less similar principles. The most important men to re-
member are Ashley, Ingram, and Cliffe Leslie . 23

But though all three of these men attracted attention and made their marks,
none of them succeeded in forming a group, let alone a militant one. This

volumes, of which the first appeared in 1866. His more popular Six Centuries of Work
and Wages (1884) is more widely known, however. He also prepared an edition of the
Wealth of Nations , wrote a not very brilliant Manual of Political Economy for Schools
(1868), and other things. He devoted much energy to the propagation of Cobden-
Bright ideas. His reputation as a scholar, however, rests wholly on the History.

22 Richard Jones (1790-1855), who, among other things, was Malthus’ successor as
professor in Haileybury, was a vital personality of strong convictions. His dislike of Ri-
cardian economics took the form of vigorous protests against hasty generalization and
of an advocacy of patient factual research, the results of which were eventually to re-
place the provisional structures of existing ‘systems.’ And he gave an example of what
was in his mind in the first and only part completed — on Rent — of his Essay on the
Distribution of Wealth and the Sources of Taxation (1831). Thus he does not badly
fit the role that historians of economics assigned to him, although it is not easy to be
sure what either his programmatic pronouncement or his example amounted to. Some
of the objections leveled at Ricardo were not well taken; but it is more important
that many of them were such as any theorist might level at any other theorist, e.g. the
objection, anticipated and refuted by Ricardo himself, that the latter’s law of dimin-
ishing returns in agriculture was invalidated by the fact of technological progress.
Moreover, in his discussion of ‘Primitive Political Economy’ (mentioned above. Part 11,
ch. 7, sec. 3), he argues from the standpoint of the opinions of his time without dis-
playing any sense of the historical relativity of doctrine. Still, both the pronouncements
and the example do suggest historical school ideas. His lectures and essays, stimulating
reading, have been edited by W. Whewell under the title Literary Remains (1859).

23 William James Ashley (1860-1927), unquestionably the strongest personality of the
three, professor at the University of Birmingham and the academic leader in Joseph
Chamberlain’s protectionist movement, conformed more than any other English econ-
omist to the German professional type of that time. Having in his early years experi-
enced the influence of economic and legal historians (Toynbee and Maine, in particu-
lar, and later on the influence of the Germans), he ran true to that type in his works —
such as his excellent industrial monographs and his very successful Introduction to Eng-
lish Economic History and Theory ... (2 vols., 1888 and 1893) — as well as in his
methodological pronouncements and in his sympathies with Sozialpolitik and economic
nationalism. But he had absorbed enough from his English environment to be proof
against the crudenesses of his prototype: nobody who lived in England could possibly

SOZIALPOLITIK AND THE HISTORICAL METHOD 823

was so even in the seventies. Later on, when Marshall’s leadership asserted it-
self, the majority of economists (and practically all the talent) flocked to his
standard. Some opposition there was, hut it was only in part methodological in
nature. We may mention Hobson and the Webbs . 24 The modest trickle of

misunderstand economic theory so completely as Schmoller had done in the early part
of his career.

John Kells Ingram (1823-1907) was a quite different sort of man. He commanded a
much wider cultural background (he was a philosopher and poet, and was in 1866 ap-
pointed Regius professor of Greek in Dublin, and also wrote on Shakespeare and Tenny-
son) but he can hardly be said to have done any economic research at all. His History
of Political Economy (first in the Encyclopaedia Britannica, 1885, independently pub-
lished, 1888; latest edition, with a supplementary chapter by W. A. Scott, 1915) is
conclusive proof both of his wide philosophical (especially Comtist) and historical eru-
dition and his inadequate command of technical economics. The latter fact made it
easier of course for him than it would otherwise have been to talk glibly about the
New Economics to which the future belonged (compare, e.g., his address at the Dub-
lin meeting of the British Association for the Advancement of Science, 1878, on ‘The
Present Position and Prospects of Political Economy’) and with which his name was
associated on the strength of programmatic pronouncements. High sentiment and moral
tone — in which Marshall was soon to compete — protest against isolating economics
from the work of other social sciences, emphasis . upon (Comtist) evolution and histor-
ical relativity, induction vs. deduction, were the main points that appealed to the
public.

Thomas E. Cliffe Leslie’s (1826-82) name survives not because of his scholarly work
of the ‘descriptive’ kind — though some of it is of high grade, such as, e.g., his work
on Irish, English, and European land systems — or because of his papers, some of
them forceful and brilliant, on current questions of policy, but because of his advocacy
of the historical method, which was both judicious and effective and did not fail to
impress. The two papers that present his methodology or, as he preferred to call it,
philosophy of the social sciences (reprinted in his Essays in Political and Moral Phi-
losophy, 1879; a 2nd ed., that left out some but added others, appeared posthumously)
read much like a reformulation of the Schmollerian program; in view of the dates of
their first publication (1876 and 1879) this should not induce us to deny them origi-
nality. And if we consider certain unguarded statements made by theorists, such as
Senior, we may even discover some merit in the otherwise none too startling assertion
that economists must always start from and verify deductions by facts.

24 John A. Hobson’s (1858-1940) feud with Marshallian economics was not primarily
methodological. However opposed to the theories of his contemporaries, he always
fought them by theories without challenging their methodological credentials. All the
same, there was a methodological aspect to that antagonism. For instance, Hobson’s
insistence upon what he considered to be irrational behavior of consumers and upon
the institutional factors that, rather than ‘rational choice,’ determine this behavior
really implies a research program of the historico-sociological sort. This is important to
realize because it supplies one of the links between Hobson and American institu-
tionalism.

Beatrice (1858-1943) and Sidney Webb (1859-1947) have to be mentioned in this
connection, first, on account of the nature of their research, which contributed sub-
stantially to the achievement of English economic historians (see especially. History
of Trade Unionism, 1894, and the Manor and the Borough, 1908); and second, on

824 iv: FROM 1870 TO 1914 AND LATER

controversial literature need not detain us further. But we must record the
excellent performance of }. N. Keynes that settled most of these methodolog-
ical issues in a spirit of judicial reasonableness and to the satisfaction of the
profession. For two decades this book held a well-earned position of author-
ity. Its perusal may be recommended even at this distance of time because of
its merits as well as of its success . 25

[The manuscript of this chapter stops at this point. The section on American Insti-
tutionalism was apparently never written.]

account of the fact that they lent the support of their great influence on a large section
of opinion to methodological views akin to those of the German historical school. This
at least was the impression I gathered from lectures on method delivered by S. Webb
at the London School of Economics.

25 John Neville Keynes (1852-1949; father of Lord Keynes), Scope and Method of
Political Economy (1st ed. 1891). Of those minor yet notable contributions that were
overshadowed by his success, we may however mention those of Bagehot and Cairnes.
Walter Bagehot’s vigorous pen repeatedly touched methodological subjects. Without
questioning the validity of Ricardian procedure, he was inclined to limit its application
to the cultural pattern of capitalist business and to look upon historical research as its
natural complement. See in particular his essay on ‘The Postulates of English Political
Economy,’ republished in Economic Studies (1880).

John E. Caimes’s Character and Logical Method of Political Economy (lectures de-
livered 1856, publ. 1857) was never appreciated according to its merit, either at the
time or later, because, like Senior before him, he used the term Political Economy to
designate what most people always considered as a small part of either Political Econ-
omy or Economics, viz. the logical scheme of economic rationality commonly known
as ‘pure theory.’ His own works simply prove that he was far from believing that this
logical schema (which, as will be remembered, does not even constitute the whole of eco-
nomic theory in our sense) comprises all our knowledge about economic affairs. But
by virtue of a misunderstanding, for which the blame rests with him in part, he was
later on, e.g., by Ingram and Schmoller, represented as an uncompromising advocate of
‘deduction’ who had no use for any factual research. However, his analysis of the na-
ture of that schema was a real contribution. Its purely hypothetical character, its un-
realistic assumptions, the width of the gulf that separates it from the observable eco-
nomic phenomenon, the difficulty of verifying its component propositions by statistical
or other observational evidence (he even spoke of the impossibility of establishing or
refuting ‘economic laws’ by such evidence), all this was exhibited more clearly than
ever before, though he stopped short of the obvious conclusion that such a schema can
never yield any ‘laws’ but only serve in an instrumental capacity.

CHAPTER 5

The General Economics of the Period: Men and Groups

1. Jevons, Menger, Walras '

2. England: [The Marshallian Age]

[(a) Edgeworth , Wicksteed, Bowley, Carman, and Hobson]
[(b) Marshall and His School ]

3. France

4. Germany and Austria

(a) The Austrian or Viennese School

(b) The Elder Statesmen

5. Italy

(a) The Elder Statesmen

(b) Pantaleoni

6 . The Netherlands and the Scandinavian Countries

7. The United States

[(a) The Men Who Prepared the Ground]

[(b) Clark, Fisher, and Taussig ]

[(c) A Few More Leading Figures]

S. The Marxists

[(a) Marxism in Germany]

[(b) Revisionism and the Marxist Revival]

1. Jevons, Menger, Walras

The call of social reform created a new focal point for the practical interests
of the economics profession; but though it influenced tone and direction, it
did not affect the technique of analytic work. The historical school meant in-
deed to revolutionize the methods of the science; but this revolution ended in
compromise even in Germany. So far as these influences went. General Eco-
nomics remained, in scope and method, substantially what it had been before.
But its analytic core, for which the term Value and Distribution became in-
creasingly popular, experienced a revolution of its own which was to subside
into a typical Classical Situation around 1900 and constitutes, in our field, the
third great event of that period. According to a familiar tradition from which it
is convenient to start, this revolution centered in the rise of the marginal
utility theory of value that is associated with the names of three leaders: Jevons,
Menger, and Walras. We pause to salute them. 1

Throughout his modest career as a civil servant and teacher, William Stanley
Jevons (1835-82) never made a mark that was at all commensurate to the im-
portance of his achievement. During his life he was better known for his
writings on money and finance and on other practical questions of current

1 Forerunners will be mentioned in eh. 6, sec. 3, below.

825

826

IV: FROM 1870 TO 1914 AND LATER

interest — even for his sunspot or harvest theory of business cycles (see below,
ch. 8) — than for the performance that was to make him immortal. In Eng-
land, moreover, his memory was overshadowed by the strong leadership of
Marshall, who consistently discounted the ‘Jevonian revolution.’ There are
many reasons for this. Jevons left hardly any personal pupils, a fact that was
in turn due not only to lack of opportunity (he never taught in a strategic
position) but also to his amiable modesty or lack of assertiveness (which was
quite compatible with the ‘compensatory’ habit of making large claims of
revolutionary novelty for his ideas). But it is also true that his work in eco-
nomic theory lacks finish. His performance was not up to his vision. Brilliant
conceptions and profound insights (particularly his championship of mathe-
matical modes of thought, his theory of value, his theory of capital and inter-
est) were never properly worked out; they were stated as apergus and so in-
termingled with old stuff as to look almost superficial. Marshall’s definitely un-
generous attitude toward him did the rest. In England, therefore, he never
got his due. In particular his originality was never recognized as it should have
been. For he was without any doubt one of the most genuinely original econo-
mists who ever lived. In very few otljer cases (John Rae is another) is it so
difficult to speak of ‘roots’ as it is in the case of Jevons. He heard of his fore-
runners only after the event, which, in his particular case, was quite excusable,
especially since he gave generous credit to those whom he did discover later
on. Perhaps he owed more to Mill than he knew: he harbored a strong aver-
sion to Mill’s Principles, which he had to use in his teaching; but Mill’s ter-
giversations, which are such excellent targets for rifle practice, may neverthe-
less have taught him many things. Barring this, however, he seems to have
built the essentials of his teaching from bricks of his own manufacture. The
bulk of his work in pure theory is contained in his Theory of Political Econ-
omy (1st ed. 1871; the date that fixes his priority as regards the concept of
the ‘final degree of utility’ is however 1862, when he read a paper, ‘Notice
of a General Mathematical Theory of Political Economy,’ at the Cambridge
meeting [section F] of the British Association for the Advancement of Science);
the bulk of his work in the fields of money and cycles has been assembled by
Professor Foxwell in a volume entitled Investigations in Currency and Finance
(1884), study of which no economist should neglect. In addition, Jevons was
as much a logician as he was an economist. I mention his Principles of Science
(1874), a work of truly Jevonian force and originality which has not, so it seems
to me, received the recognition it deserves. A bibliography is appended to his
Letters and Journal, edited by Mrs. W. S. Jevons in 1886. Mrs. and Professor
H. S. Jevons contributed a brief article on his life and work to Econometrica,
July 1934. 2

2 This is perhaps my best opportunity to mention the work of a man that is forgot-
ten now but drew praise from both Jevons and Marshall: the Plutology (Melbourne,
1863; London, 1864) by W. E. Hearn, who taught in the University of Melbourne.
The book has failed to impress me greatly. But in parts it does read curiously Jevonian.
The date of its publication proves, however, Jevons’ independence as regards the utility
aspect.

GENERAL ECONOMICS: MEN AND GROUPS

Carl Menger (1840-1921) was, after a brief career in the civil service, ap-
pointed to one of the two chairs of Political Economy at the faculty of law
of the University of Vienna, which he held for the rest of his official career
(1873-1903). This location was by no means ideal, both because there was no
local tradition in the subject, let alone one that commanded the attention
of the world, and because the future lawyers and civil servants who formed
his audience were but mildly interested in what he had to say — if you were well
up in civil and public law, you could afford to flunk the economics examina-
tion. But nothing daunted, this hickory of a man asserted himself eventually,
found personal pupils of his own intellectual caliber, and — though not with-
out an embittering period of strife — founded a school, which displayed vi-
tality and coherence and, though lacking all the means and advantages that
usually condition such achievement, exerted international influence until it
was (temporarily?) dispersed in the i93o’s. His fundamental principle of
marginal utility was his own — subjectively — though Jevons holds, of course,
priority of rediscovery. And so were, both subjectively and objectively, many
of the theorems that occur in the course of its elaboration. He was a careful
thinker who rarely slipped, if ever, and his genius stands out only the more
impressively because he lacked the appropriate mathematical tools. The ulti-
mate roots of his teaching were in that German theoretical tradition which had
reached peaks in Hermann and Thiinen. But the influence of Smith, Ricardo,
and especially J. S. Mill is also unmistakable. With Menger, as with Jevons,
it was their teaching which he meant to revolutionize. Precisely because of this
they were, in a sense, his teachers. His Grundsdtze der Volkswirtschaftslehre
(ist-ed. 1871; the 2nd ed. 1923, the work of his old age, adds nothing essen-
tial) as well as his other writings, some of which will be mentioned later, were
republished (1933-6) in four volumes by the London School of Economics.
The Introduction by F. A. von Hayek to these Collected Works (vol. 1) is
the best source of information on the man and the thinker. See also H. S.
Bloch, ‘Carl Menger/ Journal of Political Economy , June 1940. [An English
translation of the Grundsdtze, Principles of Economics , with introduction by
F. H. Knight was published in 1950.]

As has been emphasized before, economics is a big omnibus which con-
tains many passengers of incommensurable interests and abilities. However,
so far as pure theory is concerned, Walras is in my opinion the greatest of all
economists. His system of economic equilibrium, uniting, as it does, the qual-
ity of ‘revolutionary’ creativeness with the quality of classic synthesis, is the only
work by an economist that will stand comparison with the achievements of
theoretical physics. Compared with it, most of the theoretical writings of that
period — and beyond — however valuable in themselves and however original
subjectively, look like boats beside a liner, like inadequate attempts to catch
some particular aspect of Walrasian truth. It is the outstanding landmark on
the road that economics travels toward the status of a rigorous or exact science
and, though outmoded by now, still stands at the back of much of the best
theoretical work of our time. Unfortunately, Walras himself attached as much
importance to his questionable philosophies about social justice, his land-

828 IV: FROM 1870 TO 1914 AND LATER

nationalization scheme, his projects of monetary management, and other things
that have nothing to do with his superb achievement in pure theory. They
have cost him the goodwill of many a competent critic, and must, I imagine
try the patience of many of his readers. In any case, the tribute above must
be understood to refer to his pure theory alone.

Marie Esprit Leon Walras (1834-1910) was a Frenchman and not only by
virtue of his birthplace. Tie style of his reasoning and the nature of his
achievement are characteristically French in the same sense in which Racine’s
plays and J. H. Poincare’s mathematics are characteristically French. So are all
the roots of his achievement. He emphasized himself the influence of his
father Auguste Walras and of Cournot. But, as has been pointed out before,
we must add that of Say, his true predecessor. And behind the figure of Say
there looms the whole French tradition — Condillac, Turgot, Quesnay, Bois-
guillebert — however much or little he may have consciously absorbed from it.
He paid conventional respect to A. Smith. The rest of the great Englishmen
meant little to him.

His career displays the typical inability of the born thinker to master the
practical problems of personal life. He was much too original to be- a success
at his schools. His training as a mining engineer, to which he owed his mathe-
matics, failed to gain him a living. He turned to free-lance journalism, develop-
ing his various ideas about social reform— the ideas typical of the French
middle-class radical of his time — but he made no mark. 3 A lucky chance, how-
ever, rescued his genius from the danger of going to waste. In i860, he at-
tended an international congress on taxation in Lausanne, where he read a
paper that was well received. In the audience was M. Louis Ruchonnet, who
later became chief of the department of education of the Canton de Vaud and,
in 1870, founded a chair of political economy at the faculty of law of the
University of Lausanne which he offered to Walras. Having found the anchor-
age he needed, Walras went to work and remained at work until the end.
But his creative period roughly coincides with his tenure of professorial office
(1870-92). All of his work that counts (and some material that does not), most
of it previously published in memoirs and articles (beginning in 1873), was
eventually consolidated into three volumes: Elements d’economie politique
pure (1st ed. 1874-7; 5 ^ definitive ed. 1926); Etudes d’economie politique
appliquee (1st ed. 1898; 2nd ed. edited by Professor Leduc, 1936); Etudes
d’economie sociale (1st ed. 1896; 2nd ed. edited by Leduc, 1936). The first
volume ( legons 5-34) contains the great achievement. The second volume
contains supplements, some of which are of the first order of importance,
especially those on money and credit. The third volume is, from our stand-
point, of little interest. See his 'Autobiography’ in Giornale degli Economisti,
December 1908; his 'Bibliography’ in Revue du droit public et de la science
politique, May and June 1897; his correspondence with Jevons in Journal des
economistes, June 1874; William Jaffe, ‘Unpublished Papers and Letters of

3 He acted, however (1866-8), as editor of Le Travail, an organ of the co-operative
movement, to which he contributed currently.

GENERAL ECONOMICS: MEN AND GROUPS 829

Leon Walras/ Journal of Political Economy, April 1935; and J. R. Hicks,
'Leon Walras,’ E conometrica, October 1934.

At the present time, when it would be hard to find a theorist who does
not acknowledge Walras’ influence, the statement will read strange that he
formed no personal school. But the students of law who had the opportunity
of listening to him at Lausanne were hardly accessible to his scientific mes-
sage: his professorship brought him peace and security but very little influence.
And his professional contemporaries were mostly indifferent or hostile. In
France, practically no recognition was extended to him during his lifetime,
though he found a few followers, such as Aupetit. In Italy, Barone was an
early convert. Pantaleoni too was among the first to understand the impor-
tance of his work. It was through Pantaleoni, I believe, that he found his
brilliant pupil and successor, Pareto, 2 * 4 who was the man to found what under
the circumstances became a Paretian rather than a Walrasian 'school of Lau-
sanne.’ As a coherent school, this was, however, confined to Italy or almost so.
In England, the parallel and much more powerful teaching of Marshall ex-
cluded any direct influence until Professor Bowley presented the gist of the
Walras-Pareto system in textbook form ( Mathematical Groundwork, 1924).
The Germans (including the Austrians) saw nothing in Walras’ work but the
Austrian doctrines dressed up in the particularly repellent garb of mathematics.
In the United States, Walras acquired two first-rank followers, Fisher and
Moore, but was practically ignored by the rest of the profession. All along he
had had stray admirers, of course. But it was only in the 1920’$, that is to say,
long after his ideas had won out and a decade or so after his death, that he
got his due. 'If one wants to harvest quickly, one must plant carrots and salads;
if one has the ambition to plant oaks, one must have the sense to tell oneself:
my grandchildren will owe me this shade’ 5 — so he once wrote to a friend. 6

Without going for the moment into the question what the Jevons-Menger-
Walras 'revolution’ amounted to or whether or not it succeeded in creating a
new engine of analysis, we shall now proceed with our survey of men and
groups in order to get a provisional idea of the lay of the land in the general
economics of that period. As in Chapter 4 of Part in, this survey will be car-
ried out by countries.

2. England: [The Marshallian Age]

Before 1885, the year of grace in which A. Marshall delivered his Inaugural
Lecture in Cambridge, the English situation may be characterized like this.
There was plenty of good current work, factual in particular, such as New-

4 Concerning Walras’ Influence on Aupetit, Barone, Pantaleoni, and Pareto, see
below, secs. 3 and 5.

5 Quotation from the Preface to Professor Etienne Antonelli’s L’Sconomie pure du
capitalisme, 1939. [Translation by J. A. S.]

6 [The reader is reminded that J. A. S. intended to have all the biographical sketches
(with their many references) printed in small type so that they could be treated vir-
tually as footnotes.]

830 IV: FROM 1870 TO 1914 AND LATER

march’s; there was no lack of occasional sparks such as are to be found in
the writings of Bagehot or Cliffe Leslie; there was competent teaching, de-
riving from J. S. Mill, Cairnes, and Fawcett, worthily upholding the flag. But
there was nothing out of the common except the message of Jevons, and this,
so far as theory was concerned, was as yet not more than a voice crying in a
wilderness of dead wood. An after-dinner speaker of 1876 admirably expressed
a very general feeling 1 when he said that, though much remained for econo-
mists to do in the way of development and application of existing doctrine,
the great work had been done. It was Marshall who changed all that and led
out of the valley on to a sunlit height In England, the period is emphatically
the Marshallian Age. His success was as great as A. Smith’s, if account be
taken of the facts that a science must inevitably grow less accessible to the
general public as its techniques develop and that Marshall had no winning
political horse to back, such as free trade had been in its prime.

[(a) Edgeworth, Wicksteed , Bowley, Cannan, and Hobson .] Marshall’s fig-
ure overshadowed not only those English economists who continued to dwell
in the post-Millian stratum of analysis, such as Sidgwick and Nicholson, though
neither was without merit; 2 but it also overshadowed Edgeworth and Wick-
steed, who indeed lacked Marshall’s range of comprehension, both of histor-
ical and contemporaneous fact and also his personal force but who were his
intellectual equals within the compass of the theorist’s craft.

Francis Ysidro Edgeworth (1845-1926), one of the successors of Senior in the
political economy chair at Oxford (1891-1922) and editor or co-editor of the
Economic Journal (1891-192 6), descended from a family of the Anglo-Irish
gentry and was, in everything except sports, a typical product of a classical
Oxford education. Two masters have drawn pictures of the man and the
thinker — Keynes in the Economic Journal (March 1926; the piece is reprinted
in Essays in Biography, ^ pp. 267 et seq.) and Bowley in Econometrica (April
1934) — which I must be content to refer. But a few points must neverthe-
less be mentioned here in order to place him for us. First, I mention his utili-
tarianism, which strongly asserted itself from the beginning (New and Old
Methods of Ethics, 1877) and looked so incongruous in a man whose mind
was nothing if not ‘cultured’; it did much to keep alive — quite unnecessarily- —

1 See W. S. Jevons, ‘The Future of Political Economy,’ Fortnightly Review, No-
vember 1876.

2 The only work by Henry Sidgwick (1838-1900) that has to be mentioned here, is
his Principles of Political Economy (1883, 3rd ed., 1901). Substantially in the Millian
tradition, it improves upon it by the neatness of its conceptualization and offers many
valuable suggestions even where, as in the theory of international values, it fails to
follow them up or to follow them up correctly. The treatment of money and interest
deserves particular notice. His old-fashioned method of hunting for the meaning of
words has been mentioned already.

Joseph Shield Nicholson (1850-1927), who held the Edinburgh chair from 1880 to
1925, did excellent work on money but at the moment we are concerned only with his
Principles of Political Economy (1893, 1897, 1901). Entirely unoriginal and dwarfed
by Marshall’s performance, the work was yet a creditable achievement.

GENERAL ECONOMICS: MEN AND GROUPS

831

the unholy alliance between economics and Benthamite philosophy on which
I have commented repeatedly. But let me also repeat that in his case, as in
that of Jevons, we can leave out the utilitarianism from any of his economic
writings without affecting their scientific contents. Second, Edgeworth's name
will stand forever in the history of statistics: I do not mean primarily his
work on Index Numbers (see below, ch. 8, sec. 4) but his work on statistical
methods and their foundations that centered in his Generalized Law of Error.
Third, there is the long series of his papers on economic topics, the powerful
originality of some of which, hidden as it was by quaint peculiarities of pres-
entation (that not everyone will find as delightful as I do myself), has never
except by a few been adequately appreciated. In actually novel contributions
(indifference curve, contract curve, decreasing returns, general equilibrium, and
so on) to the analytic apparatus of economics, they amount to as much as,
or more than , do Marshall’s Principles. Then, fourth, why was this great figure
so entirely overshadowed by Marshall? The answer — which is interesting from
the standpoint of the sociology of science and in particular of the question:
what succeeds, and how and why? — seems to be this: Edgeworth lacked the
force that produces impressive treatises and assembles adherents; amiable and
generous, 3 he never asserted himself in any claims of his own; he was over-
sensitive on the one hand, overmodest on the other; he was content to take
a backseat behind Marshall whom he exalted into Achilles; hesitating in con-
versation, absent-minded to a pathological degree, the worst speaker and lec-
turer imaginable, he was personally ineffective — unleaderly is, I think, the
word. His Papers Relating to Political Economy (3 vols., 1925) together with
Mathematical Psychics (1881, London School Reprint, 1932) contain prac-
tically all his work in economic theory. Edgeworth 7 s Contributions to Mathe-
matical Statistics have been summarized by Professor Bowley in a pamphlet
published under the auspices of the Royal Statistical Society in 1928.

I wish that space permitted me to do justice to the personality of Philip
Henry Wicksteed (1844-1927) as it .radiated upon me, in 1906, during an
hour's chat on the lawn in front of his house at Wantage — his repose that
owed nothing to callousness, his benevolence that was not weakness, his sim-
plicity that went so well with his refinement, his unassuming modesty that
did not lack dignity. As it is, I can merely record that this theologian, who
was a lecturer on Dante, stood somewhat outside of the economic profession
— one of the reasons why his work, particularly excellent on the pedagogical
side, did not leave a more discernible mark. Is it believable that his most
original piece of work An Essay on the Co-ordination of the Laws of Distribu-
tion (1894, London School Reprint, 1932) went almost unnoticed, that two
copies only were sold, and that even today Professor Stigler is the only econo-
mist I know to rate it at its true value? His Common Sense of Political Econ-

3 1 think that everyone who knew Edgeworth will approve of the epithet ‘generous.'
But his generosity was of a peculiar kind. It all went in the direction of Marshall and
of the Ricardo-Mill inheritance. Alas for human nature! He was distinctly ungenerous
to the Austrians, to Walras, to Wicksteed, and, for reasons I have not been able to
understand, to H. L. Moore.

832

iv: FROM 1870 TO 1914 and LATER

omy . . . (1910; new ed. together with Selected Papers and Reviews, intro-
duction by Professor Lionel Robbins, 2 Vols., 1933) contains several original
points and is far more than a popularization of then established doctrines.
Particularly in matters of foundations and of critical elucidation of concepts
(for example, in connection with the theory of dimensions which he did much
to advance in an article, ‘On Certain Passages in Jevons’ Theory of Political
Economy’ in the Quarterly Journal of Economics, April 1889), his ideas were
much ahead of his time. The general complexion of his system is Jevonian —
he was in fact the only Jevonian theorist of note — but he shook off so many
old things that still stuck to Jevons’ exposition and added so many corrections
and developments — partly under Austrian influence — that he may be said to
have worked out something that, though of course a revision of the marginal
utility system, was his own.

Wicksteed was independent of Marshall rather than an opponent. Equally
independent and still less of an opponent was Professor Bowley at the London
School of Economics, the first part of whose career falls within the period
under survey and who then developed what may be termed his scientific style,
which anticipated the statement of scope in the constitution (section 1) of the
later Econometric Society: ‘The advancement of economic theory in its re-
lation to statistics and mathematics.’ This program that Bowley was to carry
out in a long series of publications was then novel and defined a distinctive
position. But it attracted little notice at the time, the less so because Bowley
did nothing to promote it by way of methodological declarations of policy.
Another ‘independent,’ this one more of an opponent, was a vital teacher,
also at the London School, and at that time better known both to the pro-
fession and to students, Cannan. 4 There were others whom we ought to, but
cannot afford to, mention. Also, there was opposition, and not only from
those who kept to older forms of thought. There were, of course, ‘heretics’
like Hobson. 5 More important, there were anti-theorists, like Sidney Webb,

4 The readers of this book know Edwin Cannan (1861-1935) already from his His-
tory of the Theories of Production and Distribution . . . from 1776 to 1848 (1893)
to which reference has been made repeatedly in Part in. This work, his editions of
Adam Smith, his History of Local Rates in England (1896) constitute his main schol-
arly achievements. But nobody can peruse his lively short tracts on money and mone-
tary policy without pleasure and profit. This of course entirely fails to do justice to
the teacher and the man, his common sense, his lovable outspokenness, the strength
of his convictions — virtues that, from standpoints other than our own, more than
compensate for lack of analytic refinement.

5 John A. Hobson (1858-1940), who had the good fortune to establish himself as
an archheretic in the heyday of Marshallian supremacy and to survive into a. time in
which this had become a badge of honor, was in many respects a very interesting man
. — vital, versatile, and aggressive. He was an educated man — in the sense of having had
a classical education — and an emotional radical, a combination that is responsible for
much of the English social-science literature of that time. In economics he was self-
taught in a wilful way that made him both able to see aspects that trained economists
refused to see and unable to see others that trained economists took for granted. He
could never understand why the professionals did not take to his message and, like

GENERAL ECONOMICS: MEN AND GROUPS

a yi-iD

GENERAL ECONOMICS: MEN AND GROUPS 833

whom anything like analytic refinement moved to scorn. 6 But there was no
opposition from anyone of comparable stature as an analyst: much more than
Ricardo had ever done, Marshall actually commanded the scene. The great
master who was also a masterful man — to some he looked pontifical — made
almost the whole of the rising generation of English economists his pupils
and followers.

[(b) Marshall and His School .] Marshall created a genuine school, the mem-
bers of which thought in terms of a well-defined scientific organon and supple-
mented this bond by strong personal cohesion. Professor Pigou, his successor
in the Cambridge chair; Professor Robertson, tvho succeeded Pigou; and Lord
Keynes — to mention only a few of the most familiar names — were formed by
his teaching and started from his teaching, however far they may have traveled
beyond it. After 1930, Keynes himself and most of what may be termed the
third generation did indeed renounce allegiance. But so far as purely scientific
analysis is concerned, this means less than it seems to mean. And though some
of them grew to dislike Marshall, not only his modes of thought but also his
personal aura, his stamp is still upon them all. 7

That school was — in a sense still is — a national one and very alive to its
specifically English character. I have compared Marshall's success with A.
Smith’s. In fact, the former was still more spontaneous and immediate than
was the latter: the Principles were received with a universal clapping of hands,
and the newspapers, which at first were rather cold to the Wealth, vied with
one another in complimentary full-dress reviews of the Principles. But one
qualification imposes itself: abroad, Marshall’s work never succeeded as had

so many of his type, was by no means averse to the comfortable explanation that his
Marshallian opponents were actuated by an inquisitional propensity to crush dissent,
if not by class interest: the possibility that, owing to his inadequate training, many
of his propositions, especially his criticisms, might be provably wrong and due to noth-
ing but failure to understand never entered his head, however often it was pointed
out to him. Belated recognition came in Keynesian times mainly on account of his
doctrine of underconsumption, which will be noticed below in ch. 8. From the long
list of his books and pamphlets, it will suffice to mention: The Physiology of Industry
(with A. F. Mummery; 1889); The Evolution of Modern Capitalism (1894; perhaps
his best performance); The Industrial System (1909); Gold, Prices, and Wages . . .
(1913^); The Economics of Unemployment (1922). But nobody who wishes to under-
stand the man and, incidentally, the economist’s comedy — or tragedy — of errors should
miss his delightful Confessions of an Economic Heretic (1938).

6 In 1906 or 1907 Sidney Webb gave a course of lectures on method at the London
School, one of which I attended. If it be safe to generalize from this lecture and its
tone, he must have presented in that course just about what a German Katheder-
sozialist would have done. The lecturer said nothing about Marshall and his teaching.
The implications were, however, strongly anti-Marshallian. The difference was not pri-
marily political: Marshall was largely in sympathy with the aims of the Fabians (as
they were at that time); the difference was primarily one of scientific method.

7 This is not true of Professor Hicks, whose basis is much more Walrasian than
Marshallian. This fact is more significant than is the spectacular breaking away of the
Keynesians.

834 IV: FROM 1870 TO 1914 and LATER

A. Smith’s. The reason is not far to seek. Marshall’s message — however much
he liked the idea of being 'read by businessmen’ — was after all a message to
the economics profession. And the economists of all countries who were open
to economic theory at all had by 1890 evolved or accepted systems that,
however inferior in technique, were substantially like Marshall’s in fundamental
ideas. First and last, Marshall was, and felt himself to be, the great English
economist of the period. But this does not alter the fact that Marshall’s great
work is the classical achievement of the period, that is, the work that embodies,
more perfectly than any other, the classical situation that emerged around
1900. I believe that Lord Keyrfes meant to express a similar evaluation when
he listed the publication of the Principles as the first of the three events in
1890 from which the 'modern age of British economics’ is to be dated. 8
Although we shall have to move within its orbit throughout this Part, it will
be convenient to assemble here the main points about Marshall’s work as a
whole.

The portrait of Alfred Marshall (1842-1924), the man, the academic man,
the teacher, the thinker, has been painted with unsurpassable brilliance by
Lord Keynes ('Alfred Marshall,’ Ecdnomic Journal , September 1924, reprinted
in Essays in Biography, 1933) and so has been the portrait of the tutelary
deity of his life, Mrs. Marshall, whose memory can never be separated from
his ('Mary Paley Marshall (1850-1944),’ Economic Journal, June 1944). Two
other references are strongly recommended to the reader’s attention: the
Memorials of Alfred Marshall (ed. by A. C. Pigou, 1925), and the article on
'The Place of Marshall’s Principles in Economic Theory’ by another leading
Marshallian, Mr. G. F. Shove ( Economic Journal, December 1942). An ex-
tensive and presumably complete list of Marshall’s writings was published by
Keynes in the Economic Journal, December 1924; it is reprinted in the
Memorials. But the bulk of Marshall’s published work is in the Principles of
Economics (1st ed., 1890, described as Volume 1 until the 6th ed., 1910; in
what follows, references are to the 4th, 1898); in Industry and Trade (1919);
and Money Credit and Commerce (1923). The three volumes are all essen-
tial: nobody knows Marshall who knows only the Principles. They are supple-
mented by a posthumous volume of Official Papers (1926). For the rest, it
must suffice to mention his Pure Theory of Foreign Trade and his Pure Theory
of Domestic Values (privately printed, 1879, London School Reprint, i£t ed.,
1930); his and Mrs. Marshall's Economics of Industry (1879), a most im-
portant stepping stone to the Principles; and, finally, the highly revealing
address on 'The Old Generation of Economists and the New’ (1896) pub-
lished in the Quarterly Journal of Economics, January 1897.

Marshall and A. Smith have more in common than similarity of success
and of position in the history of economics. Neglecting a number of time-

8 Economic Journal, December 1940, p. 409. The other two events were the foun-
dation of the Royal Economic Society (British Economic Association) and the comple-
tion of Palgrave’s Dictionary of Political Economy. [Keynes was mistaken as to the
date of the last event. Palgrave’s Dictionary was completed in r893 and published in
r894. The introduction by Palgrave is dated Christmas, r893.]

GENERAL ECONOMICS: MEN AND GROUPS 835

bound differences, we find strong similarity in the visions or general concep-
tions of the process and, in particular, with respect to economic evolution.
Also we find an approximately equal distribution of weights as between
'theory’ and ‘facts,’ although Marshall’s superior art succeeded in banishing
mere narration from the pages of the Principles — so that to readers who neglect
Industry and Trade, his treatment looks more ‘purely theoretical’ than it is
and much more so than does A. Smith’s. But the similarity extends still fur-
ther to the aim, plan (I am not referring to non-essentials such as sequence
of topics), and nature of the performance. Marshall was aware of this. He is
reported to have said: ‘It’s all in A. Smith.’ There is more in this remark
than mere recognition of the fact that today’s work necessarily grows out of
yesterday’s — there is recognition of kinship. And there is a final similarity:
both the Wealth and the Principles are what they are, partly at least, because
they are the result of the work of decades and fully matured, the products of
minds that took infinite care, were patient of labor, and indifferent to the
lapse of years. This is all the more remarkable because both Smith and Mar-
shall were extremely anxious to preach their wisdom and to influence political
practice — yet neither of them allowed himself to be hurried into print before
his manuscripts were as perfect as he felt able to make them. 9 * *

A reader’s guide through the Principles is superfluous, I trust. Suffice it,
then, to say that Book v (Theory of the Equilibrium of Demand and Supply)
contains the core of the analytic performance. Book vi on Distribution is an
extensive application of the analysis of Book v. Book i presents first ‘an eco-
nomic history in one lecture,’ so severely scaled down that what remains reads
like a series of trivialities and almost entirely fails to convey the breadth and
depth of the research that actually went into it; and second an almost un-
believably insular sketch of the history of economics. Book n. Some Funda-
mental Notions (concepts), could have been written by any nineteenth-century
hewer of wood and drawer of water. Books in (Wants) and iv (Agents of Pro-
duction) contain several novelties and, occasionally, deep insights (e.g. in ch.
12 , 55 11 an d 12 )> ah smothered by a mass of things that might have been
improved by pruning.

The reader who pierces the highly polished surface, on which everything
seems to be reduced to commonplace, is first of all struck by the tremendous
wealth of analytic and factual detail, drilled into order by a stupendously
skilled taskmaster to whom it never seems to have occurred that nothing will
make a book more difficult than will the attempt to make it too easy. Every-
thing finds its appointed niche in a vast structure and everything is, before
being displayed in its niche, analytically chiseled into shape by an artist in
neat and economical conceptualization. In the second place, that reader will

9 To my mind this was wholly a virtue. Reason for a different opinion will be found
in Keynes’s essay. But Lord Keynes’s arguments read like an oratio pro domo. And

though Marshall did indeed lose some of the claims to priority he might have had in

the matter of money, it is not true that delay of publication robbed him of any as
regards the topics treated in the Principles. The position of the Principles would, in

this respect, be no different if it had appeared in 1880.

836 IV: FROM 1870 TO 1914 AND LATER

discover a quality that comes near to constituting Marshall’s chief claim to
immortality: in Marshall he beholds not only a high-powered technician, a
profoundly learned historian, a sure-footed framer of explanatory hypotheses,
but above all a great economist. Unlike the technicians of today who, so far
as the technique of theory is concerned, are as superior to him as he was to
A. Smith, he understood the working of the capitalist process. In particular,
he understood business, business problems, and businessmen better than did
most other scientific economists, not excluding those who were businessmen
themselves. He sensed the intimate organic necessities of economic life even
more intensively than he formulated them, and he spoke therefore as one who
has power and not like the scribes — or like the theorists who are nothing but
theorists. I am afraid that this achievement — so remarkable in one who moved
primarily within academic circles and largely shared their prejudices — together
with the Olympian repose, which his attitudes to hotly debated practical prob-
lems display, accounts in part for the unpopularity that surrounds his name
today.

In the third place, the reader who gets still further and knows how to see
the analytic skeleton under the smooth skin and all the flesh will behold the
apparatus of what we now call Partial Analysis, that is, the set of tools that
have been forged for the purpose of analyzing the phenomena in relatively
small sectors of the economy — individual ‘industries’ that are too small to
call forth, through variations in their own outputs, prices, and demands for
factors, repercussions in the social aggregates (especially in real and monetary
national income), so that everything that happens outside of such sectors may
be treated as given (see below, eh. 7, sec. 6). Book v is the classic masterpiece
of this partial analysis that has been so much admired by some and so severely
criticized by others. The questions involved will be discussed later on. At the
moment another matter calls for our attention. The partial-analysis viewpoint
is so much in evidence throughout Marshall’s text, and the handy concepts
of partial analysis that he forged or refurbished have been so generally received
into current teaching that there is some excuse for those who see in Marshall
the master of partial analysis and nothing more. All the same, this fails to
do justice to the depth and range of Marshall’s thought. It is not only that
the wider conception of the general interdependence of all economic quanti-
ties receives intermittent attention in the Principles: Marshall actually formu-
lated this wider conception — embryonically but still explicitly — in the notes
xrv and xxi of the Appendix. And the Memorials contain a passage (p. 417),
rightly emphasized by Mr. Shove in the article referred to above, that reads:
‘My whole life has been given and will be given to presenting in realistic
form as much as I can of my note xxi.’ It seems fair, therefore, to list Mar-
shall also among the builders of the general-equilibrium system as well as of
the marginal utility analysis per se.

There is more to another opinion that restricts Marshall’s achievement.
His theoretical apparatus is strictly static. This does not prevent him from
dealing with evolutionary phenomena or indeed any phenomena of economic
life that are refractory to the application of the methods of statics. As Keynes

GENERAL ECONOMICS: MEN AND GROUPS

837

pointed out in his Treatise on Money (11, p. 406), Marshall 'was a little dis-
posed sometimes to camouflage the essentially static character of his equilib-
rium theory with many wise and penetrating obiter dicta on dynamical prob-
lems/ But in order to do so he had to get off the driver’s seat of his analytic
engine, the arms of which do not reach these problems: the range of the
Principles is much wider than that of the theory which the work expounds,
and the theory itself is impaired by the strain to which it is subject, especially
in the neighborhood of the phenomena of decreasing average cost.

In the fourth place, no unbiased reader can fail to perceive the twin facts
that will be fully discussed later on, namely, that Marshall’s theoretical struc-
ture, barring its technical superiority and various developments of detail, is
fundamentally the same as that of Jevons, Menger, and especially Walras,
but that the rooms in this new house are unnecessarily cluttered up with
Ricardian heirlooms, which receive emphasis quite out of proportion to their
operational importance. It is therefore understandable that a few English
writers and the majority of non-English ones have put Marshall down as an
eclectic, who tried to reconcile and to combine (or to compromise between)
the analytic principles of the English 'classical school’ (meaning Ricardianism)
and the analytic principles of the 'marginal utility school’ (meaning, mainly,
Jevons and the Austrians). It is not less understandable that both Marshall
himself and the Marshallians refused to accept this interpretation, not with-
out irritation. They are right. Marshall’s powerful engine of analysis — though
it may look antiquated by now — was the result of a creative effort and;. not
of a synthetic one: especially those will have to admit this who, like myself,
discount the importance of the Ricardianism in it. This leads, however, to
the questions of the roots of Marshall’s work and of its originality. These
questions are no mere matters of dusty records. They must be answered in
order to light up an important phase in the history of economics.

The roots of Marshall’s work are easy to lay bare. As an economist, he was
trained, or rather trained himself, in the tradition of A. Smith, Ricardo, and
J. S. Mill. In particular, his acquaintance with economics commenced with
reading Mill in 1867-8 ( Memorials , p. 10), and he retained what might be
called a filial respect for J. S. Mill throughout his life though he was under
no delusion concerning the latter’s intellectual stature. In addition, the preface
to the first edition of the Principles extends guarded recognition to the in-
fluence of Cournot and Thiinen, which is indeed unmistakable. No economist
other than these five, not even Jevons, Dupuit, or Jenkin, 10 is credited with

10 H. C. Fleeming Jenkin (1833-85) was an economist of major importance, whose
main papers belong chronologically to the previous period but who has been reserved
for discussion here because these papers form an obvious stepping stone between J. S.
Mill and Marshall in four important respects: he was the first Englishman to discuss,
with nearly the same clearness as had Verri and Cournot, demand functions; he both
developed and applied to problems of taxation the concept of consumers’ rent; he
used diagrammatic representation, in principle, much as Marshall did later on; and he
greatly improved the theory of wages, particularly in the matter of the influence of
trade unions upon wage rates. In addition, like Sismondi but much more neatly, he

8 38 iv: FROM 1870 TO 1914 and later

any influence on fundamentals, though many are recognized on individual
points of minor importance. But the resulting picture is entirely possible. We
have noticed the peculiar character of J. S. Mill’s treatise, which hovers be-
tween Ricardo and Say and invites corrective reformulation. A man such as
Marshall, who was trained in mathematics and physics and to whom the con-
cept of limits and hence the formal part of the marginal principle would be
as familiar as would be his breakfast bacon, need only have allowed his mind to
play on Mill’s loose statements and to work out their exact model (system of
equations) in order to arrive at a point where the purely theoretical parts of
the Principles came in sight. The incidental innovations would then naturally
appear to him as mere developments from Mill instead of as ‘revolutionary.’
Moreover, strong leaders who are sure of a disciplined majority do not make
revolutions — either in science or in politics — but lead on smoothly, leaving
fuss and revolution to minority groups that have to shout in order to be heard
at all. I think that this agrees pretty well with the opinion espoused by the
Marshallians. 11 In any case it is my justification for attributing to Marshall
(within pure theory, remember) creative achievement.

By this admission we have already prejudged the question of originality.
Though Marshall never left any doubt that he felt under no obligation to
Jevons, let alone to the Austrians and Walras, the full extent of his claim
to subjective originality was not known to the world before the publication
of the Memorials, Keynes’s biographical essay, and Shove’s paper. This claim
is accepted here without question. Of course, this does not touch objective
originality or priority. A ‘marginalist’ treatise published in 1890 — or, for that
matter, in 1880 — could have improved and developed existing doctrine (which
Marshall certainly did) but it could not have revealed fundamentally new
truth. According to what I believe to be the ordinary standards of scientific
historiography, such merit as there was in the rediscovery of the marginal
utility principle is Jevons’; the system of general equilibrium (including the

suggested a time-labor system, essentially the 'guaranteed wage.’ He was an engineer,
first a practical, later an academic one, and his contributions to economics passed all
but unnoticed. But Marshall referred to him. See Colvin and Ewing eds., Papers, Lit-
erary and Scientific (1887), with a life by no lesser celebrity than R. L. Stevenson.
However, there is now a London School Reprint of Jenkin’s economic essays with the
title, The Graphic Representation of the Laws of Supply and Demand, and other
Essays on Political Economy , 1868-1884 (1931).

11 If I take, as I think I may, Mr. Shove’s article as the official pronouncement of
the Marshallian group, there remains, so far, only one point of difference. Mr. Shove
holds, supporting his statement by quotation, that the basis of Marshall’s work is to
be found in Ricardo rather than in Mill. With Mr. Shove’s interpretation of Ricardo
and Mill, which minimizes the difference between them, this does not matter a great
deal. With my interpretation of the relation between the two, it makes more differ-
ence — which roughly coincides with the admission of, or refusal to admit, the impor-
tance of the role of J. B. Say in the emergence of Marshallian economics. There is no
really practicable bridge between Ricardo and Marshall, though one can, no doubt,
be built. There, is a bridge, already in existence, between Mill (or even Smith) and
Marshall.

GENERAL ECONOMICS: MEN AND GROUPS 839

theory of barter) is Walras’; the principle of substitution and the marginal
productivity theory are Thiinen’s; the demand and supply curves and the
static theory of monopoly are Cournot’s (as is the concept, though not the
word, price elasticity); the consumers’ rent is Dupuit’s; the ‘diagrammatic
method' of presentation is also Dupuit’s or else Jenkin’s. If this had been
always clearly understood, there would be no more to be said. 12 But it has
not been generally understood — perhaps it is not even understood now by
all economists 13 — with the result that the reputation of others has suffered
and that there exists, in many minds, a picture of the scientific situation of
that time that it is the duty of the historian to correct. This duty is painful
because the reason for this state of opinion is largely Marshall’s own fault.
The case of tire Austrians versus Marshall (and Edgeworth) will be considered
later and therefore need not be touched upon here. In striking contrast to
the generosity he lavished on Ricardo and Mill, Marshall was less than gen-
erous to all those whose contributions were closely related to his own. The
one exception is Thiinen, whose work was properly recognized not only in
a general way in the Preface to the first edition of the Principles but also in
the passage (p. 704 of the 1st ed.) that speaks of ‘von Thiinen’s great Law
of Substitution.’ But Cournot received only general recognition and is not
referred to where we should have expected specific reference, primarily in the
theory of monopoly. However, we are not concerned with leveling any indict-
ment against Marshall on the score of inadequate acknowledgment of indebted-
ness — of this charge Keynes and Shove have largely cleared him — but with
his inadequate acknowledgment of priority. The case of Jevons is the most
obvious one. But the case of Walras is worse. Marshall, of all men, mathe-
matically trained as he was, entertaining as he did the highest opinion of the
central importance of his own note xxi, cannot have been blind to the great-
ness as well as to the priority of Walras’ achievement. Yet Walras’ great
name occurs in the Principles only on three unimportant occasions that have
nothing to do with that achievement. 14 And exactly the same holds for the

12 The question of the propriety of making, even by implication only, claims to inde-
pendent discovery of results that to the knowledge of the claimant have appeared in
print before is onejthat everyone of us must settle for himself. Some have scorned to
do so.

13 Time and again, I have been impressed by the fact that competent and even
eminent economists have an uncritical habit of attributing to Marshall what should, in
the ‘objective’ sense, be attributed to others (evenl the ‘Marshallian’ demand curve!).
But we need not go beyond the Cambridge circle. On pp. 222 et seq. of the Essays
in Biography , Keynes attempted to list, ‘with the help of notes supplied by Professor
Edgeworth,’ some of the ‘more striking contributions to knowledge’ contained in the
Principles. There are six of them (excepting the comment on the historical introduc-
tion), all evidently meant to be taken as objective novelties. Not one of them can be
accepted without qualifying reference to the work of others, though in conjunction
and as elements of a general treatise for a wider circle of readers, they were of course
new enough.

14 Edgeworth, too, was sadly ungenerous to Walras as well as to the Austrians. But
his lack of generosity was somewhat like the lovable ungenerosity of devoted mothers

840 IV: FROM 1870 TO 1914 and LATER

less important cases of Dupuit and Fleeming Jenkin, who received but foot-
note recognition and this not in the right places. I hasten to emphasize ex-
tenuating circumstances. One of them has been formulated by Lord Keynes:
Marshall perceived in the work of Jevons and the Austrians technical faults
and other inadequacies that might have impaired the success of the new
organon unless the offending authors were kept at arm’s length. There are
other such circumstances. Continuity of analytic work is an asset, and the
originators of the new theoretical system, or at least Jevons and the Austrians,
had needlessly broadened the gulf that separated them from their predecessors.
Also Marshall was very conscious of his role as a national leader. He may
have felt it his duty to uphold the national tradition.

Fortunately, however, I can conclude on a more pleasant note. The greatest
thing about Marshall’s great work still remains to be said. Behind the great
achievement there is a still greater message. More than any other economist
— with the exception, perhaps, of Pareto — Marshall pointed beyond himself.
He had no theory of monopolistic competition. But he pointed toward it by
considering a firm’s Special Market. It has been stated above that his pure
theory was strictly static but also that he pointed toward economic dynamics.
He did no econometric work. But he always reasoned with an eye to the
statistical complement of economic theory and did his best to frame con-
cepts that would be statistically operational; and in his address on ‘The Old
Generation of Economists and the New’ he outlined important parts of the
program of modern econometrics. Naturally, his work is out of date. But there
is in it a living spring that prevents it from becoming stale.

3. France

The French situation from 1870 to 1914 was curious indeed. Walras was
at work (to 1892 or thereabouts) and Cournot was emerging from oblivion.
In the factual branch of analysis, there were LePlay and his school, Simiand,
Levasseur, Mantoux, Martin, and many others. 1 Counting peak performances
only, we might feel inclined to put French economics at the head of all coun-
tries. But, excepting those of the factual branch, the peak achievements almost
entirely failed to percolate, and there were hardly any symptoms of .that wider
activity that makes up lost ground so rapidly in our own day. 2 The indifferent

and wives who cannot see any merit in competitors of their wholly admirable sons or
husbands. He was never, so far as I know, ungenerous on his own behalf.

1 Concerning LePlay, see above, Part m, ch. 4; Simiand and Levasseur are discussed
in ch. 4 of this Part.

2 But mention must be made of the Walrasian work of Aupetit and the textbook
presentations of Walrasian or Paretian doctrine by Laurent and Antonelli. Albert
Aupetit’s Essai sur la theorie generate de la monnaie (1901), a youthful work of
striking quality that still deserves perusal, marks a not unimportant step in the theory
of money but is mentioned here because of the still greater significance of the rela-
tively early reformulation of Walrasian equilibrium theory it presents. Hermann Laurent
(1841-1908) wrote a brief but very good abstract of the Walras-Pareto theory (Petit

GENERAL ECONOMICS: MEN AND GROUPS 841

reputation of academic French economics in that period is, however, not due
to its deficiencies in the field of 'pure theory’ — and there is no reason to
think little of it so far as applied fields are concerned — but to something else
that will preclude recognition by modern radicals a limine, namely, to liberal-
ism in the Gladstonian sense. So obvious were the political affiliations of the
leading group of French economists and so completely did their politics dom-
inate every line they wrote that we have no choice but to adopt political cri-
teria for the rest of this sketch.

Accordingly, we consider first the laissez-faire ultras who are known as the
Paris group because they controlled the Journal des economistes, the new dic-
tionary, the central professional organization in Paris, the College de France,
and other institutions as well as most of the publicity — so much so that their
political or scientific opponents began to suffer from a persecution complex.
It is extremely difficult, even at this distance of time, to do justice to this
group that was also a school in our sense. I shall mention only a few names
that will guide any interested reader to its works and, instead of characterizing
individuals, attempt to characterize, in a few lines, the group as a whole. The
most distinguished names, then, were Paul Leroy-Beaulieu, Courcelle-Seneuil
once more, Levasseur, the indefatigable Gustave de Molinari, Yves Guyot,
Maurice Block, 3 and L6on Say. They were anti-etatistes, that is to say they
indulged in a belief to the effect that the main business of economists is to
refute socialist doctrines and to combat the atrocious fallacies implied in all
plans of social reform and of state interference of any kind. In particular,
they stood staunchly by the drooping flag of unconditional free trade and
laissez-faire. This accounts easily for their unpopularity with socialists, radicals,
Catholic reformers, solidarists, and so on, though it should not count for us.
But what does count for us is the fact that their analysis was methodologically
as 'reactionary’ as was their politics. They simply did not care for the purely
scientific aspects of our subject. J. B. Say and Bastiat, and later on a little
diluted marginal utility theory, satisfied their scientific appetite. Some who
sympathized with the politics of the group — though they were no members
of its inner circle and are hence, very significantly, mentioned but rarely —
took a higher flight and did notable work. This holds particularly for two men
who should always be listed among economists of eminence, Colson and
Cheysson. It is not without importance to note that both were engineers by
training and in this respect continued a French tradition that is adorned by

Traite d’economie politique mathematique, 1902) and Professor Ltienne Antonelli
actually risked a Walrasian course of lectures at the College Libre des Sciences So-
ciales that he published in 1914 under the title Principes d’economie pure — a pio-
neer venture. There were various writings on 'mathematical economics,’ some of which
will be mentioned later. They had little influence.

3 Leroy-Beaulieu and Courcelle-Seneuil are discussed above. Part hi, ch. 4. Maurice
Block’s survey work, Le Progres de la science economique depuis Adam Smith (1890;
2nd ed., 2 vols., 1897), will be mentioned as a fair specimen of what the school con-
ceived of as purely analytic work. Neither should Leroy-Beaulieu’s Essai sur la reparti-
tion des richesses (1881) go unnoticed.

842 IV: FROM 1870 TO 1914 AND LATER

the name of Dupuit and is now more alive than ever: if I were willing to.
use the term School in any other sense than that adopted in this book, I
should certainly form a school from those brilliant French engineers in the
public service who contributed, and are contributing, so substantially to sci-
entific economics. 4

But even the others, whose flights cannot be described as high, had one
great merit. Their philosophies were deplorable, their theory was weak; but
when they wrote on practical questions they, like their predecessors and like
Marshall, knew what they were writing about. That is to say, they lived and
thought in close proximity to business and political practice, which most of
them knew from experience and not from newspapers. There is an atmosphere
of realism and shrewdness about their works that partly compensates for lack
of scientific inspiration. 5

The politicians can hardly have liked a group that stood for free trade and
otherwise indulged in an impracticable liberalism. So, when the government
proceeded to establish chairs in economics in all the law faculties of all the
universities of France (1878), it saw to it that the new professors should not
all of them be of the political complexion of the Paris group. This wrought
a change, of course, but — apart from bringing the light of economics to the
most unfortunate provinces that had had to dwell in outer darkness until then
— this change was at the beginning more political than scientific. However,
the new men who felt themselves to be new men in more senses than one
drew together, founded the 'heterodox 7 Revue d’economie politique (1887),
doubted (most of them) the Natural Law that booms laissez-faire, looked with

4 C 16 ment Colson (1853-1939) did not follow the vocation for which he was trained
but was a public servant in the term’s widest and most honorific acceptance. We can-
not go into his many activities — which included teaching — and merits. It must suf-
fice to mention his Transports et tarifs (1890), which still repays perusal, and his Cours
d’economie politique (1901-7), a work that is not equally commendable in all its parts
but rises to considerable heights in places, especially in transportation.

Emile Cheysson (1836-1910; Oeuvres choisies , 1911) was another man of many mer-
its. I shall only refer to a conference of his that was published in 1887 under the
title 'Statistique geometrique.’ It brims over with suggestions, some of powerful origi-
nality, on statistical demand, revenue, and cost curves, location and .transportation
rates (he has a sort of rate-indifference curve), wages (where he develops a model of
the kind that is now known as ‘cobweb’), sales as functions of wages, rational choice of
sources of raw materials, quality, variation of product, profit maximization. I am in-
debted to Dr. H. Staehle for having pointed out to me this amazing assemblage of
tools and ideas that I should otherwise have overlooked.

5 The frank contempt with which both higher-powered theorists and anti-liberals
treated the group is therefore not justified. Take Yves Guyot (1843-1928) to whom a
brilliant theorist has referred as ce pauvre Guyot. This theorist was perhaps right if he
had, e.g., Pareto in mind as a standard of comparison. But I have to add that, were I
a businessman or politician, I should have consulted Guyot — who was a wizard at prac-
tical diagnosis — rather than Pareto in order to be enlightened on, say, the prospects of
employment or of metal prices in the next six months. We are all of us liable to de-
serve the epithet ce pauvre if we are made to confront a task very much out of our line.

GENERAL ECONOMICS: MEN AND GROUPS

843

more favor on protection that was carrying the day anyhow, and allowed them-
selves to be caught in modest programs of social reform. Scientifically, very
little came of this at first. But in the course of the thirty-five years, counting
from those appointments, by the grace of the spirit of the times, substantial
improvement was effected and not only by the new professors themselves;
the Paris milieu was livened up, though the little knot of laissez-faire stalwarts,
not less remarkable for longevity than for strength of conviction, held out like
Leonidas’ Spartans at Thermopylae. As for representative names, it will suffice
to mention P. L. Cauwes, who, more a jurist than an economist and influenced
by German Sozialpolitik and German historism, was a man of sense and force
even if not much of a scientific economist; Charles Gide and Charles Rist,
who rose into prominence later on; 6 and two men whose performances were
among the first harbingers of a new epoch in French economics, Landry and
Aftalion. 7 So far as I know, none of the groups that expounded systems of
social reconstruction, socialists and solidarists included, made any contribution
to be noticed in a history of analysis. 8

4. Germany and Austria

As we know, in Germany Sozialpolitik and the work of the historical school
asserted their influence upon general economics more than in any other coun-
try. These interests did not entirely destroy tradition nor did they entirely
crush out the 'theoretical’ component in general economics. But in places
they came near doing so: although a reaction had set in by 1900 and was
running strong by 1914, the men who were then in their twenties were prac-
tically untrained in the art of handling analytic tools and some of them ac-
tually conceived of 'theory’ as consisting of philosophies about socialism or
individualism and the like and of quarrels about 'methods’ — they had no con-
ception of theory as a 'box of tools.’ Broadly speaking, genuinely home-grown
theory was insignificant and anaemic and the only live impulses came from
the Austrian and the Marxist schools. The situation, thoroughly decentralized
as it was — much as in the preceding period — is difficult to describe by means

6 Charles Gide (1847-1932) cannot occupy any great place in a history of analysis
but played a most useful and most creditable role all the same. He was an all-round
leader, free from prejudice, in sympathy with all that was going on, and made by
nature for imparting this sympathy to others. He wrote one of the most successful
textbooks of the period, and, in collaboration with C. Rist, a still more successful
Histoire des doctrines economiques (1st ed., 1909; 7th ed., 1947; English trans., 1915;
with additions from 6th and 7th French eds., 1948) that is widely used still. There
were several other performances in this field (Perin, Espinas, Denis, Dubois, Rambaud,
Gonnard).

7 Adolphe Landry, L’lnteret du capital (1904). Aftalion and Juglar will be mentioned
in ch. 8 in the fields to which their works belong.

8 Professor G. H. Bousquet’s Essai sur revolution de la pensee economique ( 1927 )*
Gaetan Pirou’s Les Doctrines economiques (1925), and the well-known History by
Gide and Rist will usefully complement the sketch above.

844 IV: FROM 1870 TO 1914 AND LATER

of a brief sketch. Simplifying to the utmost, I propose to deal with it as fol-
lows: we shall first consider the Austrian school; then we shall glance at a
number of representative men who form a group in no sense except that they
had laid the foundations of their reputations in the preceding period and
exerted considerable influence — as 'elder statesmen’ — in the one under survey;
finally, reserving the Marxists for separate treatment at the end of the chap-
ter, we shall add additional representative names that will serve to complete
the picture, begun in the preceding chapter, of the 'life and work’ of German
economics so far as impressionist patches of color can be said to complete any
picture. In all three subsections this purpose of painting a picture that must
not be overcrowded has been kept in view at considerable ' pain-cost ’ of in-
justice to many individuals . 1

(a) The Austrian or Viennese School. The close cultural relations that ex-
isted between the Austro-Hungarian monarchy and Germany did not prevent
the emergence in Austria of a scientific situation in our field that differed
completely from the German one. This was largely due to two personal facts:
to the fact that Carl Menger was a leader of quite unusual force; and to the
fact that he found two disciples, Bohm-Bawerk and Wicser, who were his in-
tellectual equals and who completed Menger’s success. They cannot really be
called second generation but have title to be considered as co-founders of what,
considering all circumstances, was to be a school of surprising importance and
durability. There were several other followers of some note (such as Sax and
Zuckerkandl), and of course a second generation did rise within the period.
But I think it to be both right and conducive to a correct impression to con-
fine this subsection to those two 2 leaders and to two other men who, per-
sonally rather than doctrinally, stood somewhat apart and never got all the
credit they deserve, Auspitz and Lieben.

Eugen von Bohm-Bawerk (1851-1914) was, so far as his career was con-
cerned, primarily a public servant. This must be kept in mind in appraising
his scientific work, exactly as Ricardo’s business avocations must be kept in
mind if we are to do justice to his. What is before us to read is not the fin-
ished work that Bohm-Bawerk had in mind — parts of the published perform-
ance were written in a hurry, the consequences of which Bohm-Bawerk never
had the opportunity to remedy. In order to show this, let us cull a few relevant
facts from the record of a life conspicuous for single-minded devotion to duty,
complete disinterestedness, high intellectual endeavor, wide cultural interests,

1 In this respect, I am all the more open to criticism because I cannot plead igno-
rance of the details of what is for me a very familiar scene. But some of the lacunae
of my exposition can be filled from many sources, especially from the two following
Festschriften, which shed light on the period under survey although only one appeared
in the period: (1) the Schmoller Festschrift of 1908: Die Entwicklung der deutschen
V olkswirtschaftslehre im neunzehnten Jahrhundert ; (2) the Brentano Festschrift of
1925: Die Wirtschaftswissenschaft nach dem Kriege, especially Professor Amonn’s con-
tribution, 'Der Stand der reinen Theorie’ (vol. n, part 3).

2 Von Philippovich will be mentioned below. L. von Mises, whose book on money
appeared at the end of the period, will be mentioned in our chapter on money.

GENERAL ECONOMICS: MEN AND GROUPS

and genuine simplicity — all of which was entirely free from sanctimoniousness
or any propensity to preach. His early scientific development must have been
seriously interfered with by his entering the civil service immediately on com-
pleting the usual legal studies that, as we know, left but little room for eco-
nomics. He was thirty when he was appointed to the University of Innsbruck,
and the eight years he taught there define the whole of the time that he was
able to devote, in the plenitude of his powers, to scientific economics. He
was a hard, systematic, and effective worker, and we need not, perhaps, deduct
very much from his fund of energy on the score of academic teaching. More
of it, however, went into his polemics, by which he established himself as by
far the most eminent champion of Menger's teaching. 3 The rest went into
the chief work of his life, Kapital und Kapitalzins (ist vol., 1884; 4th ed.,
1921; English trans., 1890; 2nd vol., 1889; 4th ed., 1921; English trans., 1891).
Volume 1, Geschichte und Kritik der Kapitalzinstheorien appeared in English
as Capital and Interest; Volume n. Positive Theorie des Kapitales as Positive
Theory of Capital. Work on the second volume that contains his own creative
contribution — the first contains a series of criticisms of interest theories — had
to be curtailed and the volume had to be hurried through the press in parts
as the author wrote it — anticipating his re-entry into the Ministry of Finance
for the purpose of preparing the great fiscal reform of 1896. Distinct ideas
are but imperfectly welded together; in essential respects the author changed
his standpoints while writing; different currents of his own thought run side
by side; the decisive later chapters are frankly provisional (see Preface to the
unchanged 2nd ed.) and as he was able to make them, not as he wanted
to make them. A brilliant but absorbing career followed from 1889 to 1904,
during which he held cabinet office three times and had no more leisure than
is implied in scanty leaves of absence and occasional hours that he snatched
from official work, especially in the early mornings. Even so he kept up a
peripherical relation with academic teaching (he was Honorary Professor at
the University of Vienna, occasionally conducting a seminar). Also he was
able to do some writing of a polemical or expository nature. Among other
things, he produced his famous criticism of the Marxist system. 4 But he was
not able to do original work. Leisure came indeed in 1905, when (refusing the
most lucrative post in the gift of the Crown) he accepted appointment as
'ordinary' (full) professor at the University of Vienna. This spelled freedom
from all but self-imposed duties and also from the petty vexations of modern
life, since all 'authorities’ of that environment were infinitely respectful to
the Privy Councilor full of honors. But he was older in mind and body than
in years. Though he conducted his famous seminar to his death (1914), his
creative force was spent. He did work at his Kapital and added formidable
appendices, but no real progress was possible any more. The revised and en-

3 These and later parerga of his have been republished as Gesammelte Schriften (2
vols., 1924-6) by Professor Franz X. Weiss, one of the ablest of Bohm-Bawerk’s pupils.

4 Z um Abschluss des Marxschen Systems (1896) translated as Karl Marx ai\d the
Close of His System (1898). [New edition (with Hilferding’s reply), ed. with intro-
duction by P. M. Sweezy, 1949.]

846 IV: FROM 1870 TO 1914 AND LATER

larged third edition of Kapital und Kapitalzins was published in three volumes
1909-14 [volume 11 was expanded into two volumes, 11, 1 and 11, 2]; an un-
changed fourth edition with an introduction by von Wieser appeared in 1921.

Let us neglect Bohm-Bawerk’s championship of the marginal utility prin-
ciple, his critique of Marx, and a few other things that might be mentioned,
and ask what was the nature and significance of his main contribution. The
answer that most people are likely to return is: a theory of interest and, in
connection with it, the ‘period of production/ This answer is wholly inade-
quate. The Bohm-Bawerkian theory of interest and, incidentally, the Bohm-
Bawerkian period of production are only two elements in a comprehensive
model of the economic process, the roots of which may be discerned in
Ricardo and which parallels that of Marx. Part of it is, naturally, a complete
theory of distribution — not of interest alone — that culminates in ‘The Capital
Market fully Developed’ (see Part 2 of Positive Theorie, Book iv, 3rd and 4th
eds.), where the stock of goods, the period of turnover, wages, and interest are
simultaneously determined. If we wish to label his place in the history of eco-
nomics, we had better call him the bourgeois Marx. 5

There is thus a Ricardian root to Bohm-Bawerk’s achievement 6 though he
was entirely unaware of it. Equally unaware was he of the fact that he had
been anticipated, in one essential point by Rae. 7 Finally, much more definitely,
he was anticipated by Jevons — his relation to the latter is not unlike that of
Marshall. Occasional anticipations on this point or that occur fairly frequently,
one of them, as we have seen, in Senior and another in Newcomb’s Principles.
Subjectively, however, he was so completely the enthusiastic disciple of Menger
that it is hardly necessary to look for other influences . It is not only that he
followed Menger in matters of value and price: even the two propositions that
the productivity of a given ‘quantity’ of capital can be increased by extending
the period of production and that we habitually undervalue future pleasures
as compared with present ones — two cornerstones as we shall see of the specif-
ically Bohm-Bawerkian theory of capital and interest — had been indicated by

5 There is a good reason as well as a bad one for the surprise the reader is likely
to feel as he reads this statement. The good reason is that Marx was much more than
an economist. Of course, the statement refers only to Marx’s economic theory of the
capitalist process. The bad reason is that when thinking of Marx, we have habitually
in mind what are non-essentials from the standpoint of this book — the agitatorial ges-
ture, the prophetic wrath. Leaving these out and looking at the cold analytic steel
frame below, the reader will not find my statement so surprising. Bohm-Bawerk’s mar-
ginalism makes but a technical difference; being a more efficient tool, it clears from
his path the spurious problems that Marx encountered on his.

6 This has been pointed out repeatedly by Professor Knight and also by Dr. Edel-
berg (see above. Part m, ch. 4, sec. 2).

7 When he wrote the original work, Bohm-Bawerk did not know more of Rae than
the quotations in Mill that do not reveal the core of Rae’s analysis. He used Rae in
the 3rd ed. See on this C. W. Mixter (‘Bohm-Bawerk on Rae,’ Quarterly Journal of
Economics, May 1902), who, however, greatly overstates the case for Rae.

GENERAL ECONOMICS: MEN AND GROUPS 847

Menger . 8 It is this rather than Jevons’ priority that raises the question of
Bohm-Bawerk’ s originality. It could be argued that a man who had it in him
to develop such embryonic suggestions into an imposing organic whole hardly
needed any suggestions at all. But it is not necessary to do so. It is Bohm-
Bawerk’s model or schema of the economic process adumbrated above which
makes him one of the great architects of economic science, and this schema
was quite outside Menger’s as well as Jevons’ range of vision.

A few of the best minds in our field, Wicksell and Taussig 9 in particular,
have in fact considered him as such. But much more numerous, from the
first, were critics and detractors. This is due, in the first place, to Bohm-
Bawerk’s reserve, which, though he had very many pupils, prevented him from
turning them, as did Marshall, into disciples: hence he never acquired a sci-
entific bodyguard that would stand ready to sally forth in his defense. In
the second place, the famous controversialist had accumulated many accounts
that some people were not slow in settling . 10 In the third place, as explained
above, Bohm-Bawerk’s work had not been permitted to mature: it is essen-
tially (not formally) a first draft whose growth into something much more
perfect was arrested and never resumed. Moreover, it is doubtful whether
Bohm-Bawerk’s primitive technique and in particular his lack of mathematical
training would ever have allowed him to attain perfection. Thus, the work,
besides being very difficult to understand, bristles with inadequacies that in-
vite criticism — for instance, as he put it, the ‘production period’ is next to
being nonsense — and impedes his reader’s progress to the core of his thought
In consequence, criticism of individual points was often successful, and such
piecemeal defeats injured the reputation of the whole. He even got criticism
from such eminently fair-minded men as Irving Fisher, who seems never to
have realized how much his Theory of Interest owes to Bohm-Bawerk, though
he, of all men, was certainly anxious and even over-anxious to do justice to
any predecessors he could find. By the time Keynes wrote his Treatise , it was

3 This is the more noteworthy because Menger, far from welcoming that theory as
a development of suggestions of his, severely condemned it from the first. In his some-
what grandiloquent style he told me once: ‘The time will come when people will
realize that Bohm-Bawerk’s theory is one of the greatest errors ever committed.’ He
deleted those hints in his 2nd edition.

9 That eminent man (Taussig) told me once (I think it was in the spring of 1914)
that he considered Bohm-Bawerk the greatest economist of all times, excepting Ricardo
alone (or even that he considered Ricardo and Bohm-Bawerk, on a par, the two
greatest economists: I do not remember which).

10 Let us note in passing the indictment of unfairness in criticism that has been so
often leveled at Bohm-Bawerk, e.g. by Marshall. As raised, I believe this indictment
to be without foundation. But Bohm-Bawerk’s was an advocate’s mind. He was unable
to see anything but the letter of the opponent’s argument and never seems to have
asked himself whether the offending letter did not cover some element of truth. This
often impaired his critical argument, though his criticism nevertheless remains the best
existing series of exercises in theoretical thinking of that type. It is thus understandable
that unsympathetic readers of his sometimes derived an impression that is voiced by
that indictment.

848 IV: FROM 1870 TO 1914 AND LATER

an almost general opinion that Bohm-Bawerk’s theory was just a curious error
— and not to be discussed seriously any more. And yet his ideas keep on turn-
ing up and teaching people, critics and detractors included, their business.
This, in fact, his ideas had done from the first: though Bohm-Bawerk got few
compliments, and acquired few disciples, he was and still is one of the pro-
fession’s great teachers. 11

Friedrich von Wieser (1851-1926) was a very different man. He was a born
thinker, and a brief spell of civil service in his youth and a still briefer spell
of cabinet office in his middle sixties were the only interruptions in a pacific
and uneventful academic career in Prague and Vienna. This thinker is, how-
ever, difficult to characterize. The great thing about him was a spacious vision
that went deep below the surface. But he implemented this vision very im-
perfectly, for he not only lacked, like Bohm-Bawerk, the necessary technical
training, but in addition, the natural aptitude for turning out an effective argu-
ment. His sociology, which merits more attention than it has received (Recht
und Macht, 1910; Gesetz der Macht, 1926), has been already mentioned; his
significant contribution to the theory of money will be mentioned in the ap-
propriate place. Of his three great works in general theory, the first, Ober den
Ursprung und die Hauptgesetze des wirthschaftlichen Werthes (1884) has the
merit of re-emphasizing and developing the Mengerian argument on value (he
coined the term Grenznutzen, marginality) and no other, though even that
meant a great deal at the time; the second, Der Natiirliche Werth (1889; Eng-
lish trans., 1893) worked out the Austrian theories of cost and distribution
(he coined the phrase Z urechnung, imputation), which Menger had not more
than sketched, and this work must in spite of the latter fact and also in spite
of glaring faults of technique, rank high as an original achievement; the third,
Theorie der gesellschaftlichen Wirtschaft (in M. Weber’s Grundriss der Sozial-
okonomik, 1, 1914; English trans. Social Economics, 1927), while adding noth-
ing essentially new, is an impressive summary of a lifetime’s economic thought.
History knows him — the extent to which it knows him, however, varies greatly
from historian to historian — chiefly as the man who rounded out the Aus-
trian structure, though some of his ideas were more akin to those of Walras
than to those of Menger. The best appreciation of his significance as a theorist
is to be found in Professor Stigler’s book, to which reference is here made

11 This holds true independently of the Bohm-Bawerkian revival incident to the
great success, in the early 1930’s, of Professor von Hayek’s theory of business cycles.
Professor Knight was not tilting at windmills when he opened his vigorous attack upon
Bohm-Bawerk’s teaching in 1933 ('Capitalist Production, Time, and the Rate of Re-
turn/ Economic Essays in Honour of Gustav Cassel ) and 1934 ('Capital, Time, and
the Interest Rate/ Economica, August) that evoked a lively controversy (for main items
see N. Kaldor, 'The Recent Controversy on the Theory of Capital/ Econometrica,
July 1937). Unfortunately, the essential point about Bohm-Bawerk’s message has been
only occasionally noticed or brushed against in this literature.

GENERAL ECONOMICS; MEN AND GROUPS 849

once for all. 12 His Gesammelte Abhandlungen have been edited, with a bio-
graphical introduction, by Professor von Hayek (1929).

Space does not permit more than a brief reference to the work of two re-
markable men; Rudolf Auspitz (1837-1906), an industrialist who fought the
cartel that increased his profits (which increase he handed over to his em-
ployees), a politician who was co-author of the bill that introduced the progres-
sive income tax, and Richard Lieben (1842-1919), his relation and scientific
collaborator, a private banker of artistic tastes. They produced one of the out-
standing theoretical performances of the age, the Untersuchungen iiber die
Theorie des Preises (1889; the fl f st part was published separately in 1887;
French trans., 1914). Technically, they were immensely superior to their com-
patriots and both because of this and because they put partial-analysis prob-
lems into the foreground, their work looks less ‘Austrian’ than it is. It received
some recognition from Edgeworth and more from Irving Fisher, but was with-
out honor at home. Their total and marginal supply and demand curve ap-
paratus (they did not use average curves) was an original contribution at the
time, as was the general theory of the appendix that was not noticed at all.

I have described the Austrian school as the one of the two live influences
in German general economics. But this influence did not assert itself per-
ceptibly until after 1900, and even later the German attitude toward it was
not wholly friendly. 13 There were several reasons for this. First it was but
natural that men primarily interested in the practical problems of their day
and in historical work should not welcome the renascence of a type of re-
search that they considered fundamentally wrong or at least uninteresting.
Second, many men but especially Schmoller — who frankly admitted his error
later on — associated theory with ‘Manchesterism,’ that is, with unconditional
laissez-faire. They therefore thought that they beheld not only a renascence
of a type of analysis they did not like but also a renascence of a type of eco-
nomic thought — or of a political economy — they abhorred. Third, most of the
existing theorists were either under Marxist influence — and the Marxists natu-
rally were incapable of seeing in a new theory anything but a new piece of
bourgeois apologetics — or else were the faithful followers of the English
‘classics’: some of them out-Marshalled Marshall in their admiration for Ri-
cardo and J. S. Mill but, unlike Marshall, refused steadfastly to advance be-
yond them. 14 Nor were the various guerilleros, who tried new starts for them-

12 George J. Stigler, Production and Distribution Theories [of Jevons, Wicksteed,
Marshall, Edgeworth, Menger, Wieser, Bohm-Bawerk, Walras, Wicksell, J. B. Clark],
1941. This excellent work by a competent theorist is perhaps the best survey in exist-
ence of the theoretical work of that period’s leaders and is strongly recommended.
This recommendation does not imply agreement in every point of fact or evaluation.

13 Even as late as 1918, the great success of G. Cassel’s T heoretische Sozialokonomie
was due as much to its usefulness as a textbook as to the fact that, on the surface, it
was hostile to both the Austrians and to Walras.

14 H. Dietzel (discussed below) went further than anyone else: he actually thought
that it was possible to preserve the whole of the ‘classic’ structure, and this in 1921I
(Vom L ehrwert der Wertlehre . . . , 1921.)

850 IV: FROM 1870 TO 1914 AND LATER

selves, any more disposed to accept an analytic schema which, however simple
it was, could not be appreciated without some theoretical training. In Eng-
land, an initial advance soon ran up against the Marshallian castle that
'frowned in awful state’ upon the Austrian cottage. In the United States recog-
nition was freely extended by a number of economists. But since the country
developed a ‘marginalist’ school of its own and since some of the most emi-
nent American economists, Irving Fisher in particular, followed Walras rather
than the Austrian triumvirate, the situation did not differ very much from
the English one. In France, the Austrian teaching fell in with a national
tradition and, being more acceptable than the mathematical one of Walras,
made considerable headway, Leroy-Beaulieu, Gide, Landry, Colson (who how-
ever was more Walrasian) and many others extending more or less hospitality
to it. In Italy success was substantial at first. But the Austrian impulse soon
petered out or was submerged by the teaching of Pareto. The earliest as well as
the most lasting of the Austrian successes were in the Netherlands and in the
Scandinavian countries.

(b) The Elder Statesmen. Science progresses, so Bohm-Bawerk once told a
restless and recalcitrant young man, through the old professors’ dying off.
However, before promoting the progress of science by doing so, these old
professors are in the picture and some of them must be mentioned. I choose
Roscher, who lasted until 1894, Knies, Schaffle, Stein, all of whom we have
met already and all of whom exerted significant influence.

No more need be said of Roscher. Karl Knies (1821-98) was above all a
great teacher who made Heidelberg a center of study and research in which
the most diverse types were welcomed and made to work together. Of his many
works, I shall mention only his chief performance Geld und Credit (1873-9).
Albert Schaffle (1831-1903), the Swabian radical— if he lived today and in the
United States, we should characterize him as a New Dealer or even as a
Parlor Pink — Austrian cabinet minister (1871), and then a student enjoying
lettered ease in his little home town for over thirty years, had less opportunity
for teaching but exerted formative influence as a writer. But unless there is
more to his ambitiously conceived Bau und Leben des sozialen Korpers
(1875-8) than I am able to find in it, economic analysis cannot be said to owe
much to him. His works in taxation will be mentioned in their place. [The
section on taxation in ch. 6 was not completed, Ed.] Lorenz von Stein (1815-
90), the student of French socialism, professor in Vienna, 1855-88, established
himself as an authority on public administration and public finance. His text-
book of economics is insignificant and I mention him merely because it seems
incongruous to leave out of the picture a no doubt brilliant figure.

(c) The Representatives. The names of academic leaders that first arise in
one’s mind, when one thinks of German economists of the period under sur-
vey, are of course those that have been mentioned in the preceding chapter,
and in particular Brentano, Bucher, Knapp, Schmoller, Sombart, Wagner, and
M. Weber. I select in order to illustrate various aspects of the situation, Bort-
kiewicz, Diehl, Dietzel, Launhardt, Lexis, Philippovich, and Schulze-Gaever-
nitz. But there I must stop. Many successful teachers, such as Johannes

GENERAL ECONOMICS: MEN AND GROUPS 85 1

Conrad, the kindly mentor of many American visitors, or Gustav Cohn or
Pohle or Held or the excellent Nasse or Herkner must be passed by.

Of the first group only Adolf Wagner (1835-1917) needs additional com-
ment. We know him already as a leader in the fight for Sozicdpolitik and a —
politically — conservative reformer. Besides he has to his credit substantial per-
formance in the field of money that will be noticed in Chapter 8. Also, we
shall have to notice his work in public finance ( Finanzwissenschaft , 4 vols.,
1877-1901). It is on these achievements that his historical reputation must
be expected to rest. Now we have to consider him as an analytic economist
in general. He felt himself to be a ‘theorist’ in the sense that he was opposed
to historism. But though by no means friendly to the Schmoller school, he
emphasized historical relativity by his famous, if not exactly novel, distinction
between the ‘historico-legal’ and the ‘economic’ categories (of institutions,
forms of behavior, and processes) which it is perhaps unnecessary to explain.
He used to say that Rodbertus and Schaffle were the two economists from
whom he had learned most and he always displayed a critical interest in
Ricardo, who for him remained ‘the’ theorist to the end. Of the work of his
age he absorbed but surface meanings, though he extended recognition to
many foreign economists, Marshall and Taussig in particular — in that formal
way that means so little — and received similar recognition, especially from
Marshall, in return. Always excepting the field of money, his originality or
even his competence in analytic economics cannot be rated high. Yet his
name will live much longer than will that of many an expert analyst. Of his
voluminous works that are, to an almost intolerable degree, affected by rabies
systematica, only his Principles ( Grundlegung der politischen Oekonomie, 1st
ed., 1876) superseded by his co-operative enterprise, the Handbook ( Lehr - und
Handbuch der politischen Oekonomie ), need be mentioned here.

Our second group consists of very heterogeneous material. Ladislaus von
Bortkiewicz (1868-1931) was a trained mathematician and physicist 15 and
ranks high as a statistician of the Lexis school. As a theorist he is known
chiefly as one of the most competent critics of Marx 16 and Bohm-Bawerk.
His essentially critical bent prevented him from producing, so far as economic
theory is concerned, any creative work. Nor is this all. His criticism was at its
best when directed toward details — in a sense he was a comma hunter — and
he had no eye for the wider aspects and deeper meanings of a theoretical
model. Bortkiewicz described himself as a Marshallian. But this meant no

15 This characteristic he shared with Wilhelm Launhardt (1832-1918), professor at
the Technological School of Hanover, whose Mathematische Begriindung der Volks-
■wirthschaftslehre (1885), though substantially Walrasian and disfigured by many in-
adequacies, must yet be listed as a notable and, in some points, original performance
(especially as to transportation and location). Thus, Germany was not entirely without
‘mathematical economics.’ It is curious to observe — and characteristic of the condi-
tions in our field — that a type of research may be present and in full view and yet
pass unnoticed.

16 On this, see P. M. Sweezy, op. cit., who entirely accepts Bortkiewicz’ revision
of Marx’s theory of prices.

852 IV: FROM 1870 TO 1914 AND LATER

more than that he liked some of the least admirable and least progressive fea-
tures of Marshall’s Principles. He could have exerted beneficial influence in
Berlin, however, if he had not stood on a side track — quite overshadowed by
Schmoller and Wagner — and if he had been less ineffective as a teacher. •

Karl Diehl (1864-1943), on the contrary, stood on no side track: he occupied
in Freiburg what was — partly before him and partly owing to him — one of
the most prominent German chairs of economics. And he was a most effective
teacher, not so much in the lecture hall as in his seminar, which formed and
stimulated a large number of pupils. He was of a strongly institutionalist bent
— all for historical relativity in particular. But this did not prevent him from
being a genuine ‘theorist/ that is, an economist who does not drop theory
when he has done with some philosophies and quarrels about concepts, but
who uses theory as an instrument with which to solve problems. His theory
was neither original, nor very modern, nor very refined— its roots were in
the English ‘classics’ 17 — but it was serviceable theory all the same, and in
the existing situation meant a good deal.

Heinrich Dietzel (1857-1935), the incumbent of another leading professor-
ship (in Bonn), was a man of a different stamp. He, too, was primarily a
theorist and the superior of Diehl in rigorous logic. But he was less effective
as a teacher, both by temperament and by the singular sterility of his scien-
tific message. He just ‘dug his toes in’ and stayed, intellectually, in the posi-
tion, the ‘classic’ position, he had reached in his early manhood. Though he
did some respectable work on ‘classic’ lines and contributed an interesting
volume on theory ( Theoretische Socialokonomik; method mainly) to Wagner’s
Lehr- und Handbuch, he is not likely to be remembered except for his contro-
versy with Bohm-Bawerk.

Wagner’s and Dietzel’s cases show that it was the nature of the ‘theory’
taught, rather than either Sozicdpolitik or historism, which accounts for what at
first sight looks like an eclipse of analytic work of this kind that may not
amount to a great deal in itself but seems to be necessary to vitalize the rest.
The case of Wilhelm Lexis (1837-1914), the great statistician, displays the
same thing from a slightly different angle. Lexis did work of a high grade in
many fields, especially on questions of monetary policy and foreign trade.
He was also prominent among the critics who attacked the Marxist system
when the third volume came out. But all these writings show weaknesses on
the theoretical side that are surprising in a man of no doubt remarkably keen
intellect. His textbook solves the riddle, however: it shows conclusively that
he took no interest whatever in the work of improving the apparatus of anal-
ysis; having grown to maturity in an anti-theoretic atmosphere, he entirely
failed to perceive the scientific possibilities of the new ideas that were cropping
up in his middle age. Since his purely intellectual interests were in any case

17 His Sozidwissenschaftliche Erlauternungen zu David Ricardos Grundgesetzen (see
above, Part m, ch. 4) was his main scholarly achievement in this field. But his monu-
mental Principles ( Theoretische Nationalokonomie, 4 vols., 1916-33) is also a con-
siderable work that still repays perusal. His work on Proudhon has been mentioned
before.

GENERAL ECONOMICS: MEN AND GROUPS

8 53

in the theory of statistics, he did not even bother to use mathematics — which
he would not have had to acquire laboriously — in the service of his economics.

We must on no account omit to mention Eugen von Philippovich (1858-
1917), although we shall have to mention him again in order to use his famous
textbook as a representative sample of what it was ‘the student got/ He was
one of the greatest teachers of the period, a man of intellectual stature, pas-
sionately interested in the social and economic issues of his time, yet a careful
thinker and open to all the currents in scientific economics that were within
his range. These virtues and in particular this catholicity of scientific taste
made him an ideal mediator when mediation was surely needed. He gave their
due both to Schmoller and to Menger and all they stood for; he was whole-
heartedly in sympathy with Sozialpolitik of a New-Deal type, and though not
a man of ‘theory’ himself — his own research was wholly of a ‘practical’ nature
— he saw to it that analytic culture should not, within the sphere of his in-
fluence, drop to zero level. Much earlier than the other Austrians, he got on
terms with the spirit of German economics — he was professor in Vienna —
and it was due to his influence, exerted mainly through his textbook, that
marginal utility theory filtered through to German students at all.

Gerhart von Schulze-Gaevernitz (1864-1943) illustrates — at its best — still
another type. So far as technical economics is concerned, this Freiburg pro-
fessor can hardly be called an economist at all. But he was more — a genuine
social philosopher, almost what I should like to call a social theologian, and
at the same time a political observer who did not lack realism. He thus pro-
duced works 18 of wide scope that, whatever our opinion may be about their
epistemological standing, have their place, besides being masterpieces of their
genus. They were written with a purpose — they preached a social message.
But though this is much, it is not enough unless a good technician teaches in
the next room. He never seems to have realized that, if we are to apply our
reason to social and international affairs, we need not only social visions, ideals,
and facts, but also, since we are not Laplacian demons, certain techniques, and
he unwittingly injured his pupils, some of whom were to rise to eminence, by
failing to impart to them the saving minimum of technical economics (and,
for this purpose, to learn it himself).

Even in Marshallian England, there were Hobsons. But in Germany and
Austria in a situation such as I have been trying to describe by ‘patches of
color,’ where the all-round competence of all professional economists, hence
the level of criticism, cannot be high, Hobsons must thrive and free-lance
economists must be numerous. Trained men also, the training being what it
was, would often indulge in misplaced originality that arises simply from fail-
ure to understand or master the existing apparatus of the science. Even able

18 They remind one of Adolf Held’s Z wei Bucher zur sozialen Geschichte Englands
(ed. by G. F. Knapp, 1881), another man of this type whom I hate to omit. Schulze-
Gaevernitz’s two most important and also, I think, most characteristic works are:
Z um socialen Frieden (1890; the translation of the subtitle is: ‘a description of Eng-
land’s education to Sozialpolitik in the nineteenth century’), and Britischer Imperial-
ismus und englischer Freihandel (1906).

854 iv : FROM 1870 TO 1914 AND LATER

men may then blunder atrociously, misconceive problems, take their errors
for discoveries. In consequence, we have a long list of men who even attained
success with the profession and filled considerable positions but are difficult
to characterize from a professional standpoint. I shall mention some of the
most eminent writers of this type but I shall not return to some of them:
Effertz, Gotti, Liefmann, Oppenheimer, and Spann. Treating such men in this
manner involves the duty of saying why.

This duty cannot be fulfilled properly: it would take a volume. I can only state
my reasons, not establish them. Otto Effertz, who was the only man in our list who
failed to attain a professorship and was something of a tragic figure, produced a work,
Arbeit und Boden (1890-91), which in its final form, which differs considerably from
the original one, was published in French under the title Les Antagonismes economiques
(1906). It is typically the work of an able man who does not know how to go about
his task. My reason for excluding Effertz from my subsequent report is that removal
of provable mistakes reduces his argument to commonplace. For a different opinion,
see the introduction to the French volume. I fear that the only way of appreciating
Professor F. von Gottl-Ottlilienfeld, who held a conspicuous place and found many
adherents — or else my reason for excluding him — is to read him. 19 Robert Liefmann
(1874-1941) was an economist of merit, especially on cartels. Our trouble is with his
theory (summed up, for example, in Qrundsdtze der Volkswirtschaftslehre, new ed.,
1922), which presents an interesting feature. His fundamental principle of equaliza-
tion of marginal returns in money (and the whole of his 'subjective’ theory of prices)
is (barring slips) nothing but a particularly inconvenient expression of the main con-
tent of the Austrian theory. But having discovered it independently, he stoutly denied
any affinity, wasted powers that were well above average on conducting controversies,
and asserted claims that nobody would or could take seriously. Meaningless talk about
imaginary issues such as 'subjectivism’ and ‘objectivism’ (or ‘materialism’ and ‘natural-
ism’) in price theory did the rest. His net contribution to topics relevant to the pur-
poses of this book, and excepting his work on cartels, is zero. Franz Oppenheimer
(1864-1943) was a man of mark, a leading Zionist, a ‘positivist’ sociologist who is not
likely to lose his place in the history of that line of thought, a powerful teacher who
shaped many growing minds and did much to keep the flag of economic theory flying
by spirited controversy. His Henry-George attitude toward private property in land 20
in itself would not suffice for my refusal to go at length into his doctrines. The reason

19 The psychic cost of doing so may, however, be substantially reduced by reading
instead Professor von Haberler’s review of the methodological writings of Gotti that
were republished in 1925 under the title Wirtschaft als Leben. (The review is in the
Zeitschrift fiir Nationalokonomie, May 1929, entitled ‘Kritische Bemerkungen zu Gottis
methodologischen Schriften.’) But no such helper is available for the rest of Gotti’s
writings.

20 Oppenheimer was one of the many writers, among whom are A. Smith and
Senior, who spoke of a monopoly in land. This, however, is not what I mean by
the phrase in the text. He was also one of those less numerous writers who, like
Henry George (and some who have been noticed in Part in), ascribed all phenomena
that looked to them like deviations from proper functioning of the capitalist engine
to landed property or to the exclusion of workmen from free access to land ( Boden -
sperre), which, of course, involves the thesis that private property is the reason why
land is a scarce factor at all. The abolition of this Bodensperre is (substantially) what
his Liberal socialism that made a hit with many minds amounts to.

GENERAL ECONOMICS: MEN AND GROUPS 855

for this refusal is that the case of his analytic apparatus (his ‘objective’ theory of price)
is beyond remedy or, rather, because there is only one remedy for its defects, namely,
training in theory. But he was not devoid of insight and threw out many good ideas.
Among other things, he saw the use of the concept, and coined the word, Compara-
tive Statics (see below, ch. 7, sec. 3). 21 Professor Othmar Spann, 22 whose teaching
at the University of Vienna (from 1916 on) was a great success and who formed a
genuine school in our sense, has been mentioned already on previous occasions. Neither
his social philosophy nor his epistemology nor his sociology is in question here. We
are concerned with his theory only. And this was completely barren of results. It is
only the use of certain phrases that distinguishes the works on public finance or
cycles or any others that profess to apply that theory. 23

5. Italy

The most benevolent observer could not have paid any compliments to
Italian economics in the early i87o’s; the most malevolent observer could not
have denied that it was second to none by 1914. The most conspicuous com-
ponent in this truly astounding achievement was no doubt the work of Pareto
and his school. But once more it must be emphasized that dominant schools
do not dominate. The Pareto school with its allies and sympathizers never
dominated Italian economics any more than the Ricardo school dominated
English, or the Schmoller school German, economics. The really remarkable
thing is on the contrary that, even independently of Pareto, Italian economics
attained a high level in a variety of lines and in all applied fields. Some of
the excellent work done especially in money and banking, public finance, so-
cialism, and agricultural economics will be noticed later, but it cannot be
made to stand out as it should. Not even the various currents in general eco-
nomics can get their due, least of all those that originated in historical or other
factual work which in Italy really fertilized general economics and did not, as
in Germany, conflict with ‘theory’ — the kind of general economics that may
be represented by the work of Luigi Einaudi, although it was only after 1914

21 Of Oppenheimer’s many works we need, for our purposes, notice only: Theorie
der reinen und politischen Okonomie (vol. m of his comprehensive System der Sozi-
ologie; 5th rev. ed., 1924) and Wert und Kapitalprofit (2nd ed., 1922). Professor Alfred
Amonn’s elaborate critical analysis of Oppenheimer’s theoretical structure may prove
helpful ( Zeitschrift fur V olkswirtschaft und Sozialpolitik, 1924). There is quite an
Oppenheimer literature, of which I mention only E. Heimann’s 'Franz Oppenheimer’s
Economic Ideas’ in Social Research, February 1944. If the reader refers to this ar-
ticle, he will find that, although Professor Heimann extols Oppenheimer as a social
philosopher and political thinker and makes the most — as is proper in a memorial
article — of the strong points of Oppenheimer’s teaching, the implied appraisal of his
purely analytic work does not differ substantially from that above.

22 See, e.g., his Fundament der Volkswirtschaftslehre (3rd ed., 1923).

23 The doctrine, or the influence, of Gotti, Oppenheimer, and Spann did not mature
until the 1920’s. But I wished to use this opportunity in order to relieve Part v. At
least the formative stage of the thought of these authors comes within the period under

856 IV: FROM 1870 TO 1914 AND LATER

that he rose to a leading position. We shall divide our sketch into three parts,
which we respectively inscribe to the elder statesmen, Pantaleoni, and Pareto.
An interesting figure that falls out of our inevitably oversimplified picture,
Achille Loria, is noticed in the note below . 1

(a) The Elder Statesmen. As already mentioned, the vigorous renaissance of
Italian economics is often associated with the teaching of Ferrara, Messedaglia , 2
and Cossa . 3 Sociological conscience compels us to emphasize the facts that
Italy was sure to revive her brilliant tradition in the field as soon as circum-
stances became more favorable; that national unity brought about such cir-
cumstances and produced in addition new national problems and opportuni-
ties; and that, though the worldly means at the disposal of Italian economics
were modest, there was a large number of ill-paid professorships. These facts
do not, however, detract from the merit of these great teachers and those
who were to follow them. The personal element looms large in the explanation
of the achievement: an unusual number of unusually able men certainly made
the most of these objective opportunities. It was the particular merit of Cossa

1 Achille Loria’s (1857-1943) work is a curious cross product of genius and bad
training in analysis. But this bad training was itself of a curious kind that, however,
occurs not infrequently in economics. He was not ignorant but on the contrary even
unusually learned. The English ‘classics’ he knew almost by heart and Marx only
slightly less completely. Also he was well read in history and philosophy. But he
either had not learned the art of economic analysis or else he had no bent for it.
Moreover, he lacked self-criticism completely where pet ideas were concerned. Thus,
he was led — like many older writers — to attach quite unwarranted importance to the
explanatory value of the presence or absence of free land that became the keynote
in his economic and sociological thought. He combined this idea with a wholly un-
tenable development of Ricardo’s theory of value and with the Marxist unitary con-
ception of non-wage income — which then, at one remove, splits into interest (profit)
and rent — and from these elements he constructed a ‘land-property system of eco-
nomics’ that, in conception and intent, parallels — Marxists will say, caricatures — the
Marxist system in a way that is not unlike Oppenheimer’s. He believed himself to
have founded a school. But all that I could undertake to establish from the literature
is that he interested and stimulated many of his contemporaries and that, from some
of them, he drew the kind of recognition in which it is difficult to distinguish polite-
ness from acknowledgment and acknowledgment from allegiance.

2 On Ferrara and Messedaglia see above, Part hi, ch. 4, sec. 6.

3 Luigi Cossa (1831-96), professor in Pavia, was first of all a great teacher, one of
those men who do not need the opportunities of the modem American teacher but
will, as if by magic, extract from large classes of very mildly interested students the
minority that is ready to open its mind to the vivifying influences of the personal
interview. Second, he was a very learned man. His Guida alio studio dell’ economia
politica (1876, English trans., 1880) is indeed a guide, but one that guides by means
of introducing the neophyte to the authors of the past. The title of the French trans-
lation (the book was translated into several languages and very widely read) is really
more characteristic of its content: Histoire des doctrines economiques (1899). Being
based on original research, it ranks high as a history of economics. [The French trans.
and a new English trans. (1893) were based on the third (revised and enlarged) Italian
ed., entitled Introduzione . . . dell’ economia politica (1892).]

GENERAL ECONOMICS: MEN AND CROUPS 857

and Messedaglia to teach science and to propagate the spirit of scholarship,
to lead away from the eternal squabbles about politics — laissez-faire versus
Sozialpolitik in particular — and to let the rising generations discover that
there was serious work to be done. Though they succeeded only in part — who
could have done more? — and though the old controversy went on not only
undisguised but also in the guise of apparently scientific squabbles on 'natural
laws/ they not only instigated research but also helped to create the atmos-
phere of research. This research, so far as general economics is concerned, no
doubt started from foreign examples, notably the examples of the historical
and the Austrian schools. But, by way of criticism as well as of original work,
it became rapidly ‘nationalized/ A great many men responded successfully to
the stimulus and a great many should be mentioned — such as Supino or Ricca-
Salerno, the pupil of Cossa and teacher of Loria, Conigliani, Graziani. But
we must refrain.

(b) Pantaleoni 4 The Principi di economia pura (1889) will serve as a land-
mark. Austrian or ‘Austro-Walrasian’ in fundamentals, enriched by Marshall’s
apparatus of foreign and domestic trade (from his privately printed pamphlets
of 1879), it gave an important lead away from old and toward new things. In
this consists its importance, for though it is brilliantly written — Edgeworth
was not wrong when he called it a ‘gem’ — and is still worth reading, there is
nothing entirely original in it. Pantaleoni’s original ideas are scattered in his
papers and addresses. To mention but a few, he was one of the first theorists
to try his hand at the subject of price fixing ( prezzi politici); he contributed
to the theory of industrial combinations ( sindacati ); he toyed, not without
success, with the tricky concept of collective maxima of satisfaction; he wrote
suggestively on the problem of evaluation of assets in the absence of prices;
above all, as Moore was to recognize, he was the first theorist to adumbrate
a theory of endogenous fluctuations. Nothing of this he carried very far. But

4 Maffeo Pantaleoni (1857-1924) was a man of many activities and this remains true
even if we discard all the non-scientific ones. His prominence in Italian economics dates
from the book mentioned in the text above, but his prominence in the Italian pro-
fession dates from 1900, when he was appointed to the chair of Pavia, or rather from
1902, when he succeeded Messedaglia at the University of Rome. Before the Principi
(English trans., 1898; this trans. is from the 2nd ed., 1894), he wrote another book
of importance on incidence of taxation (Teoria della traslazione del tributi, his mas-
ter’s thesis, 1882). But the full extent of his influence and his originality cannot be
appreciated from either. His suggestions were thrown out in papers out of number,
the most important of which are republished in Scritti van di economia (1904-10) and
in Erotemi di economia (1925). His ‘La crisi del 1905-07/ published in Annali di
economia, 1925, though a report occasioned by a government inquiry, is a substantial
contribution to the theory of cyclical fluctuations. This and other factual work — some
of which is not without importance for statistical theory — must be taken into account
in any appraisal of the man and scholar: he was anything but a ‘pure theorist/ al-
though he understood ‘pure theory’ as few people ever did. After his death a number
of eminent Italian economists wrote tributes to him that are published in the Giornale
degli Economist i, 1925 (a bibliography is added). See also G. Pirou, ‘Pantaleoni et la
theorie 6conomique/ Revue d’economie politique, 1926.

858 iv: FROM 1870 TO 1914 AND LATER

he disseminated suggestions and helped to get things going. And he introduced
Pareto to the work of Walras.

Again, many names ought to be mentioned here. I shall confine myself to
three, however. The first is Barone 5 who began to publish in the early 1890’s.
He was the man who showed Walras how to dispense with constant coeffi-
cients of production; who formulated the limits of the validity of Marshall’s
partial analysis; who went in some points beyond Marshall and in others (in
the theory of public finance) beyond Edgeworth; and; — no doubt on the basis
proffered by Pareto — blocked out the theory of a socialist economy in a man-
ner on which the work of our own time has not substantially improved. Only
the last performance, and his excellent textbook, have received adequate recog-
nition. But he did better than the second man I am going to name, G. B.
Antonelli, whose remarkable performance has received no attention at all. 6
The third name to be mentioned is that of Marco Fanno, 7 whose early work
belongs to this period.

(c) Pareto. At long last we approach the eminence that was Pareto. If we
follow his disciples in speaking of a Paretian epoch, we should date it from
about 1900, when he began to define a position and to form a school of his
own, as we noted above. Like all genuine schools, this one had a core, allies
or sympathizers, and a foreign sphere of influence. Many writers come under
each of these headings. But if we sample the Italian economists who, then
or later, attained international reputation, we find that followers of strict ob-
servance — those who formed the 'core’ — were in a small minority. I think that
the names of Amoroso, Bresciani-Turroni, Del Vecchio, Einaudi, Fanno, Gini,
de Pietri-Tonelli, Ricci will arise in the mind of everyone who knows the
scientific situation of 1910-40. Of these only Amoroso and de Pietri-Tonelli
belong to the core of the Paretian school. 8 Einaudi and his pupils stood en-
tirely aloof and on ground of their own. And all the others were at most
'allies or sympathizers’ in the sense that they recognized Pareto’s eminence,
allowed themselves to be influenced by him in individual points though sub-
stantially they went their own way — perhaps the word ‘ally’ is altogether too
strong. In order to appraise Pareto’s international sphere of influence, the

5 Enrico Barone (1859-1924) was a soldier, politician, and teacher, who had a good
mathematical training. Most of his publications appeared in the Giornale ' degli Eco-
nomist!. A few will be referred to later on. His Principi di economia politica first ap-
peared in 1908. I have never been able to understand why the services of this brilliant
economist were not more recognized in his own country.

6 G. B. Antonelli, Sulla teoria matematica della economia politica (1886). This
little treatise seems to me to anticipate later work in some important points.

7 See especially Fanno’s Contributo alia teoria dell’offerta a costi congiunti, supple-
ment to the Giornale degli Economisti, October 1914.

8 The contributions of Luigi Amoroso, professor in Rome, are contained in a large
number of papers, but we mention for the moment only his Lezioni di economia
matematica (1921). Similarly, the original work of Alfonso de Pietri-Tonelli, professor
in Venice, must be looked for in his papers. We mention, however, his treatise, the
3rd ed. of which is available in French: Traite d’economie rationnelle (1927). Note
that the French term rationnelle simply means the same thing as pure.

GENERAL ECONOMICS: MEN AND GROUPS 859

reader must distinguish four different things. First Pareto’s sociology was a
success internationally and, for a short time within the 1930’s, created the
limited Pareto vogue that we have noticed already in the United States. Sec-
ond, the famous Pareto Law of the (statistical) distribution of incomes evoked
much interest and criticism, mostly hostile, all over the world. 9 Third, Pareto
as a 'pure’ economist became a familiar figure in England and the United
States when Allen and Hicks developed his theory of value (indifference-curve
approach, see below. Appendix to ch. 7), giving generous credit to him. This
was, however, only in the 1930’s. Fourth, the rest of Pareto’s economics re-
mained practically unknown in the Germanic countries, except for some ad-
verse criticism of his theory of monopoly especially in Germany. Things were
more favorable to Pareto in France (but not before the late 1920’s), where
Bousquet sponsored his doctrines, and Divisia and Pirou noticed them. 10

The Marchese Vilfredo Pareto (1848-1923), the son of a Genoese father
and a French mother, was trained (and throughout his prime practiced) as an
engineer. This means more than that he had a good training in mathematics.
His powerful mind roamed far beyond the precincts of applied science into the
realm of the pure concepts that are perfectly general: few people can ever
have realized with such intensity as did he that, ultimately, all exact sciences
or parts of sciences are fundamentally one. Early interest in economic theory
is indicated by an address in 1877 the Reale Accademia del Georgofili 11
on the logic of the 'new economic schools.’ But still more obvious is an early
interest in economic policy. This calls for comment, because Pareto’s legiti-

9 Pareto published his statistical law of the distribution of incomes by size in his
Cours (1896-7) and in the Recueil, published by the faculty of law of the University
of Lausanne on the occasion of the national Swiss exposition of 1896, under the title:
‘La courbe de la repartition de la richesse.’ The large literature evoked by this pub-
lication (which still runs on) testifies conclusively to its importance and to its stimu-
lating influence. Idle discussion has been unpleasantly warped by the political pre-
conceptions of both critics and sponsors. But two contributions may be recommended
to the reader (as introductions) from the long list of the serious and competent ones:
D. H. Macgregor, 'Pareto’s Law,’ Economic Journal, March 1936, and C. Bresciani-
Turroni, 'On Some Methods of Measuring the Inequality of Incomes,’ in the Egyp-
tian periodical Al Quanoun Wal Iqtisad, 1938. E. C. Rhodes’ ‘The Pareto Distribution
of Incomes,’ Economica, February 1944, while excellent, presents some difficulties for
non-mathematicians. The implications — real or supposed — of the law for our outlook
on the income structure of capitalist society were, so far as I know, first seriously
discussed in English by Professor Pigou in Wealth and Welfare (1912). Though seri-
ous, his discussion displays symptoms of emotional bias.

10 See, especially, G. H. Bousquet, Cours d’economie pure (1928), also the same

author’s Essai sur revolution de la pensee economique (1927) and Institutes de science
economique (1930-36). Frangois Divisia, Economique rationnelle (1928); G. Pirou, Les
theories de Vequilibre economique: L. Walras et V. Pareto (1934). *

11 To this extent, what has been said about Pantaleoni’s influence must be qualified.
The reference is due to Professor de Pietri-Tonelli’s memorial address on Pareto to
the Italian Society for the Progress of the Sciences, published in three parts in the
Rivista di Politica Economica, 1934-5, which is herewith recommended to the reader.

86o

IV: FROM 1870 TO 1914 AND LATER

mate influence has been reduced by the aversion to his politics of so many of
his readers: he looked to them (at all events until his general sociology, Trattato
di sociologia generate, appeared in 1916) like an uncritical ultra 'liberal in the
laissez-faire sense. But his liberalism, economic and political, was of a peculiar
kind and had a peculiar root. He was a man of strong passions, passions of the
kind that effectively preclude a man from seeing more than one side of a
political issue or, for that matter, of a civilization. This disposition was re-
inforced rather than mitigated by his solid classical education that made the
ancient world as familiar to him as were his own Italy and France — the rest
of the world just existed for him. And, watching with passionate wrath the
doings of the politicians in the Italian and French liberal democracies, he
was, by indignation and despair, driven into an anti -etatiste attitude which, as
events were to show, was not really his own. Add to this the fact that at the
same time he was (like Marx) a product of the civilization he hated, and
therefore (also like Marx) a positivist and laicist, and you will understand the
liberalist surface of his earlier writings.

He was 45 when he left Italy and business practice, having accepted the
chair of Lausanne vacated by the retirement of Walras. Indifferent health and
the acquisition by inheritance of adequate means motivated his own retire-
ment, at a comparatively early age, to Celigny on the Lake of Geneva, where,
in the almost twenty years of thought and assiduous writing that were still
before him, he was at leisure to fill to the full the measure of his genius and
of his intellectual ambitions. There he grew to be the 'lone thinker of Celigny,'
who was looked upon, with something akin to awe, somewhat as an ancient
sage. The interesting fact deserves to be noticed that so great an influence
could have been exerted by a man who lived in resolute though hospitable se-
clusion in a shabby house full of cats (hence Villa Angora) that was then not
convenient to visit. 12

If we now discard his sociology and also Pareto's Law, the indubitable great-
ness of his performance is as difficult to define as its roots are easy to indicate.
Ferrara and others, Cournot among them, may have provided suggestions, but
his work, as it shaped in Lausanne where he first put his mind fully to ana-
lytic economics, is so completely rooted in Walras’ system that to mention
other influences can only mislead. To the non-theorist this shows less than it
should, because Pareto's theory floats in a sociology, philosophy, and method-
ology that are not merely different but diametrically opposed to Walras’ ideas.
But as pure theory, Pareto’s is Walrasian — in groundwork as well as in most
details. Nobody will deny this, of course, as regards Pareto’s work until 1900
that centers in the Cours d’economie politique (1896-7). This is simply a bril-
liant Walrasian treatise. Later on Pareto discarded the Walrasian theory of
value and based his own on the indifference-curve apparatus invented by Edge-
worth and perfected by Fisher. He also overhauled Walras’ theory of produc-

12 A charming picture of the man and thinker has been drawn by Professor G. H.
Bousquet in his Vilfredo Pareto, sa vie et son oeuvre (1928; English trans., same year).
I use this opportunity to refer to the same author’s Introduction a l’ etude du Manuel
de Vilfredo Pareto (1927).

GENERAL ECONOMICS: MEN AND GROUPS 86l

tion and capitalization and he departed from the latter’s teaching in matters
of money and others, adding various developments of his own. The new sys-
tem was presented in the Manuale di economia politico. (1906), the mathe-
matical appendix of which was greatly improved in the French version ( Manuel ,
1909). 13 But even the Manuel — always disregarding the sociology — is not more
than Walras’ work done over, as can be established by drawing up the exact
models of both authors. It was, however, done over with so much force and
brilliance as to grow into something that deserves to be called a new creation,
though various deductions from the achievement are in order: there are not
unimportant points in which Walras’ system remained superior. Recognition
of the quality of his creation does not excuse Pareto’s less than generous atti-
tude toward the teaching of Walras from which he put himself at a greater
distance than was really necessary. 14

6. The Netherlands and the Scandinavian Countries

Two facts describe the scientific situation in the Netherlands that prevailed
at the beginning of the period: a high level of competence and culture in our
field, based upon an old tradition that was being worthily kept up by such
men as Mees; and the absence of a domestic impulse toward scientific revolu-
tion. Dutch economists were quite above any Tattle of methods’ and but
mildly affected by either historism or any other of the new tendencies of the
age. They carried on the usual discussions about socialism, Sozialpolitik,
money, free trade, but on the whole things were quiet. Thus they were both
able and willing to accept the "new theories’ — in the Austrian edition rather
than in the Walrasian or Marshallian ones simply because Menger’s teaching
was available, in a usable form, before the others. The leading Dutch econo-
mist of the period, Pierson, inserted this teaching in his own and founded 1 a

13 Having already mentioned the Trattato di sociologia generate (1916), we need,
for the purposes of this book, add only the following publications to the Corns and the
Manuel: Les Systemes socialistes (1902-3) and ‘ficonomie mathematique’ in the French
edition of the Encyclopaedia of the Mathematical Sciences, 1911 (the corresponding
article in the earlier German edition is insignificant). The articles that appeared in
the 1890’s in the Giornale degli Economisti, though not uninteresting — they should
be republished — were, from Pareto’s own standpoint, obsolete by 1900; later articles
in the field of pure theory were merely chips of the Manuel or the Encyclopaedia
article.

14 Personally, the aristocratic Pareto and the middle-class radical Walras did not
like one another.

1 Nicolas Gerard Pierson (1839-1909) was primarily a public servant — a director of
the Dutch Central Bank at an early age; later on its president, Minister of Finance,
Prime Minister, and a parliamentarian to the last. Such a career will not prevent
a strong intellect like his, when coupled with a giant’s capacity for work, from
achieving eminence as a scientific economist — he was in fact a prolific writer, who
published about a hundred books and papers — but it will absorb those sources of
energy that produce original creations. His chief work, the Leerboek der Staatshuis-
houdkunde (1884-90), is available in English ( Principles of Economics, 1902-12, from

862

iv: FROM 1870 TO 1914 AND LATER

school that, supported by leaders such as Verrijn Stuart and de Vries, lasted
well into the 1920’s, when it assimilated newer tendencies without any vio-
lent break. 2

We might repeat all this, with very little change, for the Scandinavian
countries, which may for our purposes be taken as a unit. But I shall merely
mention the names of Birck (Copenhagen), Davidson (Uppsala), and Cassel 3
(Stockholm), and then hurry on to the Nordic Marshall, Wicksell, whose
work was one of the most important factors in the emergence of the economics
of our own time, and not only in Sweden.

No finer intellect and no higher character have ever graced our field. If the
depth and originality of his thought do not stand out more clearly than they
do, this is only owing to his lovable modesty, which led him to present novelty
— semi-hesitatingly — as little suggestions for the improvement of existing pieces
of apparatus, and to his admirable honesty, which pointed incessantly to his
predecessors, Walras, Menger, and Bohm-Bawerk, although, with much more
justification than did others, he might have presented his system of analysis
as substantially his own creation.

Knut Wicksell (1851-1926), like Marshall, was a trained mathematician. He
was also, for his time, a radical who knew how to get himself into trouble, but

the 2nd ed. of the original) — a performance that, in the doctrinal development of
that time, filled a function similar to that of Pantaleoni’s work.

2 See, e.g., C. A. Verrijn Stuart’s Grondslagen . . . [Fundaments . . .], 1920.

3 Professor L. V. Birck ’s (1871-1933) position may, so far as economic theory is
concerned, be compared with Pierson’s. See his Theory of Marginal Value (1922). Pro-
fessor David Davidson is chiefly known as the author of a history of Sweden’s central
bank, for his contributions to the theory of money, and as a friendly critic of Wicksell.
But he was also a theorist of note — so I infer from his work on capital formation
(owing to my scanty reading knowledge of Swedish, I cannot say, however, that I
really know it). See the excellent work by Mr. Brinley Thomas that interprets Swedish
doctrine for the English-reading public (Monetary Policy and Crises: a Study of Swedish
Experience, 1936). Professor Gustav Cassel’s (1866-1945) international fame rests upon
his contributions to, and role in, the discussion on monetary policy during and after
the First World War (see below, ch. 8) and upon his textbook, Theoretische Sozial-
okonomie (1st ed., 1918; English trans., The Theory of Social Economy, 1923). But
he started as a theorist with a paper, 'Grundriss einer elementaren Preislehre’ (Z eit-
schrift fur die gesamte Staatswissenschaft, 1899) that made the attempt, important
considering the date, to reformulate the Walrasian equations without using utility con-
cepts. His fresh — fresh in more than one sense — book on The Nature and Necessity
of Interest (1903), in spite of some unfounded criticisms and still more unfounded
claims to originality, is a considerable performance that deserves perusal as an anti-
dote to the theories of interest that became current in the 1930’s. Cassel, as a theorist,
belongs in this context because he too was one of those second-generation writers who
rounded off the Jevons-Menger- Walras structure. Only he followed Walras rather than
Menger. His textbook, in its fundamental conception, is mainly a version — or popu-
larization — of Walras’ doctrine (minus utility) in spite of the fact that Walras’ name
does not occur in it. Cassel was an effective and inspiring lecturer and some of the
opinions, in matters of pure theory, of modern Wicksellians may still be traced to
his teaching.

GENERAL ECONOMICS: MEN AND GROUPS 863

who never learned to sacrifice to his emotions what he believed to be scientific
truth. In this respect, he was not unlike J. S. Mill, who must be listed among
the formative influences that acted upon Wicksell’s work and with whom in
particular he shared an almost passionate neo-Malthusianism. 4 Barring this
qualification, his life may be described as that of a quiet and retired scholar.
He attained a professorial chair (Lund) only late in life and occupied it for a
comparatively short span of years. Nevertheless, his influence spread — by vir-
tue of its own momentum — particularly after his retirement, when he took
part in current discussions more actively than before. He had many pupils of
very' high quality. Practically all the well-known Swedish and Norwegian econ-
omists of today are, more or less, his pupils. His international reputation, how-
ever, was not commensurate with his achievement until, in the late 1920’s
and the early 1930’s, it began to dawn upon the professional world that he
had anticipated, to a very large extent, all that was most valuable in the mod-
ern work on money and interest. This part of his work will be considered
later on, as will his work on taxation. In this and the following two chapters
we are chiefly concerned with his performance in 'general theory.’ Attention is
drawn to the standard biography, which carefully analyzes Wicksell’s work,
by Professor Emil Sommarin, unfortunately not available in English ('Das
Lebenswerk von Knut Wicksell,’ 'Zeitschrift fur Nationaldkotiomie, October

i 93°).

His first publication on economic theory, Uber Wert, Kapital und Rente
(1893, London School Reprint, 1933) is the work of a mature man of 42 and
contains the skeleton of the first volume of his Lectures (1901; German ed.,
1913; English ed., with excellent introduction by Professor Robbins, and two
important appendices, 1934). Volume 1 of the Lectures embodies the bulk of
his contributions in that field, though several papers (e.g., his last piece of
work, the paper on the theory of interest ('Zur Zinstheorie’) in Die Wirt-
schaftstheorie der Gegenwart, ed. H. Mayer, hi, 1928) ought to be added. No
reader’s guide will be offered: no student of economics has completed his
training who has not read the whole of this volume, although the first part
is elementary and, for us, valuable mainly for the purpose of dispelling er-
roneous ideas, old and new, about the utility theory and ‘marginalism’ in
general. The main original contributions are pointed out in Professor Robbins’
introduction.

7. The United States

The background of individual performance in the United States from about
1870 to 1914 is adequately described by the following familiar facts. During

4 Wicksell himself would have attached great weight to his work on population
problems. But in this Part of the present book we are only peripherically interested
in these and cannot therefore do justice to that work. It must suffice to state that
Wicksell always considered limitation of the birth rate as an essential factor in the
future of the working class and that the tendency of the birth rate to fall that began
to assert itself in his time was unconditionally welcomed by him as it would have
been by J. S. Mill.

864 IV: FROM 1870 TO 1914 AND LATER

that period the American economic profession established itself both nation-
ally and internationally. It acquired definite standing at the universities and
in the country, an organization, and all the paraphernalia of an established
department of scientific knowledge; and it came to be increasingly recognized
by the other national professions. Also American economics increasingly
professorialized itself. But, starting from near zero at 1870, these developments
went on at such a rate of acceleration that the growth of fully competent
personnel lagged behind the opportunities that were opened up. Many of the
men who entered the new profession were practically untrained; and they ap-
proached their professional activities with their minds full of preconceived
ideas that they were not prepared to put through any analytic mill — even the
spirit of the old social-science movement kept on reasserting itself and had
much to do with the success of institutionalism. So had sympathies with Pop-
ulism that many economists entertained. Others, not finding in the country
what they wanted, continued to rely on European ideas and methods though
no longer exclusively English ones — the pilgrimage to Germany, in particular,
became for those who could afford it almost a regular incident of their career,
something like the cavalier’s tour of old. When they met, after having found
their individual bearings, they had difficulty in understanding one another, and
of locating, let alone appreciating, one another’s standpoints. Disagreement
was hence largely disagreement owing to misunderstanding. Surprisingly differ-
ent intellectual levels — not only as regards scientific apparatus — were found
side by side, for there was no uniformity either in professional training or in
general education. For a considerable stretch of time, there were no recognized
professional standards, and competent teaching was not always guaranteed.
Most were at their best when working on some factual problem of national
interest, which they learned to master thoroughly, and it was in this type
of endeavor that the first successes occurred. But from the first, ‘theory’
was unpopular with the majority and likely to evoke opposition quite inde-
pendently of the reinforcing German influence, and long before this opposi-
tion was rationalized and made vocal. All this had its obvious advantages as
well as disadvantages. Moreover, it all straightened itself out in time — through
a long, arduous, wasteful, but not inglorious struggle.

The best way to recall to the reader’s mind a number of figures that, with
one or two exceptions, should be familiar to him, will be to adopt a schema
similar to the one that has served us before. First (a) we shall glance at a few
of those men who helped to prepare the ground for the developments from
the 1890’s on. They do not exactly correspond to what we have called the
‘elder statesmen’ before. They were simply good economists and good teachers
who, both before and after those developments began, stood for straight think-
ing and were instrumental in raising standards all round. We shall then (b)
form a group of Clark, Fisher, and Taussig. And we shall (c) combine into a
final group some representative men whose names, in one way or another,
we need for the purpose of general orientation.

But we cannot afford to pass by the economist whose individual success
with the public was greater than that of all the others on our list, Henry

GENERAL ECONOMICS: MEN AND GROUPS

865

George. 1 The points about him that are relevant for a history of analysis are
these. He was a self-taught economist, but he was an economist. In the course
of his life, he acquired most of the knowledge and of the ability to handle an
economic argument that he could have acquired by academic training as it
then was. In this he differed to his advantage from most men who proffered
panaceas. Barring his panacea (the Single Tax) and the phraseology connected
with it, he was a very orthodox economist and extremely conservative a !3 to
methods. They were those of the English 'classics/ A. Smith being his par-
ticular favorite. Marshall and Bohm-Bawerk he failed to understand. But up
to and including Mill’s treatise, he was thoroughly at home in scientific eco-
nomics; and he shared none of the current misunderstandings or prejudices
concerning it. Even the panacea — nationalization not of land but of the rent
of land by a confiscatory tax — benefited by his competence as an economist,
for he was careful to frame his 'remedy’ in such a manner as to cause the
minimum injury to the efficiency of the private-enterprise economy. Profes-
sional economists who focused attention on the single-tax proposal and con-
demned Henry George’s teaching, root and branch, were hardly just to him.
The proposal itself, one of the many descendants of Quesnay’s impot unique ,
though vitiated by association with the untenable theory that the phenomenon
of poverty is entirely due to the absorption of all surpluses 2 by the rent of
land, is not economically unsound, except in that it involves an unwarranted
optimism concerning the yield of such a tax. In any case, it should not be
put down as nonsense. If Ricardo’s vision of economic evolution had been
correct, it would even have been obvious wisdom. And obvious wisdom is in
fact what George said in Progress and Poverty (ch. 1, Book ix) about the
economic effects to be expected from a removal of fiscal burdens — if such a
removal were feasible.

[(a) The Men Who Prepared the Ground .] The work and services of the
men in the first of our groups will be illustrated by the names of Dunbar,
Hadley, Newcomb, Sumner, Walker, and Wells.

Charles F. Dunbar (1830-1900) was no product of the academic hothouse.
His very American career — American in a sense that is now but a reminiscence
— led through business, farming, law, journalism, and newspaper management
to the first (regular) professorship of economics in Harvard plus vigorous par-
ticipation in university administration plus highly successful activity in the
editorial chair of the Quarterly Journal of Economics , which he founded in
1886. We shall not expect that he did creative research. How is it then that
no history of American economics could be complete without mentioning him

1 Henry George (1839-97) is too familiar a figure to need introduction. Besides
Progress and Poverty (1879) only the posthumously published Science of Political
Economy (1897) need be mentioned here. His Complete Works, with a Life, were
edited by his son (1906-11). A scholarly appreciation of all the backgrounds and
affinities of the Georgian doctrine may be found in E. Teilhac’s Pioneers of American
Economic Thought (1936), ch. m.

2 Business profits he analyzed into a premium of risk, wages, and interest, exactly
like Mill; therefore he did not consider them to be disposable surpluses.

866

IV: FROM 1870 TO 1914 AND LATER

and what can students have got from him? Both questions can be answered
simultaneously: he knew the subject matter of economics from first-hand ex-
perience; his mind was clear and penetrating; his writings may not have been
'scholarly’ in the strictest sense, but any scholar could have learned from
them (and still can); 3 his administrative ability enabled him to organize the
studies in our field in a way that made the most of the opportunities then
existing; and, after all, the essentials of the scientific apparatus of that time
were not so complicated that an able man — a mind that intuitively knew what
is what — could not have mastered them in a very short time. And so, though
not a great economist in the sense appropriate to this book, he was a great
economist in the sight of God.

Arthur T. Hadley (1856-1930) was more of a purely academic man, though
he was also more of an administrator than a teacher or scholar. The work for
the sake of which he is mentioned here is his Economics . . . (1896). The
reader should really look at it. He will find a core of not very refined, but emi-
nently serviceable and realistic, theory embedded in a forceful presentation
of the institutional framework (plenty of policies and politics) — the ideal thing
for all-round introduction on a respectable level, and glorified, as seems to
have been his teaching in general, by a gift for felicitous formulation. Who
can beat — on that level — his definition of increasing and decreasing cost?
You have increasing cost if a producer sets a price at which he is willing to sell
a given quantity or less, and decreasing costs if he be willing to sell at that
price a given quantity or more.

Simon Newcomb (1835-1909) was an eminent astronomer who also taught,
and wrote on, economics but not enough to acquire the influence he deserved.
He is chiefly remembered as a sound-money man and a laissez-faire ultra, but
his name stands here because of his Principles of Political Economy (1885),
the outstanding performance of American general economics in the pre-Clark-
Fisher-Taussig epoch. He had not 'got on’ to the Jevons-Menger- Walras level
and his analysis was substantially 'classic/ But his presentation was masterly
and highly suggestive, also original in several points. But among these points
is not the Equation of Exchange that Fisher credited to him; this was but a
formulation of what was then an old story.

William G. Sumner (1840-1910), wholly an academic man and also a sound-
money, laissez-faire ultra, 4 was for the rest a different kind of person. He was

3 His best work has been collected in his Economic Essays (ed. by O. M. W. Sprague
with introduction by F. W. Taussig, 1904). But his Chapters on Banking (privately
printed 1885; 1st ed. 1891; 5th ed. by O. M. W. Sprague as Theory and History
of Banking, 1929) is still worth reading.

4 Though the ‘politics’ of our men are none of our business, it might be argued,
in the cases of Newcomb and Sumner, that their ultra-liberalism went so far as to
imply arguments, theoretical and factual, that reflect upon their judgment as scien-
tific economists. This would be true for any contemporaneous European. But it must
not be forgotten that in the United States environment of that epoch, the attitude
of Newcomb and Sumner might have been supported by facts that would have im-
pressed Marx himself, when in his historical mood, but do not lend any support to
the economic liberalism of, say, M. de Molinari.

GENERAL ECONOMICS: MEN AND GROUPS

867

a sociologist of eminence (his analysis of 'folkways’ was an extremely fertile
contribution) and his historical work on money and finance ranks with the
best performances of American economics. 5 But this is not why he is men-
tioned here. In addition to all that, he was a powerful and stimulating teacher
of wide horizons — he, the historian and sociologist, drew Irving Fisher’s atten-
tion to the possibilities of mathematical theory! — who, from his chair in Yale,
spread the message of high standards of scholarship.

Francis Amasa Walker (1840-1897), the son of Amasa, was, like Dunbar
and Hadley, primarily an administrator (Massachusetts Institute of Tech-
nology). He was also, for a time, a genuine soldier and a civil servant of dis-
tinction (revenue, census). But his indefatigable industry enabled him to earn
a great reputation as a scholar. This reputation rests primarily upon his work
in money and currency policy (see below ch. 8), but he performed creditably
also in the field of general economics. 6 He was the kind of man who cannot
touch anything without improving it, and his many activities brought him very
much to the fore — among other things, he was the first president of the
American Economic Association, a president of the American Statistical Asso-
ciation, co-president (or 'assistant’ president) of the Institut International de
Statistique. As a scientific economist, he therefore got rather more than his
due both in his day and in the historical record. In particular, his own con-
tributions to economic theory (residual-claimant theory of wages, emphasis
upon the role of the entrepreneur, criticism of the wage-fund theory) received
perhaps more attention than they would have if made by a less prominent
man. But I am saying this to protect the memory of others— and the historical
standing of American economics of that time — and not to discount the serv-
ices of a man whose name certainly deserves to live forever in the history of
our subject.

David A. Wells (1828-98) we have met already. He is mentioned again to
impress upon the reader’s mind how important in the total of American re-
search was the factual component — also in the makings of American general
economics. His famous Recent Economic Changes (1889), which every mod-
em student of economics should study, illustrates admirably what I mean.
Wells stands here as the representative of a large class. Carroll D. Wright
(1840-1909) would have made an almost equally good one. But this sketch
must not degenerate into a catalogue.

[(b) Clark, Fisher , and Taussig .] There cannot be much difference of opin-
ion, among either adherents or opponents, about the actual positions in
American economics held by Clark and Taussig in the first decade of this cen-
tury, though there may be about Fisher’s position at that time. The difficulty
is to appraise their positions in the history of that economics. The three men
were cast in very different molds. All they have in common is eminence and

5 His main achievement was the History of American Currency (1874), followed
by the History of Banking in the United States (1896).

6 See especially The 'Wages Question (1876) and his textbook Political Economy
(1883). A bibliography that gives an idea of the range of his activities has been
compiled in the Publications of the American Statistical Association, June 1897.

868

IV: FROM 1870 TO 1914 and LATER

the fact that they were all purebred academic economists. Perhaps, however,
there is also something else. All three of them stood out as economists in the
technical sense; for the rest they accepted unquestioningly the grand common-
places of their time and country: they were all three of them typically animae
candidae Americanae. But not even their detractors will deny that, however
much helped by the times, they were for the world at large ‘the’ great Ameri-
can economists of that period.

John Bates Clark (1847-1938), last of the claimants to independent discov-
ery of the principle of marginal analysis and architect of one of its most sig-
nificant theoretical structures, did not conquer an adequate pulpit until 1895,
when he was called to Columbia. There he remained until his retirement
(1923), and there he witnessed the vogue of his teaching that may be said
to have lasted from 1895 to 1910. But the fundamental elements of his theo-
retical system were all worked out before, mainly, I think, during the 1880’s,
though some seem to have emerged in his mind in the early 1 870’s before his
visit to Europe. In part, this shows in the papers he published in the 1880’s,
which, if space permitted, could be shown to display stages of the development
of his thought in a very interesting manner. They also corroborate the claim
alluded to because they reveal his own individual route to marginal productivity
distribution: what he did was to turn the ‘Ricardian’ theory of rent, which with
Ricardo had no other function than to eliminate rent from the price problem
by making it an intramarginal surplus, into a principle that was of general
application to all kinds of competitive returns (‘law of three rents’) without
becoming tautological in the process — marginal utility (and disutility) coming
in quite naturally on this route. In spite of the priority of Thiinen, on the one
hand, and Jevons, Menger, and Walras, on the other, this was an achievement
of the first order of importance and, so we may add now, of subjective origi-
nality. Nor was it his only one. Apart from his theory of capital (see below,
ch. 6, sec. 2c), he made a great stride toward a satisfactory theory of the
entrepreneur’s function and the entrepreneur’s gain and, in connection with
this, another great stride toward that clarification of all economic problems
that must result from a clear distinction between stationary and evolutionary
states. He identified this indeed with the distinction between statics and dy-
namics. But this did not greatly matter. He saw the essential points involved
in constructing the model of a stationary state and he created, for the pur-
pose of describing its properties, the concept of Synchronization. To call him
simply the master of American marginalism, therefore, spells failure to grasp
the whole of his analytic message. If his achievement fell short of that of
Bohm-Bawerk, Marshall, and Walras in some respects, it rose above theirs in
others. 7

7 Clark’s first book, highly characteristic of the man and of his outlook on the
world — perhaps also of the spirit of an environment — is not relevant to our purposes
except as regards one point I am about to mention in the text: The Philosophy of
Wealth (1885). It contributed greatly to establishing his reputation, however. His
famous Distribution of Wealth appeared in 1899, and is a theory of a stationary
process, all the essential elements of which he had published before. So far as per-

GENERAL ECONOMICS: MEN AND GROUPS

■a*:

But it is as the master of American marginalism that he was and is chiefly
known to the American profession and to the world . 8 The reader has pre-
sumably heard so often of the Clark school or the Marginalist school that he
may be surprised at the difficulty I experience in adopting this phrase. All
American and many foreign economists who were interested in economic
theory at all were of course greatly influenced by Clark and they learned from
him. There is no question about this. The circle of 'allies and sympathizers 7
was extremely large, and there certainly was a 'foreign sphere of influence . 7
But the precise extent of his influence is difficult to determine because, so
far as his theory of distribution goes, this influence is inextricably mixed with
the influences of all the other builders of similar systems. Even in the United
States, one has to look very closely at an author — at his theoretical manner-
isms, for instance — in order to make sure whether he got his marginal pro-
ductivity theory from Clark or from Marshall or from the Austrians. More
important, there was no clearly discernible ‘core 7 in the sense in which there
was a nucleus consisting of sworn disciples such as Ricardo or Marshall had.
Strictly Clarkian treatises are as rare as treatises displaying Clarkian influence
are numerous. Among theoretical writings of importance, the one that comes
nearest to developing Clarkian doctrine is Carver’s , 9 but, textbooks excepted,
I do not know of any other.

Nevertheless, Marginalism came quickly to be considered the badge of a
distinct school. And not only that: it even acquired a political connotation,
growing, in the eyes of some, into a reactionary monster that stood ready to
defend capitalism and to sabotage social reform. In logic, there is no sense
whatever in this. The marginal principle per se is a tool of analysis, the use
of which imposes itself as soon as analysis comes of age. Marx would have
used it as a matter of course if he had been born fifty years later. It can no
more serve to characterize a school of economics than the use of the calculus
can serve to characterize a scientific school or group in mathematics or physics.
To this day, the very use of the term Marginalism is indicative of erroneous

sonal aspects are concerned, the date is as misleading as is 1890 in the case of Marshall.
Of almost equal importance is his Essentials of Economic Theory (1907). Of his other
works only The Control of Trusts (1901; rewritten in collaboration with his son, 1912)
and The Problem of Monopoly (1904) need be mentioned here. But we should not
forget his factual work, mainly with the Division of Economics and History of the
Carnegie Foundation. Let me draw the reader’s attention to the charming Memorial
to that great and lovable man, prepared by his children and privately printed in 1938.

8 See on this the chapter on Clark in Paul T. Homan, Contemporary Economic
Thought (1928).

9 Thomas N. Carver, Distribution of Wealth (1904). I take this opportunity to
mention the name of an American theorist who developed marginalist theory inde-
pendently of Clark — Stuart Wood, another case of striking ‘subjective originality.' By
1889 Wood had in fact discovered for himself a whole Walrasian system with variable
coefficients of production (substitution) added. So far as theoretical groundwork goes,
he could have written the Marshallian treatise. See G. J. Stigler, ‘Stuart Wood and
the Marginal Productivity Theory,' Quarterly Journal of Economics, August 1947, es-
pecially p. 644.

870 IV: FROM 1870 TO 1914 AND LATER

conceptions of the nature of the principle. A fortiori, it cannot have any
bearing upon policy or social philosophy: this is perfectly understood in Eng-
land, where no radical or socialist takes offense at it. It is only the political
or ethical interpretation that is put upon the results of marginal analysis which
can have such a bearing. And, as has been pointed out before, Clark was not
free from blame. He was, of course, within his right when, in a book on the
Philosophy of Wealth, he expounded his ethical evaluations, though they were
of a type that is'apt to get on radical nerves. But he went further and asserted
that distribution according to the daw’ of marginal productivity is ‘fair.’ And
this, in the eyes of a profession, the large majority of which did not take
kindly to theory in any case, created an association between ‘Clarkian mar-
ginalism’ and capitalist apologetics in the face of the refuting fact that this
‘marginalism,’ barring differences in technique, plays exactly the same role it
played with Clark in the reasoning of scientific economists of socialist per-
suasion, such as Professors Lange and Lerner. 10

Frank William Taussig (1859-1940), whom we are to consider next, must
suffer still more than either Clark or Fisher from my inability to draw, within
the available space, well-rounded pictures of individuals as such. He rose to
prominence later than Clark, and his influence was still increasing when, in
1917, he accepted the chairmanship of the newly created Tariff Commission
and, during the war, various other public duties from which he returned with
enhanced reputation and authority. Barring this interruption he was a teacher
at Harvard throughout his adult life — and certainly one of the greatest teachers
of economics who ever lived. His teaching in the classroom, his guiding ad-
vice, and, last but not least, his example formed innumerable young minds
and no man had more to do with the steady rise of standards throughout
the period than had he. However, except in the field of international trade,
he did not form a school in our sense. Measuring by hours of work, his re-
search was primarily factual: in particular, he was the country’s great authority
on international trade and especially the tariff. Even in this field, facts came
first — earlier publications on the subject developing into his classic Tariff
History of the United States (1888) — and theory came afterwards ( Interna-
tional Trade, 1927), though he was a master of the art of welding factual
and theoretical analysis. Also he developed an interest in economic sociology
that produced important results. His Inventors and Money Makers (1915) and
his American Business Leaders (in collaboration with C. S. Joslyn, 1932) are

10 In order not to have to return to this subject, let us use the opportunity to no-
tice another factor that keeps that association alive. Reformers, like other people, are
not above making mistakes. It is the duty of the professional economist to point them
out. Now, if the economist in doing so uses 'marginal’ methods, the criticized person’s
humanly understandable resentment will often take the form of complaints that he
has been attacked by the reactionary monster called Marginalism. If there be in fact
logical error on his part, he could in general be convicted of it without the use of
this modest piece of apparatus. But not understanding theory, he is not aware of this
and he naturally turns against these parts of the critic’s argument which he under-
stands least of all.

GENERAL, ECONOMICS: MEN AND GROUPS 87 1

the chief examples. The roots of his theory are to be found in Ricardo and
in Bohm-Bawerk, whose influences show clearly in his most ambitious theo-
retical venture. Wages and Capital (1896; London School Reprint, 1932).
Formed by an older tradition, he displayed a curious resistance to the newer
doctrines — Bohm-Bawerk’ s capital theory excepted — which is perhaps why, of
all their exponents, Marshall appealed to him most. But this resistance wore
away, and in the end nothing was left of it except certain formal reservations
that are not entirely unlike Marshall’s. A turning point is indicated by his
'Outlines of a Theory of Wages’ ( Proceedings of the American Economic
Association, April 1910) that frankly embraced marginal analysis. Criticisms
may no doubt be raised, from a technical standpoint, against the general eco-
nomics he taught, and some of them are valid even ex visu of 1900. But he
was more than a theorist, historian, and economic sociologist. Above all, he
was a great economist. The first edition of his Principles of Economics (1911)
will help us to appraise 'what students got’ at that time. 11

Irving Fisher (1867-1947) was a Yale man from first to last — one of the
two stars of the first magnitude that glorify Yale’s scientific record, the other
being Willard Gibbs, the great physicist. He was a mathematician by training
and even taught astronomy for a year. We neglect all those of his scientific
or propagandist activities (temperance, eugenics, hygiene, and others) that
have nothing to do with economic analysis and, for the moment, also his
writings on money and cycles, which will be noticed in the last chapter of this
Part. Also we cannot go into his considerable contributions to the theory of
statistics (index numbers, distributed lags, 12 and others) beyond emphasizing
that with him statistical method was a part of economic theory and no longer
a mere adjunct to it — in other words that he was essentially an econometrician
standing in line with Petty and Quesnay. The following remarks must be con-
fined to his three main works in general theory. The first, his thesis — Mathe-
matical Investigations in the Theory of Value and Prices (1892, reprint 1926)

11 Since it is impossible to do full justice to that great figure within this book, the
reader’s attention is drawn to a memorial that was published in the Quarterly Journal
of Economics , May 1941, by some of his colleagues. [This was written by J. A.
Schumpeter with the assistance of Arthur H. Cole and Edward S. Mason.]

12 It should be observed, however, that the idea of distributing the effect of a dis-
turbance upon several subsequent values of the variable affected is of the utmost im-
portance for economic theory. Clearly, it is unrealistic — and in fact a counsel of de-
spair — to say that a disturbance in some variable x that occurs at the time t will just
affect the value of x (or of any other variable that depends upon x) at the time
t -f- n and at no other. We all know that a violent change in, say, a price or a set
of prices will affect subsequent values of this and other prices over a more or less
prolonged period and with an intensity that varies within that period. Economic rea-
soning that fails to take account of this cannot be said to have outgrown childhood.
Yet Fisher was the first to face this problem and to try to develop a method that
will take care of it statistically. This method (improved by Franz L. Alt) was very
imperfect. But it constitutes a pioneer venture that will bear fruit through the ages.
The reader will find all references in Alt’s paper, 'Distributed Lags,’ Econometrica,
April .1942.

872 IV : FROM 1870 TO 1914 AND LATER

— is a masterly presentation of the Walrasian groundwork. To this, however
Fisher added (at least 13 ) two contributions of first-class importance and orig-
inality: he indicated a method for measuring the marginal utility of income
(which he developed later in his paper published in Economic Essays Con-
tributed in Honor of John Bates Clark, 1927) and in the second Part of the
Mathematical Investigations, where he treated (as Edgeworth had done) the
utility of every commodity as a function of the quantities of all commodities,
he developed the fundaments of indifference-curve analysis. The second, his
Nature of Capital and Income (1906), which was much admired by Pareto,
besides presenting the first economic theory of accounting, is (or should be)
the basis of modern income analysis. 14 In the third, The Rate of Interest
(1907, done over and republished in new form in 1930 as The Theory of
Interest ), 15 his generous acknowledgment of the priorities of Rae and Bohm-
Bawerk did not allow the powerful originality of his own performance to
stand out as it should. The ‘impatience’ theory of interest is but an element
of it. Much better would its nature have been rendered by some such title
as: Another Theory of the Capitalist Process. Among the many novelties of
detail, the introduction of the concept of marginal efficiency of capital (he
called it marginal rate of return over cost) deserves particular notice. 16

This, together with Fisher’s work in the fields of money and cycles, will
substantiate the statement that some future historian may well consider Fisher
as the greatest of America’s scientific economists up to our own day. But this
was not the opinion of his contemporaries. In the profession and the world
at large, Fisher was, so far as the period under survey is concerned, not widely
recognized until he became the Fisher of the ‘compensated dollar,’ which most
people did not like. Even later on it was ‘stable money’ and Too per cent

13 There are others. But I wish to confine myself to the two that are generally
recognized by now.

14 Again, this is the main thing about it. The appendices contain a wealth of
suggestions that are stimulating even to him who does not agree with all of Fisher’s
results.

15 The volume includes much, but not enough, of Capital and Income, and the gist
of Fisher’s monograph on ‘Appreciation and Interest,’ Publications of the American
Economic Association, August 1896.

16 Two remarks should be made in passing. First, the identity of the Fisherian con-
cept with the Keynesian marginal efficiency of capital has been recognized by Keynes
(and Kahn) but denied by some of the followers of Keynes, notably by Professor
Lemer. Second, when emphasizing Fisher’s generous acknowledgment of Bohm-Bawerk’s
work, I did not contradict my statement in sec. 4a above. Fisher did not fully realize
the extent of Bohm-Bawerk’s achievement and was unduly influenced by the surface
defects of the latter’s exposition. This is quite compatible with saying what is indeed
obvious, that Fisher did generously recognize all he saw in Bohm-Bawerk: Fisher,
Keynes, and Wicksell are the three authors whom I should name if I were asked
to illustrate by examples what it is I mean by 'adequate acknowledgment.’ In fact,
these three exemplify more than I mean: all three must be defended against the
consequences of their readiness to unearth predecessors that, in some points, goes so
far as to obscure the true state of things.

GENERAL ECONOMICS: MEN AND GROUPS 873

reserve against deposits/ and so on which diverted attention from his genuinely
scientific work. In these and other matters, Fisher, a reformer of the highest
and the purest type, never counted costs — even those most intensive pain
costs which consist in being looked upon as something of a crank — and his
fame as a scientist suffered correspondingly. In addition, the very nature of
his achievement did not make for quick success. The Mathematical Investi-
gations passed practically unnoticed, of course, and came into its own only
when the contents were no longer of any except historical interest. The con-
tents of Capital and Income were considered by most people as elaborate
trivialities. The Rate of Interest fared better, nationally and internationally,
but it is doubtful whether it conveyed its message fully before the reformula-
tion published in 1930.

[(c) A Few More Leading Figures .] The economics profession reminds the
outsider of nothing so much as of the Tower of Babel. However, to some
extent we have seen already, and to a greater extent we shall see in the next
chapter, that this impression is, on closer inspection of the scenery, not only
easier to explain but also less justified than it might seem. In this subsection
we shall carry our work of description a little further by mentioning a few
more leading figures that stand out, here and there, from the divisions of the
ever-growing army of United States economists that was then, as it is now,
surging on in apparent disorder. The reader is asked once more to bear in
mind that we have noticed the men in the institutionalist movement 17 in the
preceding chapter (Veblen and Commons in particular) and that a few more
men will be mentioned in our survey of the period’s work in applied fields. 18
But he is also asked to remember that the point of view appropriate to our
purpose excludes or pushes into the background men whose services were
invaluable to the profession and to their students if they did not do the kind
of work that matters here, which means chiefly, if they neither contributed
to the development of our apparatus of analysis nor proved themselves masters
in its use. I exemplify by the honored names of Henry C. Adams, Ely, Hol-
lander, Laughlin, Seager, and Seligman. 19

17 [It will be recalled that J. A. S. intended to write on American institutionalism
in Chapter 4, which was not completed.]

18 No doubt this procedure has its disadvantages even apart from the impossibility
of doing full justice to the work in the applied fields. In order to illustrate these dis-
advantages let us select a man like William Z. Ripley (1867-1944). The man who
wrote on the races of Europe, and wrote and lectured on railroads and labor — and
this is far from describing his activities exhaustively — is certainly not adequately char-
acterized by his work in any or all of these fields. Some who were students of his
at Harvard told me that they received more inspiration from him than from anyone
else, and the department then included Taussig, Carver, and Young. He therefore
certainly ought to figure among ‘general economists/ whatever his deficiencies in tech-
nical analysis may have been. And this goes for many men of his type.

[The survey of the period’s work in the applied fields (ch. 6, sec. 6) was unfortu-
nately not completed.]

19 The reader who desires to do so can easily follow up the suggestion implied in
mentioning these names. Particular reference should be made to the very instructive

874

IV: FROM 1870 TO 1914 AND LATER

In one of those divisions which in fact he did much to create, Professor
Frank A. Fetter (1863-1949) rose to a leading position in the first decade of
this century. He was primarily, though not exclusively, a theorist, a man of
scientific progress and no friend to theoretical survivals. He has sometimes
been classed as an 'Austrian,' but this is not quite correct. It is true that at
that time all serious theoretical endeavor had to start from the bases laid by
Jevons, Menger, and Walras and that non-mathematicians would prefer the
Menger version to the other two. It is also true that he did not like Marshall
— precisely because of the latter’s attempts to preserve outmoded heirlooms —
a feeling that was perhaps reciprocated. But all this does not suffice to make
a man a follower of Menger. On that basis. Fetter erected a building that
was his own, both as a whole and in many points of detail, such as the theory
of 'psychic income.’ The vivifying influence upon the American profession’s
interest in theory of his critical exploits cannot be evaluated too highly. 20

Fred M. Taylor (1855-1932) is another name that comes to mind when-
ever we feel able to muster sufficient complacency to congratulate ourselves
on the present level of economic analysis in the country. He was eminently a
teacher of economic theory — -down to the minutiae of theoretical reasoning —
and formed very many minds, among them those of some of the most promi-
nent economists of today: there is a Taylor school though not in the one-
master one-doctrine sense. His own work developed from, and went into, his
teaching and he was very hesitant about publication. But when it eventually
did appear, his Principles of Economics (1911; 9th ed., 1925) was a great suc-
cess. Though technically it is open to many objections, I wonder whether
modern students would not do well to refresh themselves by a dive into Tay-
lor’s world of problems, which of course — like the problems of most of the
theorists of that age — seem now very remote. Taylor’s highly significant con-
tribution to the theory of the socialist economy will be noticed elsewhere.

As the period drew toward its end, the non-mathematical theorist found
himself confronted by an increasingly difficult task. This was Taylor’s predicar
ment and the main source of his inadequacies. The same applies to Herbert

obituaries of Ely, that excellent German professor in an American skin (by H. C.
Taylor in the Economic Journal, April 1944), and of Seligman, that kindly leader and
indefatigable worker (by G. F. Shirras, ibid. September 1939). Hollander’s work on
Ricardo has been mentioned, however, and some of Laughlin’s on money and of
Adams’ and Seligman’s on public finance will be mentioned in the appropriate places.
Carver has been mentioned above.

20 Perusal of Fetter’s Principles of Economics (1904) is not quite enough to sub-
stantiate the statements above. But the book gives all the essentials of what may be
called the Fetter system. Some of his papers we shall meet later. The one on the
relation between rent and interest illustrates a fact that blurs the frontier line of
Fetter’s influence, viz. the fact that there are parallelisms between his teaching and
Fisher’s. The one on ‘The Passing of the Old [Ricardian] Rent Concept’ is Fetter’s
most directly anti-Marshallian performance. I do not know how Marshall took the —
wholly justified — stricture. But I do know that Edgeworth resented it on the not
quite convincing ground that he did not like papers with titles like that.

GENERAL ECONOMICS: MEN AND GROUPS 875

J. Davenport (1861-1931). If we want to appraise the historical position and
services of these men and others like them, we must not apply modern stand-
ards of rigor, because at that time there was as yet valid excuse for those
who had no conception of things that seem elementary now — such as con-
tinuity, incremental quantities, determinacy, stability, and so on. In conse-
quence, they on the one hand struggled with difficulties that seem imaginary
now, and on the other hand failed to see problems that bother us. 21 H. J.
Davenport was an excellent theorist and a great teacher in his day, and the
profession is under considerable obligation to him for the infinite pains he
took to straighten out the fundamental problems of the theory of his time. 22
There is another interesting point about him. He was an enthusiastic Veb-
lenite and a strong radical of the Middle Western type who saw the evil
spirits of reaction stalk both the professional and the national scene without
making any effort — obviously unnecessary — to verify their existence. Daven-
port thus affords one of the examples that show that preoccupation with the
theory of that epoch was perfectly compatible with institutionalist sympathies.

The work of these and other men shades off without violent break into
that part of the work of our own period that may be identified with such
men as J. M. Clark, F. H. Knight, J. Viner, and A. A. Young. This pointer
must suffice. 23 We must be content to glance at one of the brightest ‘patches

21 This illustrates well the sense in which, even in economics, it is possible to speak
of ‘progress’ and to evaluate a given state of development meaningfully as one that
is ‘lower’ than our own. This cannot be done with ‘economic thought’ in general.
The economists of that time had opinions on social and economic policy that differ
from those that prevail now. But this difference is due to social conditions and to
Zeitgeist, and there would in fact be no sense at all in our feeling superior to them
or in speaking of progress accomplished. But in matters of analysis, so far as we are
trying to do the same kind of thing that the theorists of that time tried to do, it
is possible to speak of progress from an inferior to a superior technique, just as there
is definite sense in saying that dentistry or transportation of our time is superior to
that of 1900.

22 See especially his Value and Distribution (1908), one of those books that are
bound both to bore and to benefit their readers. It contains several points that are,
subjectively at least, original. His Economics of Enterprise (1913), although devoted
not to criticism but to construction, is really less original. I have heard of, but do
not know, his manuscript on the Marshallian system, The Economics of Alfred Mar-
shall (1935). His textbooks made no mark. But several articles of his would have to
be gone into if space permitted.

23 Though there is no need to ‘introduce’ such well-known figures as the first three,
I take the opportunity of saying a few words on Allyn A. Young (1876-1929). This
great economist and brilliant theorist is in danger of being forgotten. A volume of
essays, Economic Problems, New and Old (1927), and An Analysis of Bank Statistics
for the United States (1928; first publ. in the Review of Economic Statistics, 1924-7)
constitute the bulk of his published work and do not convey any idea of the width
and depth of his thought and still less of what he meant to American economics and
to his numerous pupils. But ex ungue leonem — that is to say, the reader may form
some idea of that lion from a single claw, namely, his paper ‘Increasing Returns and
Economic Progress,’ Economic journal, December 1928. He was among the first to

876 IV: FROM" 187O TO 1914 AND LATER

of color’ in the picture of that epoch, Patten, and then at a lonely peak
Moore.

If vision were everything, Simon Patten (1852-1922) — who taught at the
University of Pennsylvania from 1888 to 1917 — would, historically, have to
be put down as one who had few equals if any. If technique were everything,
he would be nowhere. As it is he is somewhere between, standing apart on
ground largely his own. He is chiefly remembered for his advocacy of pro-
tectionism— this alone was a barrier between him and the large majority of
the profession — for his conception of an ‘economy of plenty/ in which neither
diminishing returns nor thrift would be of primary importance any more. This
savors, on the one hand, of dilettantism, but, on the other hand, of later
currents of thought, successfully anticipated. Neither impression is quite cor-
rect, but at the time the profession was inclined to take the former view of
the matter, though it never failed to recognize what may be called the seminal
importance of Patten’s ideas, and still less to appreciate the vigorous teacher
and delightful conversationalist — breakfast with whom was apt to shade off
into lunch.

Henry Ludwell Moore’s (born 1869) P os iti° n in the history of economics
is as assured as Patten’s was among his contemporaries. To forget him in any
future historical record of our science would be as easy as it would be to for-
get Sir William Petty. And this is as true of future economists who admire,
as it is of future economists who disapprove of, every line he ever wrote. For
his name is indissolubly associated with the rise of modern econometrics, which
must inevitably, whether we like it or not, become more and more synonymous
with technical economics. The least of his titles to lasting fame is that his
work is the scientific fountainhead of the torrent of statistical demand curves
that was to pour forth in the early 1930’s. The great thing was his bold at-
tempt to create, by a number of ingenious devices, a statistically operative com-
parative statics (see below, ch. 7). This venture, embodied in a series of papers
that he worked up into his Synthetic Economics, published in 1929, is one
of those landmark achievements that are bound to stand out irrespective of
whether or not we make use of them. It is therefore necessary, both in the
interest of our picture of that epoch’s scientific situation and of the sociology
of science, to stay for a moment in order to explain why a man of such
stature did not acquire a greater reputation. For, though he got some credit
for his statistical demand curves — mostly through his follower Henry Schultz
— and caused some raising of eyebrows by his crop theory of cycles — an im-

understand the stage of transition that economic analysis entered upon after 1900
and to shape his teaching accordingly — which, so far as I have been able to make
out, may be described as a cross between Marshall’s and Walras’, with many sugges-
tions of his own inserted. One of the reasons why his name lives only in the memory
of those who knew him personally was a habit of hiding rather than of emphasizing
his own points: one must, for example, be not only a specialist but also a very careful
reader to realize that in his concise and unassuming analysis of national bank statis-
tics, there is enshrined the better part of a whole theory of money and credit.

GENERAL ECONOMICS: MEN AND GROUPS 877

proved version of the Jevonian theory — his reputation has not been what it
should be to this day.

The first reason is, of course, the nature of his work. To try to make the
Walrasian system statistically operative is something that was altogether be-
yond that epoch's scientific horizon. 8 * * * * * * * * * * * * * * * 24 The second reason was that he was a
very modest and at the same time very sensitive man. His research program
could have been understood, and it might even have attracted institutional
support, if it had been pushed by vigorous propaganda and if it had been
represented as a program of revolt against existing — 'orthodox' — theory (which,
in a sense, it was). But Moore was not the man for such tactics: when he
did not meet with response, he retired into himself; he was the very opposite
of a high-pressure salesman. 25 But there is a third reason. Moore published
indeed a series of papers that should have familiarized the profession with
his thought. His first books, however, deterred rather than attracted even com-
petent judges. In order to rate at its true value his ingenious Laws of Wages
(1911), or his Economic Cycles : Their Law and Cause (1914), or his Gen-
erating Economic Cycles (1923), it is necessary to make a lot of allowances
for the peculiar merit of pioneering effort. In some points, this also applies
to Synthetic Economics, which was, however, internationally noticed. The
route this book chalks out is, however, not only difficult but, in the age of
developing alternatives, also unpopular. Nevertheless, all modern analysts
should study this book with care, though it is quite possible that by so doing
they will become admirers of Moore rather than followers.

8. The Marxists

We have occasionally observed that many economists of that period were

radicals in the sense in which we use the term today. Socialism has been

called an intellectual Froteus, and it is difficult to say how many of those

radicals should be called — at least potential — socialists. But neither their radi-

calism nor their socialism is any business of ours so long as it does not in-

volve differences in analytic approach or, to put it perhaps more tellingly, so

long as it involved only different aims, sympathies, and evaluations of the

capitalist economy and civilization but not a different 'theory' of the economic

process: if we have mentioned radical or socialist convictions at all, this has

been done only in order to destroy widely held prejudices against the scien-

tific work of that time. For example, the Fabians are for us just a group that

did economic research and there is no reason to separate them from other

people who did the same thing on the ground that they were planners or,

according to some definitions, socialists. In this section we are interested

24 His Forecasting the Yield and the Price of Cotton (1917) was not. But theorists
had not yet discovered that this was economic theory.

25 I am indebted to Professor F. C. Mills for a picture of Moore's character and

ways. It is similar to the impression I received myself when meeting Moore at Co-
lumbia in 1913. [At the end of 1951, Moore was still alive and living in complete
seclusion.]

8 j 8 IV: FROM 1870 TO 1914 AND LATER

in those socialists only who professed a different and specifically socialist sci-
entific economics. Of these, the Marxists were so much more important than
were any others that we may, for our purposes, consider them as the only
ones. But we shall naturally touch also upon their socialist critics whose work
acquires meaning only with reference to the system criticized.

The Marxists were a group or sect in more senses than one. But among
other things they were also a scientific school, for, as has been explained be-
fore, dependence upon a creed, though it may affect, does not destroy the
scientific character of the work of a group. It is only as a scientific school in
our sense — as a group whose members did analytic work, accepted One Master
and One Doctrine, and worked in close, if not always harmonious, contact —
that Marxists come in here. All other aspects of Marxism — perhaps the essen-
tial ones — must be neglected. Now, scientific work done on Marxist lines,
and even full mastery of the scientific contents of Marx’s work, was until
about 1930 so largely confined to German and Russian writers that, for the
purposes of general orientation, no others need be mentioned at all. 1 Also,
as pointed out already, it was in Germany and Russia only that Marxism ex-
erted a strong influence upon the work of non-socialist economists: for a time,
theory-minded economists had in these countries hardly any choice but to
turn to Marx (or, in Germany, to Rodbertus).

The conquest by Marxism of the socialist part of the Russian intelligentsia
was not due wholly to the strong cultural influence of Germany; it was partly
due also to the fact that Marxist speculation was congenial to the Russian
mind. But it was largely due to the German influence, and the relation be-
tween Russian and German Marxists remained very close (though not always
amicable) in a personal sense, until Lenin’s death or even until Trotsky’s
defeat. From the standpoint of analytic work done, it is only necessary to
mention, among the strictly orthodox writers, Plekhanov and Bukharin. 2 But

1 This is obvious for England: nobody has as yet credited to H. M. Hyndman and
his group any contribution to economic analysis. This statement does not involve denial
of some influence upon the English intellectuals, though this influence was then no-
toriously small. Nor is it denied that Marxism became an influence in English eco-
nomics later on. But an analogous statement for the Latin countries requires qualifi-
cation principally because of the work done, by socialists and others, on the Marxist
theory of history. No qualification is, however, involved in the recognition of the
fact that Marxist ideas were more widely known and more carefully interpreted in
France, Italy, and Spain than they were in England, for this did not spell any analytic
work to speak of in technical economics. Japanese Marxism, also, is of later date.
As regards the United States, the same holds true, but an exception should possibly
be made for the writings of Daniel De Leon. See, e.g., his Reform or Revolution?
(1899).

2 G. V. Plekhanov (1855-1918), the old leader of the small Marxist party of Russia
and its leading figure until the beginning of this century, would deserve a very dif-
ferent place in a history of a different kind than we can allocate to him in this one.
But in addition he was a scholar and a thinker. Though not much of an economist,
he stands very high as a Marxist sociologist and, in particular, as an analyst of the
socio-psychical 'superstructure.’ This, at least, is the impression I have received from

GENERAL ECONOMICS: MEN AND GROUPS 879

it must not be forgotten that Marxism was the chief formative influence of
practically all the Russian economists ’ of the age. Marx was the author they
really tried to master, and the Marxist education is obvious even in the writ-
ings of those who criticized Marxism adversely. The most eminent of these
semi-Marxist Marx critics was Tugan-Baranowsky who is discussed below.

[(a) Marxism in Germany.] At the basis of the success in Germany are two
facts: first the tremendous success of the Social Democratic party; and second
the official adoption of Marxism by this party (Erfurt Program, 1891). Both
these facts raise most interesting problems of political sociology - into which
we cannot go. But it must be emphasized on the one hand that, from the
standpoint of Marxist orthodoxy, these two facts are really one, because any
truly socialist party must of — presumably 'dialectical’ — necessity be Marxist;
and on the other hand that, from any standpoint other than that of Marxist
orthodoxy, this adoption by a party that was rapidly growing toward political
responsibility of a creed that prescribed abstention from political responsibility,
in capitalist society, was obviously not the only possible, but on the contrary
a most astounding, course to take — a course that was bound to cause weaken-
ing dissensions within the party, as in fact it did before the century was out.
Actually, however, the party did go Marxist with a will, and its huge organi-
zation offered inspiration, support, and employment — a regular career, in fact
— to orthodox Marxists only and, on principle at least, to no other socialists,
however devoted or radical. On this basis developed a large and able corps
of intellectual adherents that produced a large orthodox literature. Besides the
party newspapers, it had as an outlet a 'heavy’ magazine. Die Neue Zeit —
later on there was also the Austrian Kampf — study of which is perhaps the
best method of acquiring familiarity with the group’s work. The non-Marxist
socialist was something of an outcast and had a rather uphill fight that the
party had plenty of means of turning into defeat. This is one side of the medal.

so much of his work as is, directly or indirectly, accessible to me. See especially his
Fundamental Problems of Marxism (English trans., 1929). All I know of the writ-
ings of N. I. Bukharin (1880-1938), one of the stalwarts who were crushed by Stalin,
is Der Imperialismus und die Akkumulation des Kapitals (1926), which leans heavily
on the German performances to be mentioned (and really is part and parcel of the
German discussion), and The Economic Theory of the Leisure Class (written 1914;
English trans. 1927), a still less original performance. Some readers may miss Lenin’s
name, the better part of whose voluminous writings belong to the period under survey.
But Lenin was a man of action, one of the shrewdest and most clear-sighted tacticians
that ever lived. It is a mistake, from the standpoint of his Russian and other admirers,
to insist that, being canonized now, he must also have been a great thinker. Perhaps
he did contribute something to political thought, though I find in Marx all the points
he ever made in the writings that are accessible to me, with one exception: he ad-
mitted frankly what Marx never either saw or admitted, viz., that the ‘emancipation’
of the proletariat can never be achieved by the proletariat itself, a great improvement
(considering all implications) of political sociology. See, e.g., Sttte and Revolution
(English trans., 1919)- He did not contribute anything to economic analysis which
was not anticipated by either Marx himself or the German Marxists. The same goes
for Trotsky.

880 IV : FROM 1870 TO 1914 AND LATER

Before looking at the other we shall see what the results were for economic
analysis. It is clear from the outset that, under those circumstances, literature
was bound to be apologist and interpretative in nature and that no substantive
novelties and no substantive dissent were possible except in the guise of cau-
tious reinterpretation of the Master’s meanings.

Until his death (1895) Friedrich Engels, as the grand old man of the party,
wielded an authority that was indeed challenged sometimes — by Rosa Luxem-
burg for instance — but never successfully or in any matter except tactics.
Doctrinal leadership (with little say in practical politics) passed to Karl Kaut-
sky (1854-1938),' who had known Marx and was cut out for the role of high-
priest, not least because he was not absolutely rigid and knew how to make
concessions to dissent, within the inner circle of party writers, on individual
points. 3 He edited the Theorien iiber den Mehrwert (1905-10), composed
what may be called the official reply to Bernstein’s crificisms and many other
pieces of apologetics and countercriticism, wrote learnedly on the economic
interpretation of history, and tackled problems of applied theory, especially
the question of socialist agricultural policy, thus contributing here and there
even to a development of Marxist doctrine. There was nothing very original
in all this. The nature of the position he had taken up from the first would
have precluded originality even if he had had any spark of it. But taking
Kautsky’s work as a whole, we may well speak of a historically significant
performance. 4 The writers who, amidst acrimonious controversies, succeeded
in working out more or less novel aspects of Marxist doctrine are usually re-
ferred to as neo-Marxists. Though the productive years of most of them fall
within the period under survey, many of their publications belong to the
next. We adopt, however, the same practice that we also follow in some
other matters, namely, the carrying of our survey down to the present in

* Kautsky’s association with Marx and Engels and his unquestionable loyalty were
not the only qualities that recommended him for that function. No doubt, nobody
can walk on stilts all his life and not look stilted. And both his adherence, in prin-
ciple, to every letter of the faith, and the reinterpretations which, in actual fact, he
permitted himself and others to make, reduced his popularity with ardent followers
bent upon having their own innings. Also, though primarily a theorist, he was really
not a good theorist, and he was no match for the keenest intellects of - the group.
But nothing of this should be allowed to obscure either his high character or his
ability or the services he rendered to Marxism and, through Marxism, to the social
sciences in general.

4 The book that contains perhaps more of what was specifically his own than does
any other is his Die A grarfrage (1899), in which he tried to extend Marx’s law of
concentration to agriculture. He met criticism in his own camp, and Otto Bauer’s
Sozialdemokratische Agrarpolitik (1926), is far removed from Kautsky’s views. But
his work created the literature in which Bauer’s is the most notable performance.
Kautsky’s — not unsuccessful^— reply to Bernstein, Bernstein und das Sozialdemokratische
Programm (1899); Die materialistische Geschichtsauffassung (2nd ed., 1929); exegetic
work on Das Erfurter Programm (1891; English trans. under the title Class Struggle,
1910); and the article on 'Krisentheorien’ ( Die Neue Z eit, 1901-2) are probably the
other publications that should be mentioned.

GENERAL ECONOMICS: MEN AND GROUPS 88l

order to relieve Part v. I select for purposes of illustration Bauer, Cunow,
Grossmann, Hilferding, Luxemburg, and Sternberg.

Of those that this choice omits I regret most of all Max Adler. 5 But this brilliant
man suffered such loss of energy by his party activities and his practice of law that
he was never able to do justice to his gifts, though he was an important element of the
Viennese circle of Marxist theorists. Otto Bauer (1881-1938), a man of quite excep-
tional ability and not less exceptionally high character, was to some extent in the
same predicament even before he rose to the position of leadership. But, besides the
book on agrarian policy that has been mentioned already, at least his ‘Akkumulation
des Kapitals,’ Die Neue Zeit, 1912-3, may be mentioned as a contribution to analysis
of force and originality; many other writings are of great interest for the student of
Marxist political thought. Rudolf Hilferding (1877-1941), a close friend and ally of
Bauer’s, wrote a notable reply to Bohm-Bawerk’s criticism of Marx (B ohm-Bawerks
Marx-Kritik, 1904; English trans. with introduction by P. M. Sweezy, 1949) and other
things, which a fuller review could not pass by, but must be mentioned principally
as the author of the most famous performance of the neo-Marxist group: Das Finanz-
kapital (1910). Whatever may be thought of the rather old-fashioned monetary theory
of the first chapter and the monetary theory of crises of the fourth, its central thesis
(that banks tend to gain control over industry at large and to organize the latter into
monopolistic concerns that will give increasing stability to capitalism), though a hasty
generalization from a phase of German developments, is interesting and original (see
especially the third chapter) and had some influence upon Lenin. The one publication
by H. Cunow (1862-1936) that is relevant in this connection is his series of papers
‘Zur Zusammenbruchstheorie,’ Die Neue Zeit (1898-9). Rosa Luxemburg’s (1870-1919)
Gesammelte Werke were published in 1925-8, but her most important contribution
to Marxist theory is Die Akkumulation des Kapitals . . . (with the subtitle: Con-
tribution to the Economic Explanation of Imperialism, 1912). [P. M. Sweezy has
pointed out to me that there is a second book with the same title (but different
subtitle) written in answer to her critics while she was in prison during the war and
published in 1921. Ed.] H. Grossmann (Das Akkumulations- und Zusammenbruchs-
gesetz des kapitalistischen Systems , 1929) and Fritz Sternberg ( Der Imperialismus,
1926) represent a younger generation. The first is chiefly a Marxist scholar. The latter,
who recently published a highly successful book ( The Coming Crisis , 1947), is less
concerned with Marxist theory but tries rather to write what he believes Marx would
write were he alive today. Their works fall in with the Marxist revival to be noticed
presently.

Most of the titles mentioned point toward a goal that, in spite of their
violent altercations, the neo-Marxists have in common. Identifying, in the
true Marxist spirit, thought and action, theory and politics, they were pri-
marily interested in those parts of the Marxist system that have, or seem to
have, direct bearing upon socialist tactics in what they believe to be the
last — the 'imperialist’ — phase of capitalism . 6 Accordingly, they were but mildly

5 Not to be confused with Victor Adler, the leader who unified (for a time) the
various national sectors of Austrian socialism, and Fritz Adler, the son of Victor, who
was to gain notoriety of a different kind in and after the First World War.

6 This holds for all of them, although to very different degrees. And this is the
point of contact with Leninist and Trotskyite doctrine, which turned completely on
Imperialism. Comparison of the ideas of say Bauer and Hilferding with the ideas

882

IV: FROM 1870 TO 1914 AND LATER

interested in Hegelian dialectics, the labor theory of value, and such ques-
tions as whether or not it is possible to transform Marx's values into ‘pro-
duction prices' without altering the sum total of surplus value. All the more
interested were they in ‘imperialism’ and in the problem of the breakdown
of capitalism, hence in the theory of accumulation, of crises, and of in-
creasing misery. It is impossible to do justice to the widely different features
of the more or less ingenious systems of the individual writers. Very broadly
speaking, the upshot was this. They were relatively successful in elaborating
an economic theory of protection and of a, real or alleged, tendency of capital-
ist society to develop an increasing propensity to wage wars. Neither exposi-
tion nor criticism can be attempted here . 7 But critics who feel inclined to be
too severe on this theory should remember what sort of arguments it is in-
tended to replace: it may be wrong, but it constitutes the first attempt to
look at the phenomenon in something like a scientific spirit. The increasing
misery was either discarded silently Or deferred to some indefinite future when
counteracting factors would have spent their force (compare, for example,
Sternberg’s theory of the ‘closed season’ during which that tendency is sus-
pended). The modus operandi of accumulation and the breakdown theory
provided the battleground that was most hotly contested. And here the most
sensational event was Hilferding’s frank renunciation of the breakdown theory:
he even contended that capitalist society, if left to itself, would increasingly
consolidate its position and petrify into a sort of feudal or ‘hierarchic’ or-
ganization. Naturally, this was high treason to some. But even those or some
of those who rejected Hilferding’s theory watered down Marx’s spectacular
breakdown — for, if words mean anything, this is what Marx envisaged — to a
mere inability of capitalist society to keep up its traditional rate of accumu-
lation, which means little more than the settling down into a stationary state
that was envisaged by Ricardo and hardly corresponds to the ideas evoked by
the word Breakdown . 8

[(b) Revisionism and the Marxist Revival.] Before going on, let us glance at
the other side of the medal. Revisionism. As has been observed, it was not
to be expected that so large a party, with so large a fringe of sympathizers,
would indefinitely accept such doctrinal discipline as the strict Marxists in-
sisted on imposing. It was indifference to philosophical and theoretical minutiae
rather than acceptance of them that secured the passing of the Erfurt reso-

expounded in Lenin’s Imperialism (English trans., 1933) is instructive, the more so
because, in other respects, the neo-Marxists were anti-Bolshevik.

[Two long essays in German by J. A. S. (originally publ. in 1919 and 1927), the first
of which attacked these neo-Marxist views, have been translated into English under the
title, Imperialism and Social Classes (1951).]

7 The reader will find an extremely orthodox exposition of this line of reasoning in
P. M. Sweezy’s Theory of Capitalist Development, already referred to.

8 The work of Hilferding and Luxemburg has been briefly but admirably discussed
by Eduard Heimann in History of Economic Doctrines (1945)-

GENERAL ECONOMICS: MEN AND GROUPS 883

lutions. Retribution came when Bernstein, 9 a man of sufficient importance who
was not indifferent to doctrine and who, moreover, believed the Marxist creed
to be injurious to the party, made up his mind to risk frontal attack. 'Dia-
lectics/ historical materialism, class struggle, labor theory, increasing misery,
concentration, breakdown (including the revolutionary ideology), all came in
for wholesale condemnation at his hands. We are not interested in the en-
suing row, or in the tactics of August Bebel, the man in supreme command,
who, like the good tactician he was, displayed at first the requisite amount of
wrath, then accepted formal submission without going to extremes — though
minor lights were penalized in various ways — and finally acquiesced in a state
of things in which revisionism was allowed in the party on condition of re-
fraining from active hostility. Nor are we interested in the facts that several
outstanding party men were or became revisionists, that the wing acquired
its own periodical ( Sozialistische Monatshefte ) and its own writers. Fot though
some of these writers did creditable work, especially on individual practical
questions — as did, for example, Schippel on foreign-trade policy — this work
inevitably lost most of its distinctive color. All we are interested in is the
question what net results the revisionist controversy produced for Marxist
analysis. It is safe to say that Bernstein’s attack had a stimulating effect and
produced here and there better and more careful formulations. Perhaps it
had also something to do with the increasing readiness of Marxists to jettison
prophecies of spectacular misery and breakdown. On the whole, however, re-
sults cannot be rated very highly so far as the scientific position of the Marx-
ists is concerned. For on analysis, Bernstein’s attack proves to have been much
weaker than one would infer from its effects on the party and on the general
public. Bernstein was an admirable man but he was no profound thinker and
especially no theorist. In some points, especially as regards the economic inter-
pretation of history and the concentration of economic power, his argument
was distinctly shallow. In others, he proffered the sort of common sense that
any bourgeois radical might have produced. Kautsky was, if anything, more
than equal to the task of answering him. And if it had not been for the
political implication of the attention he got, Marxists need not have worried
greatly about him.

We go on to notice two phenomena that belong to later times. Marxist
analysis displayed few, if any, symptoms of decay before 1914. The contrary
assertion was often made, of course, but only by writers with whom the wish
was father to the thought. But during the 1920’s we observe a phenomenon
that \yas scientifically much more important than revisionism had been: we
find an increasing number of socialist economists — some of them quite radical
in politics and not all revisionist or 'laborisf in the political sense — who,
while professing the utmost respect for Marx, nevertheless began to realize

9 Eduard Bernstein (1850-1932) was a tried socialist, besides being a scholar and
a delightful man, and carried weight as one of the old guard. But years of exile did
not radicalize him. They.fabianized him. Of his writings, only his book of 1899 need
be mentioned. It is available in English under the title Evolutionary Socialism (1909).

884 IV: FROM 1870 TO 1914 AND LATER

that his pure economics had become obsolete. Marxism remained their creed,
and Marxist remained their allegiance, but in purely economic matters they
began to argue like non-Marxists. To put it differently, they learned the truth
that economic theory is a technique of reasoning; that such a technique is
neutral by nature and that it is a mistake to believe that something is to be
gained for socialism by fighting for the Marxist or against the marginal
utility theory of value; that no technique can be exempt from obsolescence;
and that the literary defense of the cause of socialism stands to lose efficiency
by clinging to outworn tools. The importance of this for the evolution of a
genuinely scientific economics cannot be estimated too highly: here was at
last a recognition, by the group most averse to this recognition, of the ex-
istence of a piece of ground on which it was possible to build objectively
scientific structures. For the 1920’s this tendency may be represented by the
names of Lederer and Dobb, both of whom also exemplify the fact that po-
litical ardors need not suffer by that recognition in the least: 10 with neither
of them was it a matter of watering down practical issues; with both of them
it was a matter of logic. This gain was not quite lost in the turmoil of the
1930’s. It may still be averred that, in spite of the Marxist revival we observe,
the. scientifically trained socialist is no longer a Marxist except in matters of
economic sociology. The names of O. Lange and A. P. Lerner may be in-
voked as illustration. 11

The other phenomenon we have to notice is precisely that Marxist revival.
The sociology of it is too obvious to detain us. But there are three aspects
of it that deserve attention from our own standpoint. First, though the gain
for analysis of the tendency just referred to has not been quite lost of late —
as our illustrative examples show — it has been lost in part: economists of
high standing have turned Marxists, not in the sense of accepting Marx’s social
or political message — this would be their affair — nor in the sense that they
(like Lange) accept much or all of Marx’s economic sociology — this would
be capable of defense — nor finally in the sense that they pay respect to Marx’s
historical greatness — few people would quarrel with them about this — but in
the sense that they actually try to revitalize Marx’s pure economics, thus join-
ing forces with the surviving neo-Marxists. The outstanding examples are P. M.

10 Emil Lederer (1882-1939) who, during the last years of his life, was a member
of the Graduate Faculty pf Political and Social Science of the New School for Social
Research in New York, may be described as the leading academic socialist of Germany
in the 1920’s and was an influential teacher in the Universities of Heidelberg and
Berlin. His little textbook ( Grundziige der okonomischen Theorie, 1922) displays the
tendency in question very well. Maurice Dobb was never impregnated with Marxism;
allowance must be made for the English environment. But his sympathies, intellectual
and other, are obviously with Marx rather than with Marshall or with the Fabians.
Nevertheless, he cannot be described as a Marxist so far as economic analysis is con-
cerned. See his Capitalist Enterprise and Social Progress (1925).

11 O. Lange made the position in question very clear in his paper on ‘Marxian
Economics and Modern Economic Theory,’ Review of Economic Studies, June 193 5,
to which I refer the reader.

- GENERAL ECONOMICS: MEN AND GROUPS 885

Sweezy and J. Robinson . 12 Second, there are the attempts to Keynesify Marx
or to Marxify Keynes. These attempts are very revelatory of prevailing ideolo-
gies but also indicate awareness of a purely analytic task. It is in fact possible
to enrich the meanings of both these authors by points culled from the other,
though they are at opposite poles in matters that are of decisive importance
analytically. But these attempts have never, so far as I am aware, gone to
the length of trying to revive Marx's theoretical apparatus . 13 Third, though
the Marx vogue in England and in the United States is in part simply the
natural consequence of immigration, it is also something more. On the Eng-
lish or American student of economics, Marx's doctrine impinges as some-
thing new and fresh, something that differs from the current stuff and widens
his horizon . 14 This impact may indeed spend itself in scientifically worthless
emotions, but it also may prove productive. In any case, Marx’s influence
must be listed among the factors of the scientific situation of today.

12 I have strongly recommended Sweezy’s Theory of Capitalist Development (1942)
as an admirable presentation of Marx’s (and most of the neo-Marxists’) economic
thought. The thing that calls for notice now is that Dr. Sweezy believes that the
economic theory there presented is actually usable theory ex visu of today and that
it is not only equal but superior to the technique used, for example, by Lange. Still
more remarkable, and something of a psychological riddle, is Mrs. Robinson’s Essay
on Marxian Economics (1942). On this, see Mr. Shove’s article, ‘Mrs. Robinson on
Marxian Economics,’ in the Economic Journal, April 1944.

13 One of the most interesting of these attempts has been made by S. Alexander
in his paper, ‘Mr. Keynes and Mr. Marx,' Review of Economic Studies, February 1940.

14 One reason for this is that Marx has not been and is not being currently taught,
especially not in theory courses. And one reason for this in turn is that he is so
difficult to fit in. Because both of his virtues and of his faults (e.g. because of his
diffuseness and repetitiveness that make ‘assignments’ difficult), he either is crowded
out or else crowds out the rest of the material teachers feel they should convey.

CHAPTER 6

General Economics: Its Character and Contents

x. Outposts

(a) The Sociological Framework of General Economics

(b) Population

2. The Vision, Enterprise, and Capital

(a) The Vision

(b) Enterprise

3. The Revolution in the Theory of Value and Distribution

(a) The Theory of Exchange Value

(b) Cost , Production, Distribution

4. Marshall’s Attitude and Real Cost

5. Interest, Rent, Wages

(a) Interest

(b) Rent

6. The Contribution of the Applied Fields

(a) International Trade [Heading only; section not written.]

(b) Public Finance [Not finished.]

(d) Agriculture [Heading only; section not written.]

(e) Railroads , Public Utilities, ‘Trusts,’ and Cartels

1. Outposts

(a) The Sociological Framework of General Economics A As we have seen,
economic sociology and in particular historical and ethnological knowledge of
social institutions progressed most satisfactorily during the period under survey.
But the general economics on which I am going to report now was but little
affected by these developments. Its institutional framework was left practically
untouched, that is to say, it was left in the shape in which it had been thrown
by the English ‘classics’ and in particular by J. S. Mill. Nations remained
amorphous agglomerations of individuals. Social classes were not living and
fighting entities but were mere labels affixed to economic functions (or func-
tional categories). Nor were the individuals themselves living and fighting
beings: they continued to be mere clotheslines on which to hang propositions

1 1 refer again to P. T. Homan, Contemporary Economic Thought (1928). The
book deals with the thought of the period we are discussing rather than with the
thought that was ‘contemporary’ in 1928. Another general reference that should be
repeated is to G. J. Stigler, Production and Distribution Theories (1941).

886

GENERAL ECONOMICS: CHARACTER AND CONTENTS

887

of economic logic. And, with improving rigor of presentation, these clothes-
lines stood out even more visibly than they had in the works of the preceding
period. 2 Critics sneered. They saw that all this was poor sociology and even
poorer psychology. Like their predecessors in the first half of the nineteenth
century, they failed to see that, for a limited range of problems, this was at
the same time sound methodology. Owing to the importance of the problems
of interpretation involved,. I shall digress for a moment in order to make,
once more, an attempt at clarification.

The Marxists especially but also others accused the marginal utility
theorists of psychologism, that is to say, of entirely missing the true
problem of economics, which is to analyze the objective facts of the
social process of production, and of substituting the completely secondary
problems of the psychological reactions or subjective attitudes of in-
dividuals to those objective facts (see, e.g., K. Kautsky’s remark on the
Austrian school, p. xix of his preface to the first volume of Marx's
Theorien iiber den Mehrwert, 1905-10). The Austrians and other groups,
with all their misplaced emphasis upon ‘psychological’ magnitudes, had
only themselves to blame for this mistaken objection, which can be dis-
posed of, so far as the objectors were Marxists, by pointing out that the
‘new’ theories were hardly more psychological than was that of Marx,
who never hesitated to appeal to capitalists' psychology (e.g., in the
matter of accumulation) whenever he felt it convenient to do so. In
addition, however, an increasing number of critics objected not indeed
to psychology per se, but to the hedonistic or otherwise unsound psy-
chology from which economic theorists were supposed to derive their

2 This accounts for the survival and even the increased use of two conceptions
that were particularly effective in provoking the critic’s mirth or wrath. First, in i

order to display certain aspects of the pure logic of choice, some theorists employed
the old concept of an isolated individual whom they called Robinson Crusoe. The
less the critic understood what the theorist was about, the more he was amused by
the picture of economists’ attempting to solve social problems by ‘drilling Crusoe.’

Second, in order to display other aspects of the pure logic of economic behavior, some
theorists, Pareto for instance, employed the concept of the economic man, homo oeco-
nomicus. Nothing that was wrong was implied in the actual use they made of it. But 1

critics did not look at this actual use, but only at the ridiculous caricature itself, which
they believed was the economist’s idea of human nature. Inept defense sometimes
made matters worse, though some of the leaders, Menger and Marshall in particular,
said all that should have been necessary to prevent misunderstanding. The latter’s
felicitous phrase, that the economist is studying man in the ordinary pursuits of busi-
ness life, went some way in the right direction. Two points should be noted in addi-
tion: first, the fact that the German word, Wirtschaftssubjekt, is not synonymous with
economic man though it has been often thus translated; second, the ease with which \

the use of the latter term can be avoided without altering the meaning of the state-
ments in which it occurs — instead of saying that economic man will do this or that,
we can always say that this or that course of action would, e.g., maximize satisfaction
or profit. j

888

IV : FROM 1870 TO 1914 AND LATER

propositions. These objections will be briefly noticed in another place
(see below, eh. 7). Here, we are concerned with three other sources of
criticism or misunderstanding which, for purposes of identification, we
shall label Political, Sociological, and Methodological Individualism.

By Political Individualism we mean simply a laissez-faire attitude in
matters of economic policy, the attitude that was dubbed Smithianism
or Manchesterism in Germany. Economists who built their theoretical
structures from assumptions about the behavior of individual households
and firms were under suspicion of recommending the results of the free
interplay of individual self-interests which they described. In the eyes of
the critics, this suspicion seemed verified by the facts that many of those
theorists actually were economic liberals in that sense and that some, for
example, Pareto in the first stage of his career, did harness their theory
into the service of an ultra-liberal policy. But this meant no more than
that, like everyone else, the laissez-faire men among the theorists of the
period indulged in the bad habit of giving vent to their political prefer-
ences whenever practical applications were under discussion. As has been
pointed out, however, the majority no longer adhered to unqualified
laissez-faire. It moved with the times. The English and the Austrians
accepted Sozialpolitik and progressive taxation. Marshall professed to be
in sympathy with the ultimate aims of socialism, though he expressed
himself in so patronizing a way as to evoke nothing but irritation. Walras
is best described as a semi-socialist, Wicksell as a bourgeois radical. More
important, however, is it to realize that the political liberalism, so far as
actually espoused by the theorists of the period, had nothing to do with
their marginal utility theories. Marxists no doubt believed that these
had been excogitated for purposes of social apologetics. But the 'new’
theories emerged as a purely analytic affair without reference to prac-
tical questions. And there was nothing in them to serve apologetics any
better than had the older theories. In fact, the contrary would be easier
to maintain (compare, e.g., the equalitarian implications of the ‘law’ of
decreasing marginal utility); and it was ‘bourgeois’ economists who de-
veloped, during that period, the rational theory of the socialist economy
(see below, eh. 7, sec. 5); it was Marshall, Edgeworth, and Wicksell who
reduced the doctrine that free and perfect competition maximizes satis-
faction for all to the level of an innocuous tautology. 3

By Sociological Individualism we mean the view, widely held in the
seventeenth and eighteenth centuries, that the self-governing individual
constitutes the ultimate unit of the social sciences; and that all social
phenomena resolve themselves into decisions and actions of individuals
that need not or cannot be further analyzed in terms of superindividual
factors. This view is, of course, untenable so far as it implies a theory of

3 How independent of political preference the new theory of value really was is
nicely shown by the cases of Walras and Pareto: in matters of theory, Pareto, who
was nothing hut a follower of Walras, improved the latter’s system in a number of
technical points; politically there was a wide gulf between them.

GENERAL ECONOMICS: CHARACTER AND CONTENTS 0&9

the social process. From this, however, it does not follow that, for the ‘
special purposes of a particular set of investigations, it is never admissible
to start from the given behavior of individuals without going into the
factors that formed this behavior. A housewife’s behavior on the market
may be analyzed without going into the factors that formed it. An at-
tempt to do so may be suggested by considerations of division of labor
between different social disciplines and need not imply any theory
about the theme of Society and Individual. In this case we speak of
Methodological Individualism. How does this concept apply to the actual
procedure of the general economics of that time?

On the one. hand, it is true that the formative influences of environ-
ments, group attitudes, group valuations, and so on were not taken into
account in any other way than they had been by J. S. Mill, 4 and that this
was one of the reasons why, in conscious contrast, the historical school
should have emphasized ‘ethical’ aspects as much as it did. Marshall,
who did more in this direction than any other of the leading theorists,
still remained within established tradition. It is also true that the failure
of theorists to go further than this 'made itself felt — as it does now — in
their treatment of a number of problems that are nevertheless ‘purely
economic.’ On the other hand, however, it may be shown that, within
the range of the problems that primarily interested them, that is within
the range of the problems that come within the logic of economic mech-
anisms, the procedure of the theorists of that period may be defended as
methodological individualism, and that their results, so far as they went,
were not substantially impaired by the limitations that are inherent in
this approach.

(b) Population. As we know, the theory of population, mainly the Mal-
thusian theorj, formed an essential part of the general economics of the pre-
ceding period. This means more than that economists worried about pressure
of population and that apprehensions on this score influenced their vision of
the social future and their ideas about economic policy. It means that hy-
potheses about actual and expected rates of increase in population entered
into their theorizing just as did the law of decreasing returns, and that in con-
sequence their theoretical analysis would have been incomplete without those
hypotheses. Senior, therefore, had been quite right when he included a di-
luted Malthusianism among the fundamental postulates of economic theory.
The essential point to grasp is that this ceased to be so during the period
under survey. No theorist writing in, say, 1890 would have thought of doing
what Senior had done. And this was not primarily because, very obviously,
there was no longer any immediate reason for worrying about pressure of

4 The reader will find an instructive analysis of this range of problems, with par-
ticular reference to Marshall, in two articles by Professor Talcott Parsons in the
Quarterly Journal of Economics, November 1931 and February 1932 (‘Wants and
Activities in Marshall' and ‘Economics and Sociology: Marshall in Relation to the
Thought of His Time’).

890 IV : FROM 1870 TO 1914 AND LATER

population: it was because the marginal utility system no longer depended
upon a particular hypothesis on birth or death rates and was in a posi-
tion to take account of whatever hypothesis an author might think fit to make.
Hence the population branch of general economics tended to wilt and in its
place developed a special field, not necessarily cultivated by economists alone,
of population studies. This is why, since we cannot survey this special field
properly, we are no longer vitally interested in the subject and why we are
going to dismiss it with the following three comments.

First, though no longer essential to general economics, a topic that had
been essential for so long was not abandoned quickly. It is of some interest to
note that most of the leaders continued to accept, in one form or another,
the Malthusian thesis, at least for an indefinite future: Bohm-Bawerk, Mar-
shall, Walras (to some extent), and especially Wicksell , 5 all paid their respects
to it, even though they no longer based upon it any part of their analytic
structures. For the rest, an inconclusive discussion pro and con the Malthusian
Law lingered on in textbooks and monographs . 6

Second, the fall in the birth rate that began to set in first in the higher in-
come brackets then also in the lower, first in towns then also in the country,
first in some nations then in practically all industrialized ones, has in the sub-
sequent period given rise to a sort of Malthusianism in reverse, that is to say,
to widespread concern about the economic consequences to be expected if
birth and death rates should keep on behaving as they did in the twenties —
an extrapolation that, barring details and technique, reproduces Malthusian

5 Wicksell was particularly emphatic in considering increase of numbers as the
main danger to an ever-increasing standard of life of the working class — so much so
that he got himself into trouble with the Swedish government. Let us note in passing
that he revived the concept of optimum population. On this, see L. Robbins, ‘The
Optimum Theory of Population' (in Gregory and Dalton eds., London Essays in Eco-
nomics in Honour of Edwin Cannon, 1927). Concerning ‘Pareto on Population,’ see
Professor J. J. Spengler's instructive articles in the Quarterly Journal of Economics,
August and November 1944.

6 Perhaps I ought to mention, as standing out from the rest: Professor F. A. Fetter’s
youthful essay, Versuch einer Bevolkerungslehre (1894); F. Oppenheimer’s Das Bevolk-
erungsgesetz des T. R. Malthus ( Law of Population, 1900); and A. Loria’s Malthus
(1909). For general surveys see R. Gonnard, Histoire des doctrines de la ' population
(1923) and F. Virgilii, II problema della popolazione (1924). A curious flare-up of the
discussion ( Economic Journal, December 1923) should be noticed if only in order
to illustrate the mental processes of economists. At the threshold of a period of un-
salable masses of foodstuffs and raw materials, Keynes had contended that from some-
where in the first decade of the century ‘nature’ had begun to respond less generously
to human effort than before — an interesting misinterpretation of the rise of agricultural
prices that had then occurred — and even that pressure of population had been one
of the causes of the First World War and also of the Russian Revolution (sic!). For
this he was attacked, in the name of common sense, by Sir William H. Beveridge.
But, nothing daunted, he kept on asserting (for a time) that the Malthusian devil was
stalking the scene once more. It must be added, however, that few, if any, economists
followed Keynes’s lead in this instance. Most of them felt indeed the urge to worry.
But they were soon busy worrying in the opposite direction.

GENERAL ECONOMICS: CHARACTER AND CONTENTS

methodology in the opposite direction . 7 In the period under discussion, we
find only the first beginnings of this. In addition, the falling birth rate itself —
or rather the motives responsible for its obvious immediate cause, contracep-
tion — presented a problem in explanation that was attacked from various
standpoints. I must be content to mention what seems to me the most im-
portant performance in this field, though it also belongs to the next period,
Mombert’s 'prosperity theory’ of the falling birth rate . 8

Third, the really valuable progress accomplished in this field consists in the
great improvement of the methods of marshalling and interpreting demo-
graphic material. This achievement greatly helped to create the new specialty
mentioned above and to remove population problems from the mere econo-
mist's sphere of competence . 9 This is not to say, of course, that these problems
will not re-enter general economics. The theory of secular stagnation or 'ma-
turity’ contains a hypothesis on population in its set of fundamental postu-
lates and thus illustrates the possibility that the tendency noticed in this sub-
section may be reversed in the future.

2. The Vision, Enterprise, and Capital

The 'revolution’ in economic theory we are going to appraise also left other
things untouched in general economics besides its sociological framework. This
statement must not be understood to mean that there was no advance respect-
ing those parts of general economics that were not affected. There was sub-
stantial advance — as we shall see all along and especially in our discussion of
that period’s theory of money and of cycles. Only this advance was not es-
sentially connected with the ‘new’ theory of value and distribution and could
have come about nearly as well without the latter’s help. In this section, we

7 See, e.g., Enid Charles, The Twilight of Parenthood (1934). For the most ef-
fective statement of this new worry of economists, see Mr. R. F. Harrod’s brilliant
paper on ‘Modem Population Trends,’ Manchester School, 1939, and Professor John
Jewkes’ criticism of it, ‘The Population Scare,’ ibid. October 1-939.

8 There were many forerunners within the period — L. Brentano, for instance — but
we cannot afford to survey them. For Paul Mombert, see his contribution ( Bevolker -
ungslehre) to M. Weber’s Grundriss and his Bevolkerungsentwicklung und W-irtschafts-
gestaltung (1932).

9 If we could deal with the literature of the period, we should, in the purely statisti-
cal line, have to mention such names as Lexis, Knapp, Knibbs, and Pearson. Not to
leave the reader quite without pointers, I shall mention in addition Carr-Saundeis'
Population Problem (1922); H. Wright’s textbook on Population (1923); R. R. Kuczyn-
ski’s Measurement of Population Growth (1936); and L. I. Dublin’s (ed.), Population
Problems in the U.S. and Canada (1926). This choice is not meant to imply anything
beyond a belief that these works open up convenient approaches to the history of the
subject. Others would make other choices, I suppose. One of the achievements of the
period that has received no mention at all — the work of historians on the population
problems of the past — must finally be recognized at least by mentioning the name of
what I believe to have been the outstanding performer in the field, Julius Beloch
(Die Bevolkerung der Griechisch-Komischen Welt, 1886).

892 iv: FROM 1870 TO 1914 AND LATER

shall survey some topics that were left untouched by the 'revolutionaries’-

and a fortiori by Marshall, who did not feel himself to be a revolutionary — .
within the range of the strictest possible definition of economic theory.

■(a) The Vision. The first item to be mentioned is the economists’ Vision
of the economic process. We are already familiar with this concept and with
the role that Vision plays in any scientific endeavor (see Part 1), and nothing
more needs to be said about it. Now, it is perfectly obvious that all the lead-
ers of that time, such as Jevons, Walras, Menger, Marshall, Wicksell, Clark,
and so on, visualized the economic process much as had J. S. Mill or even
A. Smith; that is to say, they added nothing to the ideas of the preceding
period concerning what it is that happens in the economic process and how,
in a general way, this process works out; or to put the same thing differently,
they saw the subject matter of economic analysis, the sum total of things that
are to be explained, much as Smith or Mill had seen them, and all these ef-
forts aimed at explaining them more satisfactorily. No conceptual creation of
the period points toward a new fact or a new slant. This may be illustrated
by their treatment of competition. Their economic world, like that of the
'classics,’ was a world of numerous independent firms. To a surprising extent
they continued to look upon the competitive case not only as the standard
case that, for certain purposes, the theorist might find it useful to construct,
but also as the normal case of reality. Even the owner-managed firm survived
much better in economic theory than it did in actual life. The great merit
that must nevertheless be put to their credit is that they complemented this
vision by an analysis that was far superior to that of the ‘classics.’ As we shall
see, they defined competition and analyzed its modus operandi with ever-
increasing success; they worked out the theory' of other cases such as straight
monopoly, oligopoly, and so on; Marshall, moreover, glanced at the case where
firms are rushing down descending cost curves, and thus clearly pointed to-
ward the set of phenomena that were to attract theorists’ attention in the
1920’s and 1930’s. But in all essentials, the vision of the analysts of the period
remained Mill’s. However much more they worried about ‘trusts’ and cartels,
they treated them as exceptions or, at any rate, as deviations from the normal
course of things (see below, ch. 7, sec. 4).

We also know that the subject that is most closely related to Vision is eco-
nomic evolution or, as practically all non-Marxist authors of that period con-
tinued to call it, ‘progress.’ Within the precincts of this conception, there was
no change at all. The reader may satisfy himself of this by studying the 36th
legon of Walras’ Elements d’economie politique pure 1 (1926). Marshall’s
theory of progress is much richer than are those of either his contemporaries
or predecessors but, stripped to bare bones, it comes to the same: population
increases, accumulation proceeds; markets widen in consequence; and this in-
duces internal and external economies (cost-reducing improvements in the

1 The line of argument that interests us now is blurred by the insertion of marginal
productivity considerations, especially of variable coefficients of production. But the
rest — the distinction between economic and technological progress notwithstanding — •
could have been written by J. S. Mill. See, in particular, the theorem on p. 383.

GENERAL ECONOMICS: CHARACTER AND CONTENTS

893

organization and technique of production). To these effects we must add those
of non-induced or revolutionary inventions that just happen— all of which
may, but for the calculable future need not, be interfered with by the action
of the law of decreasing returns in the production of food and raw materials.
All this does not go fundamentally beyond ]. S. Mill or even A. Smith. In
particular, this progress is thought of as a continuous and almost automatic
process that does not harbor any phenomena or problems of its own.

(b) Enterprise. In most minds, the idea of economic evolution will call up
the associated idea of enterprise. Here again analytic advance, though substan-
tial, proceeded mainly along the old lines. No doubt the entrepreneur was be-
ing distinguished from the capitalist, and his profit from interest, with ever-
increasing clearness as time went on. But the majority of contributions
amounted to little more than elaborations of Mill’s three elements of profits
or of Mangoldt’s rent of ability idea, and differences in explanation were
chiefly differences of emphasis or formulation. A brief survey will suffice under
these circumstances. Jevons and, excepting Bohm-Bawerk, the Austrians had
very little to say about the matter. Bohm-Bawerk’ s theory was a friction or
uncertainty theory, whichever the reader prefers: the source of entrepreneurs’
profits was the fact that things do not work out as planned, and persistence of
positive profits in a firm was due to better-than-normal judgment. Observe that
the obvious common sense of this explanation may easily cover up its inade-
quacy . 2 Walras’ contribution was important though negative. He introduced
into his system the figure of the entrepreneur who neither makes nor loses
(entrepreneur ne faisant ni benefice ni perte). And since this system is essen-
tially a static theory — despite some dynamic elements that will be noticed in
the next chapter — he thereby indicated a belief to the effect that entrepreneurs’
profits can arise only in conditions that fail to fulfil the requirements of static
equilibrium and that, with perfect competition prevailing, firms would break
even in an equilibrium state — the proposition from which starts all clear think-
ing on profits . 3 Marshall went further than most, however, in his careful anal-

2 Let us notice at once that Bohm-Bawerk coupled this theory of profit (in the sense
of entrepreneurial gain, Untemehmergewinn) with a theory of interest ( Kapitalzins )
that was still a theory of profit in the Ricardo-Marx sense. We shall discuss this point
below.

3 With Walras this means only, of course, that firms (‘entrepreneurs’) would not
reap surpluses beyond the current interest on such capital as they may own, rent at
the market rate of such natural agents as they may own, and wages for their managers
at the rate usually paid for such managerial services as they employ (including those
of the self-employed owner-managers). Moreover, such conditions would be in the na-
ture of a limiting state: if this limiting state should occur in practice, the entrepreneur
might still hope for more than that since reality is never stationary. There was thus
no justification whatever for Edgeworth’s objection to the concept of the entrepreneur
ne faisant ni benefice ni perte on the ground that such an entrepreneur would have
no motive to go on. Another criticism, however, does impose itself: Walras postulated
zero (surplus) profits (in the sense indicated), but he did not prove as a theorem that
profits would converge toward zero. Under his other assumptions, however, there is
no difficulty in doing so. Thus, this criticism, though logically valid, is purely formal.
See below, ch. 7, sec. 7.

894 IV: FROM 1870 TO 1914 AND LATER

ysis of earnings of management that expanded and deepened Mill’s wages of
superintendence so greatly as to make practically something new out of them.
He also offered other helpful suggestions. One was his reception of Mangoldt’s
idea of rent of ability, though he did not use it for the special purposes of an
explanation of profits but more generally in the explanation of all super-
normal returns to personal exertion. Another suggestion was enshrined in his
concept of quasi-rent. 4 Clark’s contribution was the most significant of all: he
was the first to strike a novel note by connecting entrepreneurial profits, con-
sidered as a surplus over interest (and rent), with the successful introduction
into the economic process of technological, commercial, or organizational im-
provements.

Among the rest, many authors developed Mill’s (or A. Smith’s) element of
risk. 5 This was done most successfully by Hawley and especially by Professor
Knight. To the latter we owe, in the first place, a very useful emphasis upon
the distinction between insurable risks and non-insurable uncertainty; and, in
the second place, a profit theory that linked this non-insurable uncertainty on
the one hand to rapid economic change — which, barring extra-economic dis-
turbances, is the main source of this uncertainty — and on the other to dif-
ferences in business ability — which are much more obviously relevant to the
explanation of profits and losses in conditions of rapid economic change than
they would be otherwise. He thereby achieved a synthesis that is not open to
the main objection against the ordinary type of risk theories. A further step
in the same direction was taken by Dobb. 6 No attempt can be made to go
further into the large literature of the subject that embodies and indeed char-
acterizes a considerable part of the analytic developments of the period under
survey, then produced some of its best performances in the 1920’s, and finally
petered out so far as its theoretical component is concerned. 7 Factual work,

4 I do not mean, of course, that quasi-rent is identical with or uniquely related to
entrepreneurial profit. But it comes in handily in an analysis of business gains. A third
suggestion may perhaps also be attributed to him. The Cambridge economists, in the
1920’s and 1930’s, came to distinguish normal profits from those windfall profits that
result from the operation of the monetary system. We are not ready as yet to consider
this schema. But we may note that Marshall’s obiter dicta on the cyclical behavior of
credit and prices contain the germs of a theory of windfall profits of this type, as his
treatment of the earnings of management contains the substance of the theory of nor-
mal profit.

5 The objections to this have been pointed out already. The reference in the text is
to F. B. Hawley, Enterprise and the Productive Process (1907); and to F. H. Knight,
Risk, Uncertainty and Profit (1921). Though the latter work does not belong chrono-
logically in the period under survey, it is like others mentioned here in order to light
up an important line of analytic advance that starts from roots within that period.

6 M. Dobb, Capitalist Enterprise and Social Progress (1925), already quoted in an-
other context.

7 I shall, however, mention in this footnote a few more contributions that, for one
reason or another, may be considered as representative. The American work on the
problem may be said to have been started by F. A. Walker (T he Wages Question,
1876; ‘The Source of Business Profits,’ Quarterly Journal of Economics, April 1887).

GENERAL ECONOMICS: CHARACTER AND CONTENTS

which in this field meets with particular difficulties, did not get beyond be-
ginnings. The record of successful research practically begins in the 1920’s,
especially in the United States where scarcity of material was an almost pro-
hibitive obstacle before. 8

There is one more point, however, that cannot be left untouched. All the
theories of entrepreneurial activity and of entrepreneurial gains that have been
mentioned are functional. That is to say, they all started by attributing to
entrepreneurs an essential function in the productive process, and they all
went on to explain entrepreneurial gains by success in filling that function. No
doubt, different authors defined this function in different ways. But Mr.
Dobb’s later turn of phrase that entrepreneurs (‘undertakers’) are the people
‘who take the ruling decisions’ of economic life (op. cit. p. 54) might well serve
as a common motto for them all. In describing the period’s work on this
topic as one of its major contributions to economic analysis, we have placed
ourselves on the same standpoint. 9 It is natural, however, in a matter that
concerns the central figure of the capitalist economy and, moreover, in a mat-
ter on which reliable factual information is, for most economists, so difficult
to acquire, that any functional theory must be under suspicion of ideological
bias and that it must sooner or later be met by equally suspicious opposing
theories, the burden of which is to establish that the entrepreneur fills no
‘productive’ function at all but merely preys upon the productive activity of

A late contribution cf note was C. A. Tuttle’s paper on ‘The Function of the Entre-
preneur,’ American Economic Review, March 1927 (also see his survey, ‘The Entre-
preneur Function in Economic Literature,’ Journal of Political Economy, August 1927).
German work simply continued an old tradition, see, e.g., Victor Mataja, Der Unter-
nehmergewinn (1884) and the earlier publication, J. Pierstorff, Die Lehre vom Unter-
nehmergewinn (1875). It is a question of some interest why most of this literature
should have been either American or German. Perhaps because the figure of the entre-
preneur was at that time more prominent in the United States and in Germany than
it was in England or France? Or perhaps also because at least the English economists
took the entrepreneurial function and entrepreneurial profits so much for granted as to
see little need for more analysis of them than they found in Marshall — just as most
of them considered the problem of interest as satisfactorily settled? But I take the op-
portunity to call the reader’s attention to an important contribution which, if it does
not exactly deal with the problems of the profits of enterprise, yet bears on them and
so may be mentioned here: F. Lavington, ‘An Approach to the Theory of Business
Risks,’ Economic Journal, June 1925.

8 One of the reasons for this was that, by and large, American business did not
adopt adequate methods of depreciation and cost accounting until the crisis of 1907.
Factual investigation into the facts of profits had, therefore, to work on rough indica-
tions that might easily mislead.

9 It should be emphasized at once, however, that, for those theories of entrepreneurial
activity — or some of them — to be valid, it is not necessary to go beyond the proposi-
tion that this activity fills a function that is essential in capitalist society. How, by
whom, and with what degree of efficiency analogous functions might be filled in any
other organization of society, e.g., a socialist one, is an entirely different question.
What the writers of that period thought about this does not affect at all the instru-
mental value of their theories as applied to the capitalist process.

8g6 iv : from 1870 to 1914 and later

others. Such theories enjoy wide currency in the popular economics of our
time. Our first question is: has any such theory been held by any economist
of repute?

The reader might think of Marx and the Marxists. If so, he mistakes the
point that is at issue at the moment. Throughout the period there was a con-
siderable number of economists who did not go along with the tendency to-
ward a divorce of the entrepreneur from the capitalist and of the entrepre-
neurial gain from capital gain. All these economists continued to identify the
entrepreneur, on principle, with the capitalist in the same sense as had A.
Smith and Ricardo. For them, hence, the principal thing to explain was the
return that accrues to capital. Of all the economists who retained this approach,
the Marxists were, as a group, the most important. Thus, the Marxist theory
of exploitation is a theory of the exploitation of labor by capital; and it is
therefore correct, as is and has been the usual practice, to list this theory
among theories of interest. The entrepreneur is undoubtedly present in the
Marxist drama. But he is present behind the scenes and his gain is not a
Marxist problem. It can be inserted into the Marxist system only by means
of an un-Marxist reinterpretation. Even in Marx’s description of the process
of concentration, it is big capitalists that prey upon — 'expropriate' — the smaller
ones. So soon as we realize this and accordingly exclude the Marxists as well
as the other authors who adopted a similar view , 10 we have difficulty in finding
any accredited exponents of what we may call the depredation theory of entre-
preneurial gain. Veblen comes nearest to being an instance: though even in
his case certain qualifications should be made, we may perhaps consider him
as the scientific ancestor of the popular theory alluded to above. But modern
scientific socialists do not qualify — as may be seen from the writings of Lange
and Dobb.

Under these circumstances, it is hardly worth while to raise the question
whether functional explanations of the entrepreneur’s role and gain are ideo-
logically vitiated or deserve to be discounted on the ground that their authors’
minds may have harbored apologetic intentions . 11 Unfortunately, this does not
settle the matter. For in the first place, the functional theories do not cover
the whole contents of the profit or loss item as known to business practice.
This is so not only because this item also includes returns to owned factors —
some of those theories, especially the older ones, following J. S. Mill’s ex-
ample, did include these — but also because the entrepreneur, and even the
mere manager, especially the owner-manager of a concern, is so placed as to be
the recipient of (positive or negative) ‘leftovers’: the word residual as applied
to his profit, has therefore more definite meaning than it has in the case of
the other claimants to shares in total receipts. Moreover, the entrepreneur or
owner-manager who stands between the commodity and factor markets has

10 On the same ground we exclude in particular various bargaining-power theories
that were also used primarily for the purpose of explaining capital profit.

11 Of course, this does not exclude the possibility that ideological bias is present in
the Vision of the economic process that causes economists to emphasize the functional
aspect at the expense of others in an analysis of a historical development.

GENERAL ECONOMICS: CHARACTER AND CONTENTS 897

more opportunity for exploiting favorable situations 12 and is more vulnerable
to other people’s doing the same thing than is anybody else. Total net profits
in the sense of the gain item in an entrepreneur’s personal income statement
are hence an agglomeration of elements of quite different nature, and they are
not anything like as closely related to whatever it is that, adopting some par-
ticular theory, we may conceive ‘pure’ profits to be as other people’s total re-
ceipts are to their ‘functional’ incomes. The difference may be very consider-
able and constitutes a reason, though not the fundamental one, why we should
not speak of a tendency of entrepreneurial gains toward equalization.

The fundamental reason is that entrepreneurial gains are not permanent
returns at all but emerge each time — to adopt the language of the Knight-
Dobb theory — an entrepreneur’s decision in conditions of uncertainty proves
successful and have no definite relation to the size of the capital employed.
In other words, entrepreneurial gains, though always present like technolog-
ical unemployment, yet arise, also like technological unemployment, from a
sequence of events each of which, being unique, would not of itself cause per-
manent gains or unemployment. There is no mechanism to equalize such ‘in-
dividually temporary’ gains except at zero level. But many theorists of that
epoch, explicitly or tacitly, did assume the existence of such a tendency simply
because they had not completely got rid of the association of entrepreneurs’
gains with capital gains that can indeed, if allowance be made for risk, be
shown to display such a tendency. This topic is difficult — though in a sense
that differs from that in which the non-mathematical student of today finds
modern theory difficult — and cannot be further pursued. But I want to add
that, partly for this reason, we also should not speak of ‘supply of business
ability.’ English authors and others did this because they were prone to as-
similate what they significantly called earnings of management with wages.
This language is capable of defense but should not induce us to draw supply
curves for entrepreneurial services even if we believe in supply curves for any
other kind of work.

In the second place, it should be observed that, whatever their nature in
other respects, entrepreneurs’ gains will practically always bear some relation
to monopolistic pricing. Whatever it is that produces these gains, it must of
necessity be something that, for the moment at least, competitors cannot paral-
lel for, if they did, no surplus over costs (including entrepreneurial ‘wages’}
could emerge. The successful introduction of a new commodity or brand is
perhaps the best illustration of this. Moreover, there are means available to
the successful entrepreneur — patents, ‘strategy,’ and so on — for prolonging the

12 A special case of this is what Professor Robert A. Gordon called the ‘gains of
position’ that members of the executive group in a corporation may be able to make.
See his Business Leadership in the Large Corporation (1945), p. 272. In the text above
I mean, however, a much wider category of gains to which the same term might be ap-
plied, viz., gains that are not made in the fulfilment of the entrepreneurial 'function’
but can be made by those who fill this function. I think it fair to say that the econo-
mists under discussion did recognize this phenomenon. It would indeed have been
difficult for them not to do so.

898 rv: FROM 1870 TO 1914 AND LATER

life of his monopolistic or quasi-monopolistic position and for rendering it
more difficult for competitors to close up on him. Obviously, this may be
linked up with the elements of the case that have been glanced at in the
preceding paragraph in such a way as to yield a picture of reality that may,
for practical purposes, differ but little from that drawn by a straight depreda-
tion theory. Rare birds indeed are the economists who give the proper weight
to this set of facts and at the same time do not overstress them. It is here
rather than in the fundamental question of theory involved that ideological
bias as well as political interest assert themselves. On principle, a sponsor of
a functional theory is at liberty to give as much weight to predatory activities
as he pleases. 13 But most economists who wrote before 1914 may have under-
utilized this freedom as much as many of their successors have abused it. It
must not be forgotten, however, that the widespread hostility to big business
and to 'trusts/ so far as there was any analytic meaning to it, does imply
equally widespread recognition of the facts referred to.

(c) Capital. Once more we have to report advance, but advance almost
wholly unconnected with the ‘revolution’ in value and distribution. 14 Through-
out the period, economists of all countries displayed a propensity to adhere
to the deplorable ‘method’ of trying to solve problems by means of hunting
for the meaning of words. There was a controversy about the concept of
capital, or rather there were several of them, in particular one in which the
chief figure was Bohm-Bawerk and another in which the chief figure was
Irving Fisher. 15 All this must not blind us to the fact that serious and not
fruitless analytic work was actually done, partly even through the instrumen-
tality of that unprepossessing ‘method.’ We briefly note the main points.

First, as we know, Fisher defined capital as the stock of wealth that exists
at any moment. Analysis stands to gain from this in two ways: it always gains
when added emphasis is placed on the fundamental distinction between funds
and flows; and in this particular instance, as Fisher’s argument shows, it gained
a stepping stone between the economist’s capital concept and the accountant’s
capital account. Most economists continued, indeed, to define capital as a

13 This is his advantage over sponsors of depredation theories who must hold, if
their theory is to be distinctive, that entrepreneurs had nothing at all to do with the
emergence of the modem industrial apparatus except to plunder it and to sabotage
its working: this is of course easy to refute both by theoretical and historical analysis.

14 The period’s analysis of capital formation (saving and investment) will be discussed
in sec. 5 below and in the next chapter.

15 Bohm-Bawerk’s contribution to this activity is contained in the 2nd vol. of
Kapital und Kapitalzins, and Fisher’s in Nature of Capital and Income, and in all the
authors cited in both. Parallel to this capital controversy went the controversy on in-
come (which experienced a curious revival in our own day) . German contributions were
particularly numerous but I shall cite only R. Meyer, W esen des Einkommens (1887)
and for the rest refer the reader to Fisher. Since income did not as yet play the role it
came to play in the Income Analysis of today, we shall not bother about this con-
cept further. Let me, however, recall Fetter’s concept of Psychic Income ( Principles ,
ch. 6) and Fisher’s development of the same concept (op. cit. ch. 10).

GENERAL ECONOMICS: CHARACTER AND CONTENTS 899

stock of goods but as a particular category of goods rather than as the total
stock. 16

Second, though 'physical’ concepts still enjoyed greater popularity, non-
physical ones began to intrude. Capital tended to become a fund or a sum
of assets consisting of money or evaluated in money. This tendency shows well
in the work of Menger, who at first, in his Grundsatze, defined capital as
‘goods of higher order/ but later on (in his contribution to the theory of
capital, ‘Zur Theorie des Kapitals/ which he published in Jahrbiicher fur Na-
tionaldkonomie, July 1888) as ‘productive property . . . [considered] as a sum
of money productively used.’ This foreshadows later tendencies, but we shall
not go on to show how this point of view cropped up here and there because
not much came of it at the time except in uninfluential instances. 17 The con-
ception of capital as the discounted value of streams of expected returns put
in appearance, in the wake of the works of Bohm-Bawerk and Fisher, in the
guise of value of capital rather than of capital sans phrase. But it should be
clear that this makes less difference than some later authors were inclined to
think. 18

Third, the majority of writers kept to the triad of factors — of which ‘capital’
was one — and to the parallelism between the items of this triad and the items
of a corresponding triad of incomes (entrepreneurial income standing apart).
This also applies to Marshall despite his formal introduction of a fourth factor,
organization.

Now, all the analysts who kept to that triad and to that parallelism had in
fact a strong analytic interest — it is ridiculous to speak of a political one — to
define capital in a way that would qualify it to stand, in production and dis-
tribution, on a par with the labor factor and the land factor. They also had
an analytic interest that was indeed weaker but still strong to deal with capital
as a homogeneous quantity, the increase and decrease of which would have an
unambiguous meaning. Some achieved this, quite illogically, by putting a capi-
tal factor expressed in dollars alongside of a labor factor expressed in labor
hours and of a land factor expressed in acres — a practice for which instances

16 A number also worried themselves — unnecessarily as I think — about the distinc-
tion between social and private capital.

17 We may, however, note in passing that monetary concepts of capital carry the
no doubt minor advantage that they bear a relation to Capitalism which physical con-
cepts per se do not. Outside of the circle of Marxists and of economists more or less
influenced by Marxist doctrine, the term Capitalism was hardly ever used. Marx, as we
know, defined as capitalist an economy in which physical capital is owned by people
other than the workmen. One might think that this should have induced non-Marxist
economists to find characteristics of their own for the capitalist economy. But this was
not the case unless we are content with such labels as private-enterprise economy or
private-property economy, which do not differ much from the Marxist one.

18 It is perhaps owing to Bohm-Bawerk’s not wholly felicitous w ? ay of expressing him-
self that his critics often failed to notice that this idea — that capital value is the re-
sult of a discounting process (‘capitalization’ in a special sense) is one of the main
points in his capital theory.

900 IV : FROM 1870 TO 1914 AND LATER

can be found even in the 1930’s. 19 In any case, however, it should be clear
that, on principle, any such quantification of capital is quite inadmissible so
long as capital means an assemblage of physical goods — factories, machines,
lubricants, raw materials, and the like. Such an assemblage of goods can never
be considered as a quantity in the ordinary sense of the term but only in the
sense in which a matrix may be referred to as a ‘complex quantity/ 20 Nor is
this all: the same applies to the land and the labor factors that are not homo-
geneous quantities either. And still this is not all. The elements of these
three ‘complex quantities’ or matrices are not clearly separated from one an-
other but shade off into one another: a railroad track, though made by man,
behaves like a natural agent; the skill of a lawyer is — or may be looked upon
as — the result of ‘investments,’ and so on. In our own day all this has been
brought home to us, with unsurpassable energy, by Professor Knight, who ac-
cordingly described ‘the entire notion “of factor of production” ’ as ‘an incubus
on economic analysis’ that ‘should be eliminated from economic discussion as
summarily as possible.’ 21 Our agreement with him must, however, be qualified
in two directions. In the first place, in asserting his perfectly correct view of
the matter. Professor Knight was being seriously unjust to past performance
and unnecessarily so. As has been explained above, the triad of factors is one
of those things whose introduction constitutes one step in advance though, at
a later stage of analysis, its elimination may constitute another. 22 In the sec-
ond place, it would hardly be easy to eliminate the factor idea entirely. For
the condemnation Professor Knight passes upon it may be expressed . by saying
that he admits an indefinite variety of factors 23 within which there is no eco-
nomically significant difference. But, disregarding the difficulties of presenta-
tion that would arise from the adoption of this view, there are significant dif-
ferences within the world of requisites of production that are not less real and
important because no sharp dividing lines exist between them. Even an at-
tempt to take account of these differences by reasoning on an ideally pure (and
homogeneous) labor, an ideally pure (and homogeneous) natural agent, and

19 J. B. Clark’s more sophisticated attempt to quantify capital will be mentioned
presently; it is not considered in this place in order not to divert the reader’s attention.

20 In order to understand this, the non-mathematical reader need only look up the
first page of ch. 2 and the first page of ch. 6 of Bocher’s Introduction to Higher
Algebra, without troubling about what follows in either case. The term complex as used
in this connection must not be confused with its meaning in the phrase ‘complex
number/

21 The quotation is from E conometrica, January 1938, p. 81.

22 Professor Knight should be the first to recognize this, because the foremost early
sponsor of the triad, J. B. Say, used it precisely for asserting the plurality of factors and
the very view of distribution that Professor Knight himself adopts, namely, the view
that ‘distribution’ is simply the pricing of productive services. The triad may have been
a crude tool to use for these purposes but it certainly was an effective one. The other
instances of serious injustice, to be mentioned presently, occur in Knight's criticism of
Bohm-Bawerk’s doctrine that has been closely followed.

23 In strict logic, the number of these factors would have to be infinite, for con-
ceptually they form a continuum.

GENERAL ECONOMICS: CHARACTER AND CONTENTS

9OI

an ideally pure (and homogeneous) type of capital good — say shovels, one ex-
actly like the other — would hardly have to be listed among the most heinous
of the offenses theorists have ever committed against realism. The reader should
carefully observe, however, that this argument is not intended to carry us back
to the standpoint of the economists alluded to at the beginning of this para-
graph. All I wished to convey is that segregation of physical capital goods
from labor and land is not inherently objectionable and that it may serve use-
ful purposes in the analysis of structural relations within the economy. I did
not wish to defend the particular purpose that was foremost in the minds of
those economists, namely, the purpose of constructing an entity called (phys-
ical) capital, the price of whose services would constitute interest just as the
price of the services of labor constitutes wages and the price of the serv-
ices of natural agents constitutes rent. We are not concerned with interest
just now . 24 But in order to avoid misunderstandings I want to say at once that
I consider that theory of interest completely untenable 25 and the triad ar-
rangement, so far as it serves the purposes of that theory, wholly unfortunate.

However, though a majority of economists adhered to the triad schema,
the tendency was away from it even among sponsors of ‘physical 7 capital con-
cepts. Menger’s concept of goods of ‘higher order 7 (consumers’ goods being
goods of the lowest order) has often been mentioned in this connection. But
the strongest attack upon the triad came from Bohm-Bawerk. He not only de-
stroyed, by one of the most brilliant of his many efforts in criticism, the theory
of interest alluded to above, but he also fought the idea that ‘physical 7 capital
is a distinct factor of production, capable of being treated on the same plane
with the ‘original 7 factors, labor and natural agents . 26 Both the analytic motive
and the wisdom of this reduction of the triad to a dyad are open to doubt but,
so far as it exerted any influence at all, it certainly served to discredit the
triad. This dyad must, of course, be distinguished from a different one that is
more in line with Professor Knight’s views and became more and more popular

24 As has been pointed out by Professor von Hayek (T he Pure Theory of Capital, p. 5),
capital analysis has been crippled all along by too exclusive emphasis on the problem of
interest that tended to crowd out all other problems of physical capital. In the work
cited, the reader finds plenty of examples of these other problems.

25 Of course, in the economic system everything is related to everything. Therefore
the statement above does not amount to saying that the structure of the set called
physical capital is irrelevant to interest.

26 It is -therefore regrettable to find that a theorist of Mr. Kaldor’s rank should have
expressed the exactly opposite view of Bohm-Bawerk's theory of capital in sentences
that clearly violate both the letter and the spirit of Bohm-Bawerk’s analysis ( Econo -
metrica, April 1938, p. 163). And it is surprising that he should have supported this
view by the question: ‘if this [namely, to show that capital is a distinct factor of pro-
duction and that capital and interest can be brought into the framework of produc-
tion and distribution theory on the same plane as labor and land] is not what the
theory was aiming at, what was its purpose? 7 A colleague of Professor von Hayek
should not have found it difficult to answer this question. For the rest, I beg to remind
Mr. Kaldor of the fact that Bohm-Bawerk was the author of a theory of interest that
is most appropriately called a premium (Agio) theory.

902 iv: FROM 1870 TO 1914 AND LATER

as that period wore on: an increasing number of economists decided to as-
similate natural agents with capital goods on the ground that the former’s
peculiarities, if any, did not warrant separate treatment. 27

Finally, we must notice the boldest of all attempts that has ever been made
to quantify physical capital, J. B. Clark’s. He also included land in his concept
of capital goods. But alongside this concept he set up another, Pure .Capital,
that was to denote a fund of abstract productive power. Had he defined this
pure capital in monetary (or any value) terms, the construction would be
readily understandable. But he thought of it as a physical thing, the meaning
of which he tried to convey by analogies. A waterfall consists, in any given
fraction of a second, of individual drops of water, but these individual drops
pass on and are replaced by others and yet the waterfall as such remains the
same waterfall. Similarly, pure capital consists at any moment of individual
capital goods; those individual goods (or most of them) are indeed destroyed
and replaced by others, yet pure capital as such remains (or may remain in
a steady state) the same pure capital. Of course, it is possible to express in this
way any set of elements, such as population, that renews itself 28 so long as
one does hot delude oneself into believing that such a construction will solve
any problems. Clark, however, allowed himself to be so deluded and confi-
dently believed that he had established the existence of a permanent factor of
production, capable of yielding a net income.

Fourth, the event in this field that attracted most attention internationally,
and has ever since proved a fertile source both of controversy and of positive
work, was the publication of Bohm-Bawerk’s theory of capital. Since Jevons
had anticipated the main ideas, it will be convenient to start from his chapter
on the theory of capital ( Theory of Political Economy, ch. 7). There, Jevons
declared that he was going to follow the ‘classic’ (Ricardian) tradition with
which he professed himself in fundamental agreement. 29 Noticing, however —
as had Marx — that Ricardo’s capital concept embraced such disparate things
as wage goods on the one hand and plant, equipment, and raw materials on
the other, he suggested that the term capital should be confined to the wage
goods only, apparently for the same reason that induced Marx to separate

27 Such an arrangement, according to purpose, may or may not be convenient. And
this is all that should be said about it. Actually there was a prolonged discussion on
whether inclusion of land in capital was ‘right’ or ‘wrong,’ exactly as if a real issue had
been involved. The interest that economists displayed — in this instance as in so many
others — in a wholly imaginary ‘problem’ is, however, the only thing worth noticing
about this discussion, and we need not stay in order to examine arguments or counter-
arguments.

28 F. Divisia called such sets ensembles renouveles.

29 Considering the essentially essayistic or ‘sketchy’ character of the whole book, I
venture to suggest the hypothesis that, when starting to write on the subject of capital,
Jevons realized that it had nothing to do with the department of theory that he be-
lieved himself to have revolutionized. He therefore actually intended to deal with capi-
tal on ‘classic’ lines. As his ideas developed, he cannot have failed to notice that he
was chalking out novel ones. But careless as he was, he allowed the introduction to
stand as it had been written before he fully knew what he was going to say.

GENERAL ECONOMICS: CHARACTER AND CONTENTS 903

these wage goods as variable capital from the rest, the constant capital. Asking
himself the question how best to define the distinctive function of this wage-
good capital, he very naturally hit upon the answer, which was indeed any-
thing but new, that it served to support labor so — had he wished he might just
as well have said to exploit labor — during the time it takes to finish the job
on which workers are being actually employed. But at this point another cur-
rent of ideas sets in that was not explicitly present in the argument of the
Ricardians. 31 Capital, so Jevons tells us, ‘allows us to expend labour in advance’
And command over wage-good capital is therefore a prerequisite for intro-
ducing ‘ whatever improvements in the supply of commodities lengthen the
average interval between the moment when labour is exerted and its ultimate
result or purpose accomplished ’ (p. 248; Jevons’ italics), for example, for build-
ing a railroad. The time we can ‘finance’ — which in the Jevonian argument
is the same thing as the time for which we have enough wage goods to sup-
port the labor that, directly and indirectly, is employed in building the road—
is therefore one of the circumstances that restrict our choice between methods
of production, hence a determinant of the resulting product. This time, which
now enters both the production process and the concept of capital, must,
however, be thought of to include not only the time of construction and pro-
duction but, in case the product consists of durable goods or of a stream of
goods, also the time of ‘uninvestment.’ We are thus led to distinguish be-
tween ‘amount of capital invested’ and ‘amount of investment of capital,’ the
latter being determined ‘by multiplying each portion of capital invested at any
moment by the length of time for which it remains invested’ (p. 249). The
well-known explanatory diagrams follow, as well as explanatory examples. This
is, or suggests, a novel conception of the time-structure of the productive ap-
paratus. The reader himself would do well to look up Jevons. In addition, I
venture to ask him two things: to disregard details and to concentrate on the
fundamental idea; and to admit that so far this idea is not obvious and com-
plete nonsense. 32

Reasons have been offered for believing that Bohm-Bawerk’s theory of capi-
tal was subjectively original. But it will be convenient to treat this theory as if
it were nothing but an elaboration of the Jevonian ideas. 33

To begin with we have to discard the difficulty that arises from the fact
that Bohm-Bawerk, though his subsistence fund plays exactly the same role as

30 Only labor — it was a strange lapse for the great foe of the labor theory of value
to overlook, in this argument, all other requisites of production.

31 It may, however, have been induced by other writers, such as Hearn, whose
P lutology (1863) Jevons quoted in this chapter as he did in others.

32 This request may sound strange but is amply motivated by some arguments prof-
fered in the discussion of the 1930’s. I might even add another request, viz. to admit
that ‘duration,’ in the sense that is obvious from our text, is not just a technical detail
without economic relevance.

33 Its affinities with Ricardian and Marxian ideas are, however, obvious (see above,
ch. s, sec. 4).

9°4 IV: FROM 1870 TO 1914 AND LATER

Jevons’ wage-good capital , 34 defined his capital as intermediate products. We
accept Jevons’ concept but cannot dismiss this point without emphasizing
Bohm-Bawerk’s conception of intermediate products (such as tools and raw
materials) as consumers' goods in the process of maturing (Taussig’s ‘inchoate
wealth’). There is depth in this conception that is not found in Jevons . 35

Next, recalling the emphasis placed by Jevons on the relation between the
stretch of time that his wage-good capital allows us to ‘finance’ and the use
of superior methods of production, we find the same idea embodied with
added emphasis in Bohm-Bawerk’s concept of the ‘roundabout process of
production’ ( Produktionsumwege ), that is, production of consumers’ goods via
the production of intermediate goods. The extra productivity ( Mehrergiebig -
keit) of superior technology is linked so closely with the insertion of additional
stages of production and this, in turn, with the extension of the time during
which a given investment remains locked up that we are set wondering whether,
leaving aside relatively unimportant exceptions (which he went out of his
way to recognize), Bohm-Bawerk was in a position to admit the occurrence of
improvements that shorten that time instead of extending it . 36 He postulated,

34 Bohm-Bawerk’s subsistence fund even suffers from the same defect — that was later
on removed by Wicksell — namely, that it is merely a fund for supporting labor (con-
ceived as homogeneous exactly like Ricardo’s) and not also for the payment of the
services of natural agents (possibly also of capital itself). But the reason for this was
merely a desire to simplify a problem that taxed his technical aptitude as it was.

35 Also, something is to be said for the other side of Bohm-Bawerk’s miedal. His in-
termediate products are inchoate consumers’ goods. But, looked at from the other
side, they are accumulated productive services (as they had been for the 'classics’ —
hoarded labor). This raises indeed the question of the ‘resolution’ of capital into the
‘services of the two original factors,’ of which Bohm-Bawerk made so much and of
which his critics have made still more. Owing to the fact that no intermediate product
can, since gorilla days, ever have been produced by labor and services of natural agents
alone, such a resolution may not be admissible. But neither is it necessary, as will be
shown near the end of this section.

36 In view of the unending stream of criticisms that have been leveled at Bohm-
Bawerk on this score, two points should be borne in mind. First, as we shall see pres-
ently, Bohm-Bawerk characterized his roundabout process by a figure that does not
represent pure time. His ‘period of production’ may increase when the clock time
taken by the productive process does not increase — this is the case of ‘broadening’ vs.
‘lengthening’ the capital structure — or even when it decreases. Second, Bohm-Bawerk
should have made it clear that his reasoning applies only to ‘improvements’ that have
been from the first within the producers’ technological horizon. Inventions that widen
this horizon should be excluded as they always are in the ordinary theory of produc-
tion for which the technological horizon (‘state of the arts’) is a datum. But it is the
intrusion of inventions — of methods of production that are new, not in the sense that
they had not been operated before but in the sense that they had not been known
before — which will be seen, on examination, to provide the cases where the adoption
of ‘superior’ technique is attended by a shortening of the ‘period of production’ even
in Bohm-Bawerk’ s sense. So long as we move within a given and constant technolog-
ical horizon, Bohm-Bawerk’s postulate is far from absurd. In order to show this, let
us start from a state in which the economy is in perfect (competitive) equilibrium; and

GENERAL ECONOMICS: CHARACTER AND CONTENTS 905

then, that the product of a given quantity of ‘labor' increases with every in-
crease in Jevons' ‘amount of investment of capital.’ But he also postulated
that this increase proceeds at a decreasing rate. 37 This amounts to setting up
a law of decreasing (physical) returns that is formally analogous to the law of
decreasing marginal productivity of any other factor: in the arithmetical tables
by which Bohm-Bawerk illustrated his ideas (see, e.g., Kapital und Kapital-
zins, 11, p. 463 et seq. of the 3rd ed.), he ‘applied,’ as it were, successive units
of time to a given amount of resources (actually: a month’s labor). The re-
striction involved is stronger than necessary but made the going much easier
for Bohm-Bawerk than it would have been without it. In appraising the stand-
ing of this postulate we must, however, never forget this lesson from the prac-
tice of the physicist: a postulate may be justified not only by establishing ob-
servationally the facts it asserts but also by its results.

Finally, Jevons' ‘amount of investment of capital' — which has a time di-
mension — divided by his ‘amount of capital invested’ — which has no time di-
mension — gives Bohm-Bawerk’s famous Period of Production. This quantity
is to characterize, by a single figure, the structure of production, if possible of
total national production, and to serve as the fundamental variable of capital
theory. Formally, it represents a gravitational center. Think of n particles of
the masses m l7 m 2r ••• m» that lie on a straight line. Choosing this line for
axis and denoting the co-ordinates of the particles on this axis by x x , x 2 , * * * x n ,
we find that the co-ordinate X of their center of gravity is

X _ m i*i + m 2*2 + * ‘ • ™ n x„
m 1 + m 2 -i m n

let us, but only in order to simplify the argument, further assume that productive re-
sources are given, constant, and (this is really a pleonasm) optimally allocated. The only
reason why in these conditions there could be methods of production that are known
to be ‘superior’ to those in use, and yet are not being used instead, evidently is that
these superior methods cannot be 'financed' in the Jevons-Bohm sense. But, since under
the conditions assumed, the wage-good capital is being fully and optimally used, the
only reason, in turn, for that impossibility is that the superior methods would ‘lock up’
too much capital for too long a time. Now let the wage-good capital increase, all other
requisites being kept constant. Everyone would agree that this will tell primarily in
favor of new investment in productions involving a longer ‘period.’ This is all that is
necessary. That part of the increase will be absorbed by wages, hence go toward financ-
ing production for immediate consumption, is so far from being an objection as to be
even an essential part of Bohm-Bawerk’s theory of wages. In extenuation of the sins
of the critics it should be admitted, first, that with the printer’s devil waiting at his
door, in 1888, for new batches of manuscript, he put his argument unsatisfactorily from
the start, and, second, that when criticisms poured in upon him, he frequently misman-
aged his defense (particularly in the matter of inventions).

37 Denoting physical product by p, means of production by a, b, c, • • * and time by
t, we have then p = f( a, b, c * - - t), that is to say, the idea really reduces to the intro-
duction of some kind of time factor into the production function (see below, ch. 7,

sec. 8). Bohm-Bawerk’s postulates were (1) that-|£> o; and (2) that

906 IV: FROM 1870 TO 1914 AND LATER

Now let the m s represent, instead of n masses of particles, n quantities of
physical resources that are being successively applied, at n points of time
h“' t n , to the production of a consumers’ good that, after another spell of
time of storage , 38 is sold and consumed. This set-up inevitably imposes upon
us either the necessity of identifying these physical resources with a single
homogeneous agent — Bohm-Bawerk chose, like Jevons, homogeneous units of
labor 39 — or else the assumption that these resources consist of doses of invariant
composition. For axis we now choose time instead of distance, and for zero
point on this axis the point of time at which the consumers’ good is sold. Evi-
dently the t’ s are all to the left of this zero point, hence negative, and decrease
numerically as we proceed from the first act of investment in t x to the right
toward the zero point. The expression 40

j _ m x t t -f m 2 t 2 -f • • • m n t n

mi-h m 2 +- ■ ■ m n

which has only a time dimension (since the resource dimension cancels out),
is Bohm-Bawerk’s period of production. The phrase is most infelicitous — it is
difficult to think of a more infelicitous one — and to a considerable extent re-
sponsible for the flood of adverse criticisms. But the meaning of the thing it-
self is clear: it is the average of the time distances from the sale of the prod-
ucts of all the units of 'invested labor.’ 41

The need for comments on this theory of capital (in addition to those that
have been made already) is much reduced by the fact that Professor Knight,
by far the most eminent of its critics, has admitted that, under all the assump-
tions made by Bohm-Bawerk, it is valid . 42 First of all, it must be emphasized

38 This is a slight deviation from Bohm-Bawerk’s set-up.

39 Strictly, it should be 'subsistence’ considered as a homogeneous quantity. Obvi-
ously, however, he did not like to go as far as this.

40 The expression is made positive by prefixing a minus sign, since the f’s enter nega-
tively. The reader will see that it is quite reasonable to consider 'investment’ as an es-
sentially negative quantity from the standpoint of the 'investor’: it is something he
gives away. T itself should be positive, however.

41 In his Rate of Interest, Irving Fisher asked the question why that weighted aver-
age should be considered as the 'correct’ method of measuring the period of production.
This question evidently embarrassed Bohm-Bawerk greatly (see Exkurs hi in the 3rd
and 4th eds. of Kapital und Kapitalzins, n) but it should have been easy to answer.
In fact it should never have been asked: for the formula simply defines something that
Bohm-Bawerk chose to call the period of production.

42 This short cut has, of course, its dangers; in addition it deprives the reader of the
benefits of exercise in the art of theorizing that he conceivably might reap from a
fuller discussion. In order to make up for this, I refer the reader to Mr. Kaldor’s
survey article, ‘The Recent Controversy on the Theory of Capital,’ E conometrica,
July 1937, the first three footnotes to which present a bibliography for the 1930’s,
including of course the papers of the protagonist. Professor Knight, to which
I have only to add (except Knight’s ‘Reply,’ ibid. January 1938, and Kaldor’s 'Re-
joinder,’ ibid. April 1938) F. Burchardt, ‘Die Schemata des stationaren Kreislaufs

GENERAL ECONOMICS: CHARACTER AND CONTENTS

9°7

again that here we are not concerned with Bohm-Bawerk’s theory of interest
or with the bearings upon it of any of the elements of his capital theory. This
makes a lot of difference. As an example, consider the argument that in a syn-
chronized process in which production and consumption run along contin-
uously, with all its elements perfectly co-ordinated, the idea of periods of pro-
duction ceases to have any importance or even meaning and production may
safely be treated as timeless. Now, it may be true that in such a process the
period of production ceases to have any importance in the explanation of in-
terest . 43 But that is not the same as saying that the concept has no use or even
meaning in such a process. Even in Clark’s waterfall, assuming it to be per-
fectly steady, we may, for example, try to define the time which a drop of
water takes on the average to get from top to bottom, which would be a
method, though a very imperfect one, of describing some of its properties.
Similarly, Bohm-Bawerk’s period of production would, if his assumptions be
accepted, express one of the most meaningful characteristics of an economic
process, however ‘cycleless’ it may be. This has been shown, in one of the
none too numerous constructive contributions to Bohm-Bawerk' s capital theory,
by Frofessor Marschak . 44

In the second place, we must bear in mind Bohm-Bawerk’ s technical dis-
abilities, which resulted in his idea’s being much more open to formally suc-
cessful attack than it would have been if presented in a stronger armor. This
armor has been strengthened, however, by several writers, especially by
Gifford 45 and Marschak. In the third place, and independent of technical
blemishes, it must not be forgotten that the concept of period of production,
as framed by Bohm-Bawerk, was only a device to express an aspect of the eco-
nomic process and that it neglected all others, which is what Wicksell meant
when he said that Bohm-Bawerk’s capital theory was so ‘abstract’ as hardly to

bei Bohm-Bawerk und Marx’ (Weltwirtschaftliches Archiv, October 1931 and Jan-
uary 1932); W. Eucken, Kapitaltheoretische Untersuchungen (1934); and J. M.
Thompson, 'Mathematical Theory of Production Stages in Economics,’ Econometrica,
January 1936. F. A. von Hayek’s Pure Theory of Capital (1941) not only presents Pro-
fessor Hayek’s latest views but also sheds interesting light (in Part 1) on the capital
controversy. Of earlier criticisms I shall mention only Fisher’s in his Rate of Interest
and von Bortkiewicz’ ‘Der Kardinalfehler der Bohm-Bawerkschen Zinstheorie’ ( Schmol -
ler' s Jahrbuch, 1906). The interesting thing about the latter is its Spirit of uncompro-
mising hostility that differs so strikingly from the spirit he displayed in his famous criti-
cal pieces on Marx. Bohm-Bawerk’ s not wholly felicitous reply to both is in the 3rd
and 4th editions of Kapital und Kapitalzins.

43 Though I raised this point myself 40 years ago, I do not consider now that it
is well taken.

44 Jacob Marschak, ‘A Note on the Period of Production,’ Economic Journal, March
1934. His reasoning seems to run in value terms, but in the ratio of total value of
existing stocks of commodities to the value of the flow of finished consumers’ goods
the value dimension cancels out.

45 C. H. P. Gifford, ‘The Concept of the Length of the Period of Production,’
Economic Journal, December 1933. Marschak, op. cit.

908 IV: FROM 1870 TO 1914 AND LATER

constitute even a first approximation to reality. For both reasons the whole
construction no doubt looks gaunt, not to say freakish.

Some of the features that account for this impression can be removed with- '
out great difficulty. Jevons knew better than to let labor be added to a grow-
ing intermediate product until a finished consumers’ good emerges that is con-
sumed at once: as stated already, he included the process of ‘un investment’
so that his period was not simply a period of production. Bohm-Bawerk him-
self, inspired by Rae, added the gradual using up of durable consumers’ goods.
Wicksell showed how services of natural agents might come in along with
labor. His pupil, Professor Akerman, also inspired by Rae, dealt in one of the
most important works in this field, with the problems of fixed capital, which is
so curiously absent from Bohm-Bawerk’s schema . 46 One of those features of
Bohm-Bawerk’s schema that seemed most ridiculous to critics — that his period
of production seems to start from a state in which all production proceeds
without any tools or materials at all and people catch fish with their bare
hands — can be removed so soon as we realize that all economic theory is a
theory of planning and inevitably has to accept the results of the past — plant,
equipment, and stocks all included — as data. We shall then cease to try to
construct an economic process ab ovo and, looking forward only, consider in-
stead of the "amount of investment of capital,’ the "amount of investment to
be done .’ 47 Incidentally, this would also remove one of the motives for ‘re-
solving’ all capital goods into ‘labor and land’ or labor alone. Similarly, we
can get rid of the "linearity’ of Bohm-Bawerk’s schema of production — of the
idea that all products emerge as the result of processes during which, in each
intermediate stage, nothing is added to the result of the previous stage but
labor. Nor does it seem impossible to me to derive from the ‘periods’ of indi-
vidual firms the social period of production that is needed in Bohm-Bawerk’s
theory. But no satisfactory answer that I can see exists to another objection.

46 Gustaf Akerman, Realkapital und Kapitahins (1923-4). See on this Wicksell’s
comments, republ. in the 2nd appendix to his Lectures, and Akerman’s own partial
reformulation in: Om den industriella rationaliseringen . . . (1931). Erik Lindahl's
contribution (available in English under the title, ‘The Place of Capital in the Theory
of Price,’ as Part in of his Studies in the Theory of Money and Capital, 1939) com-
plements this from a different standpoint, located nearer to Walras.

47 It is a question of some interest why Bohm-Bawerk did not do this. I think that
the answer is to be found in a curious attitude that was common to all the Austrians.
They were never content with explaining a state of a process by the preceding states of
the same process. They suspected circular reasoning in any argument that did this —
or at least a begging of the fundamental question. Any truly ‘causal’ explanation had
to be ‘genetic.’ It had to uncover the (logical) origins of things. Hence the capital con-
cept had to be developed from conditions in which there was no capital. As it was,
Bohm-Bawerk Telied, for the purpose of getting a reasonably short period, on an ad
hoc postulate, namely that, as we go back into the history of a given industrial proc-
ess, the quantities of resources that have been applied in the past but are still present
in it (iron mined in Roman times that may be still present in a modern pocket knife)
decrease with time much more rapidly than the time increases with which they have
to be multiplied.

GENERAL ECONOMICS: CHARACTER AND CONTENTS

9°9

In order to make Bohm-Bawerk’s conception of the structure of capital serve
his analytic intention, this structure must be a physical fact; and the different
quantities of product that different time-structures turn out must be com-
parable physically. In order to secure the first requisite, we need indeed a physi-
cally homogeneous resource, the elements of which differ in nothing but the
time dimension; in order to secure the second requisite, the products that
enter Bohm-Bawerk’ s tables must all be the same in kind and quality, differ-
ing in nothing but physical quantity. Neither requirement can be fulfilled ex-
cept in special cases. And it is this which reduces the analytic value of Bohm-
Bawerk’s capital theory, so far, to such value as may still attach to the non-
operational illustration of an aspect of reality . 48 But, so the reader might well
ask, if we recognize all this and if we introduce all those corrections, what is
left of Bohm-Bawerk’s capital theory and in particular of his period of pro-
duction? Well, nothing is left of them except the essential idea. And this
keeps on proving its vitality by every piece of criticism and every piece of con-
structive work it evokes . 49

3. The Revolution in the Theory of Value 1 and Distribution

In this section, we shall try to formulate, in an entirely elementary manner,
what this so-called revolution consisted in and what difference it made to
economic analysis. For this purpose, we shall adopt the language of the mar-
ginal utility theory in its original and most uncritical form. And we shall use
primarily the Austrian edition of it, because the Austrians (Menger, Wieser,
Bohm-Bawerk), in spite of their defective technique, succeeded in bringing out
certain fundamental aspects more clearly than did either Jevons or Walras.
Marshall’s teaching will come in, as an instructive contrast, both in this sec-
tion and in the next chapter, where we shall move on the higher level of
Walras . 2

48 Situations like this are more frequently met with in economics than one might
think. Marx’s system offers several examples. Another is Professor Pigou’s Pound of
Resources, which he first introduced (1st ed. of Wealth and Welfare) and then
dropped. Still another is Marshall’s baskets of goods that he used in his theory of inter-
national trade. Perhaps the problem is not insoluble. (See, e.g., W. Leontief’s article,
'Composite Commodities and the Problem of Index Numbers,’ E conometrica, January
1936.) In any case, the examples adduced show that arguments that labor under the
difficulty alluded to are not necessarily valueless.

49 A recent constructive reinterpretation of Bohm-Bawerk that has not been men-
tioned yet is presented in J. R. Hicks, Value and Capital (1939), ch. 17. It is not in
Bdhm-Bawerk’s spirit. But it proves that Bohm-Bawerk’s ideas worried Professor Hicks.
Professor Douglas unintentionally erected a monument to Bohm-Bawerk’s memory in
Chart 9 of his Theory of Wages (1934), p. 128.

1 Instead of using this traditional phrase, I might also have used 'exchange ratios’ or
'relative prices.’ For most of the purposes of that period’s theory, these three terms
all mean the same thing.

2 Only a few essentials will be discussed and no systematic attempt will be made to
reproduce and criticize the phrasing of individual authors. For more complete analysis

910 IV: FROM 1870 TO 1914 AND LATER

The history of the marginal utility theory itself and of its successors will be
treated in Chapter 7. But we need a few elements of it right now. Menger
started from what he supposed were the obvious facts of human wants, which
he formalized in this way: first, there are different categories of wants or
tastes or desires ( Bediirfniskategorien ), such as the desire for food, for shelter
for clothing, and so on, which define the concept of Goods and can be ar-
ranged in a definite order of (subjective) importance; second, within each of
these categories of wants, there exists, given as a psychic reality, a definite se-
quence of desires for additional increments of each good ( Bediirfnisregungen ),
which we experience as we go on consuming successive increments. Menger
illustrated this by a numerical table that has been reproduced by Professor
Stigler (op. cit. p. 144), and dealt carefully with the large number of questions
that arise in connection with the schema — such as how far wants may be
treated as data in spite of their expansibility and malleability. Neglecting these
questions, we proceed at once to state the postulate — or ‘law’ — that was funda-
mental to the -new’ or ‘psychological’ theory of value: as we go on acquiring
successive increments of each good, the intensity of our desire for one addi-
tional ‘unit’ declines monotonically until it reaches — and then conceivably
falls below — zero. Or, replacing Menger’s discrete figures by a continuous
curve or function, and the phrase ‘desire for one more unit’ 3 by Marginal
Utility: ‘The marginal utility of a thing to anyone diminishes with every in-
crease in the amount of it he already has’ (Marshall, Principles, p. 168). Waiv-
ing various objections, we may define from this (as a sum or integral) the con-
cept of Total Utility and then also say that the total utility of a thing to any-
one increases, up to the point of satiety, with every increase in the amount of
it, but at a decreasing rate.

In either form this is what Marshall called the Law of Satiable Wants and
what the Austrians called Gesetz der Bediirfnissdttigung. In honor of the most
important ‘forerunner’ it is also called Gossen’s First Law. 4 We add immedi-
ately the proposition which is — or should be — called Gossen’s Second Law.
Unlike the first it is not a postulate but a theorem: in order to secure a maxi-
mum of satisfaction from any good that is capable of satisfying different wants
(including labor or money), an individual (or household) must allocate it to
these different uses in such a way as to equalize its marginal utilities in all of

the reader is referred to Professor Stigler’s book, Production and Distribution Theories
(i94i)-

3 Instead of unit, Menger said Teilquantitat, by which, as Professor Stigler points
out, he meant a small but finite increment. If, for the sake of analytic convenience,
we use continuous and analytic functions, we mean infinitesimal increments. The word
‘unit’ is never strictly correct. The phrase Marginal Utility is Wieser’s (Grenznutzeri) .
Jevons said Final Degree of Utility, Walras rarete. The latter term, which we will
surely translate by scarcity, suggests that there is little to the case of objectors who,
like Cassel, wished to discard utility but nevertheless to retain scarcity. The turn of
phrase ‘desire for one more unit’ is Fisher’s, who also spoke of ‘wantability.’ Pareto
introduced the term ophelimite elementaire ; Clark, the term Specific Utility.

4 See below, Appendix to ch. 7, ‘Note on Utility.’

GENERAL ECONOMICS: CHARACTER AND CONTENTS gil

them. 5 At first sight both statements are nothing but somewhat technical ren-
derings of sad trivialities. But we must not forget that the proudest intellectual
structures rest on trivialities that are entirely uninteresting in themselves. What
could be more trivial than that a body at rest will remain at rest unless some-
thing (a 'force’) acts to set it in motion (Newton’s First Law)? Let us, then,
look at the structure that was erected on those trivialities.

(a) The Theory of Exchange Value. The first problem that Jevons, Menger,
and Walras — Gossen too — tackled by means of the marginal utility apparatus
was the problem of barter. Like their 'classic’ predecessors, they realized the
central position of exchange value although, also like these predecessors, they
did not make it sufficiently clear to their readers and perhaps did not suffi-
ciently realize themselves that exchange value is but a special form of a uni-
versal coefficient of transformation on the derivation of which pivots the whole
logic of economic phenomena. 6 Their barter theories or, to use Whately’s
term once more, their catallactics, differed greatly as regards technical perfec-
tion and correctness: the peak achievement of the period is contained in legons
5-15 of Walras’ Elements . 7 But they all — also Gossen’s — aimed at the same
goal, which was to prove that the principle of marginal utility suffices to de-
duce the exchange ratios between commodities that will establish themselves
in competitive markets and also the conditions under which ranges of possible
exchange ratios must be substituted for uniquely determined ones. In other
words, they established what A. Smith, Ricardo, and Marx had believed to be
impossible, namely, that exchange value can be explained in terms of use

5 Menger spoke of the different wants that a good is capable of satisfying as being
‘satisfied to an equal level of urgency.’ This is all right so far as it goes. But it is inter-
esting to note how hesitant many writers were about this Second Law.

6 In consequence, history-minded or sociology-minded critics understood still less
what these economic theorists were about. Taking at face value the simplified schemata
by which the latter introduced their subject, and finding, e.g., that these schemata
dealt with the bartering of consumers’ goods that were present in given quantities,
these critics wondered what could be the relevance of such analysis, not only to the
great problems of social life but also to the really interesting purely economic problems
of production and distribution. Veblen’s essay, ‘The Limitations of Marginal Utility’
(republ. in Place of Science in Modem Civilization, 1919) exemplifies this attitude to
perfection.

7 Walras was the only one of the three to deal with the case of three and more com-
modities — involving indirect exchange — and to state anything approaching satisfactory
equilibrium conditions in terms of excess demand. Jevons’ chapter on the 'Theory of
Exchange’ is far inferior. Menger’s treatment of the problem is all right so far as it
went. But it did not go very far. When Bohm-Bawerk tried to elaborate his theory, de-
fective technique told immediately, and his famous horse market duly came in for easy
criticism from Edgeworth: the latter’s most important contributions are in the Mathe-
matical Psychics and, incidentally, in many of his papers. I mention specially the one
in the Giomale degli Economists March 1891, where the reader also finds an interest-
ing paper by Arthur Berry in the June 1891 number. Marshall’s Principles contain all
that the reader needs to know about the barter theory as it had shaped before the
century was out (see mainly pp. 414-16, and Appendix, Notes 1, n, and xn).

9 12 IV: FROM 1870 TO 1914 AND LATER

value . 8 Jevons, Menger, and Walras would all of them have approved of this
statement. It is this which they meant when they claimed to have discovered
the ‘cause’ of (exchange) value. However, even if granted, this would not in
itself have amounted to a great deal, especially since the ‘paradox of value’
had been, as we know, resolved a dozen times before . 9 It is more important
that the ‘new’ theory of exchange was more general than had been the old
ones 10 and that it proved more fertile in results — many of them due to Edge-
worth — even in the cases covered by the old ones. But this is not the essential
point either. The essential point is that, in the ‘new’ theory of exchange,
marginal utility analysis created an analytic tool of general applicability to
economic problems . 11 This will become clearer as we go on.

(b) Cost, Production, Distribution. The concepts of marginal and total
utility refer to consumers’ wants. Hence they carry direct meaning only with
reference to goods or services the use of which yields satisfaction of consumers’
wants. But Menger went on to say that means of production — or, as he called
them, ‘goods of higher order’ — come within the concept of economic goods

8 In Marxist terms, this means that fundamentally the ‘exchange economy’ (' Tausch -
wertwirtschaft) is also a 'use economy’ ( Gebrauchswertwirtschaft ), which Marxist ortho-
doxy denied on principle. Nothing, of course, is gained or lost for socialism whichever
view we adopt. But both parties, or at all events the Marxists, thought that there was
practical significance to this issue. It may not be superfluous to point out that this
issue has logically nothing to do with the issue of modern popular economics, produc-
tion for use vs. production for profit.

9 See, e.g., above, Part 11, ch. 6, sec. 3. But all the same there is point in empha-
sizing, against one particular form of unfair criticism, that it is not true that A. Smith
or Ricardo or J. S. Mill scorned this approach to the economic phenomenon because
of its obviousness. The truth is that they did not see how ‘value in use’ could possibly
be made to explain ‘value in exchange.’ They saw no further than that the former was
a condition of the latter.

10 This can best be realized by comparison with the labor-quantity theory of ex-
change value. The latter, so we have seen, is not ‘wrong’ as the revolutionaries, espe-
cially the Austrians, were in the habit of saying. It is much more enlightening to say
that it covers only a special case. Even where correct, the theorem that ‘prices’ of com-
modities tend to be proportional to the labor quantities embodied in them does no
more than state a property of equilibrium prices. It does not give a description of the
process that establishes these prices and therefore cannot be called a theory of prices at
all, any more than the statement that in certain conditions the price level will be
proportional to the quantity of money, even where correct, can be called a theory of
money; or the statement that in certain conditions real wages will equal minimum-of-
existence requirements, even where correct, can be called a theory of wages. So far as
this goes, the revolutionaries did not revolutionize an existing theoretical structure, but
they erected one where none had stood before.

11 This was felt but not properly brought out by the revolutionaries themselves. In
part this was due to the fact that the tool of general application — the theory of maxi-
mizing behavior — appears in the theory of exchange in the guise of a special case. It
had never been made to stand out, stripped of all non-essentials (including marginal
utility itself), and reduced to its logical fundamentals before the publication of P. A.
Samuelson’s Foundations of Economic Analysis (1947; chs. 1, 2, and 3).

GENERAL ECONOMICS: CHARACTER AND CONTENTS 913

by virtue of the fact that they also yield consumers’ satisfaction, though only
indirectly, through helping to produce things that do satisfy consumers’ wants
directly. Let us pause for a moment to consider the meaning of this analytic
device that looks so simple or even trite and was nevertheless a genuine stroke
of genius . 12 It enables us to treat such things as iron or cement or fertilizers —
and also all services of natural agents and labor that are not directly consumed
— as incomplete consumable goods, and thereby extends the range of the prin-
ciple of marginal utility over the whole area of production and 'distribution/
The requisites or factors or agents of production are assigned use values: they
acquire their indices of economic significance and hence their exchange values
from the same marginal utility principle that provides the indices of economic
significance and hence explains the exchange values of consumable goods. But
those exchange values or relative prices of the factors constitute the costs of
production for the producing firms. This means, on the one hand, that the
marginal utility principle now covers the cost phenomenon and in consequence
also the logic of the allocation of resources (structure of production), hence
the 'supply side’ of the economic problem so far as all this is determined by
economic considerations. And it means, on the other hand, that, in as much
as costs to firms are incomes to households, the same marginal principle, with
the same proviso, automatically covers the phenomena of income formation or
of 'distribution/ which really ceases to be a distinct topic, though it may, of
course, still be treated separately for the sake of convenience of exposition.
The whole of the organon of pure economics thus finds itself unified in the
light of a single principle — in a sense in which it never had been before.

Most of the problems that arise from this set-up can be discussed only on a
level on which Walras rules supreme. But, though I believe that Jevons should
be credited with a vision of the facts above and if so holds priority, the credit
for having worked out that theory systematically, on the plane on which we
are moving now, should go to the Austrians and particularly to Menger, whose
Grundsdtze contain all the essentials. Professor Stigler, indeed, pointed out
many a 'hiatus’ in Menger’s treatment and rightly attributed them to his pre-
occupation with the threshold problems of the valuation of directly consum-
able goods. This accounts in fact for the impression that he was neglecting
cost aspects. But on Stigler’s own showing, Menger had all the essential re-
sults. Nor must we forget that the Grundsdtze was, in a sense quite different
from that applicable to Marshall’s Principles , intended to be but an introduc-
tion. Actually, it was left for Wieser to work out the Austrian theory of cost
and distribution explicitly. But he was the worst technician of the three great
Austrians. And objections to methods that were peculiar to him crowded
upon his readers — and especially Wicksell — so as to impair the effect of what
was really a great performance. Bohm-Bawerk expounded, developed, and de-
fended the Mengerian theory of value. But in this field he neither had nor
asserted claims to originality. The best formulation of the Austrian doctrine
was presented later on by Wicksell.

12 In an embryonic form this device had already been used by Gossen.

9^4 IV: FROM 1870 TO 1914 AND LATER

If the explanation of the exchange value of means of production is based
upon their indirect utility or use value to the consumers of their final prod-
ucts, that is to say, if their economic significance is to be derived from the
contribution which they severally make to consumers' satisfactions, the problem
naturally arises how the contribution of each of them is to be isolated, seeing
that all ‘factors' are equally ‘requisite’ for the final product and that complete
withdrawal of any one of them will in most cases result in a zero product.
The very fact that some German critics continued to urge that this problem
was insoluble and that, because it was, the marginal utility theory was inap-
plicable to the evaluation of any goods other than consumers’ goods present in
given quantities, hence inapplicable to production, should suffice to show that
here was in fact a real and non-trivial difficulty, removal of which was the
prerequisite for the fundamental idea's becoming analytically operative. Menger
removed it by applying the analogue of the method that he had used to re-
solve the value paradox. He accepted the impossibility of separating the con-
tributions of ‘factors’ to the product that results from their co-operation. But
he observed that in order to remove the difficulty it was sufficient to deter-
mine their marginal contributions (Wieser's Grenzbeitrag ) . 13 And these can
be very simply found by withdrawing successively small quantities of each
requisite of production, keeping the others constant each time, and ascertain-
ing the loss of. satisfaction this will cause to the consumers of the product or
products.

Some technical points about this procedure 14 will be discussed in the next

13 This should, however, have convinced both the marginalists and their critics that
the marginal utility theory of income formation was constitutionally incapable of ‘de-
fending’ the capitalist method of distribution. For it is obvious that the merits — moral
or other — of, e.g., the labor factor are not affected if, relatively to the available quanti-
ties of other factors, laborers are so numerous that their marginal contribution is small.

14 It is interesting to note some of the troubles that arose both for the Austrians
themselves and for their critics from their lack of experience in handling the relevant
concepts. Thus, there was a discussion within the Austrian circle whether or not
Menger had been correct in taking as guide the loss of consumers' satisfaction incident
to the loss of a small quantity of some factor: some held that we should observe in-
stead the gain that a small increase in any factor might cause. A problem of secondary
importance arises indeed in the case of discontinuities. But so long as we are concerned
with a first formulation of the fundamental principle, we are within our rights in not
bothering about these, and then all qualms on that score are simply due to failure to
understand the logic of infinitesimals — of which examples could be cited even from
the 1920’s. Again, the objection turned up fairly early that, if you withdraw a small
quantity of some factor from a technically adjusted going concern, you will cause a
disturbance that will not be smaller than any that would be caused by further with-
drawals but, on the contrary, so upset the plan of production as to render the rest of
that factor next to useless and the schedule of decreasing productivities of the ‘suc-
cessive units’ of a factor imaginary. And a curious situation arose in which this and
similar objections remained unanswered because some of the marginal utility theorists
did not know how to reply and because others who knew did not think it worth while
to do so.

GENERAL ECONOMICS: CHARACTER AND CONTENTS 915

chapter. But we must notice at once that this was the way in which the Aus-
trians rediscovered marginal productivity. Theirs was, however, a marginal pro-
ductivity with a difference. In order to clarify this point, let us recall the usual
distinction between marginal physical productivity and marginal value pro-
ductivity. Marginal physical productivity of a 'factor’ is the increment of prod-
uct that results from an infinitesimal increment in the quantity of that factor.
Marginal value productivity of a 'factor' to a firm 15 is this physical increment
multiplied by the corresponding increment in this firm’s total revenue or
gross receipts. Both these concepts do enter into the Austrian theory. But
they do not enter on its ground floor, and they had been developed independ-
ently of it . 16 Fundamentally, the Austrian marginal productivity was indeed a
value productivity but one that did not presuppose the price of the product:
it was not physical marginal productivity multiplied by any price but physical
marginal productivity multiplied by some consumers’ marginal utility. It was
on this basis that they worked out their theory that was at the same time a
theory of production and of distribution: the tools of their barter theory, forged
beforehand, then came in to implement it and to show how this works out
in a private-property economy.

Now, this conception of marginal value or utility productivity makes ob-
vious common sense only in the case of a Crusoe economy. Crusoe may in-
deed be reasonably supposed to value his various scarce means of production
according to the satisfactions he knows to be, on the margin, dependent upon
their possession. To use Wieser’s term, he may indeed be supposed to impute
these satisfactions to those means (his own ability to work being just one of
them) and so, for his own practical purposes, to perform a subconscious proc-
ess of imputation. But if we are to maintain that a similar process of imputa-
tion constitutes the innermost meaning of the mechanisms of 'acquisitive so-
ciety’ (Tawney’s term), it is necessary to construe this imputation as vicari-
ously performed by firms that do not psychologically experience those con-
sumers’ satisfactions and in any case want to maximize pecuniary gains instead.
To prove this is the real problem. So far as it can be proved at all, it can be
proved only by showing that the barter or price mechanisms of free markets
will operate in such a way as to insure the results that would follow if fac-

15 Both physical and value productivity are in the first instance defined with refer
ence to individual firms. But the Austrians, especially Wieser, as well as J. B. Clark,
being interested in the social process as a whole, attempted to proceed directly to social
productivities, social values, social marginal utilities. This created another class of dif-
ficulties that are typical of an early stage of analysis, difficulties that Marshall and
Wicksell were much better equipped to avoid. Not much came from the discussion on
Social Value, however, and we shall not go into it beyond noting that this desire to
reason in social terms accounts for the curiously semi-socialist constructions of Wieser
and Clark in which society itself plays the role of directing agent.

16 This is why in this case we find a different set of forerunners: while in matters
of marginal utility we have Dupuit, Gossen, and so on, we have here mainly Longfield
and Thiinen. This is also the reason why Menger, if indeed he was familiar with
Thiinen’s work, failed to discover in it anything bearing directly upon his own.

9*6 IV: FROM 1870 TO 1914 AND LATER

tors were first evaluated as Crusoe evaluates them and if these utility values
were then turned into exchange values or prices in the same manner in which
the utility values of consumers' goods are turned into exchange values in a
simple consumers' goods market . 17 Even to posit this problem, which is ob-
viously neither trivial nor without interest, would have spelled considerable
achievement. But Menger and Wieser, barring technical defects, went almost
the whole way toward actually solving it, and thereby also solved the funda-
mental problems of allocation of resources (production) and of the pricing of
these resources (distribution).

However, the construction involved in applying the method of imputation
was not only far removed from any actual mental processes that may be cred-
ited to any deciding agents — this does not greatly matter considering the ‘as
if' that enters this as it does so many other scientific constructions — but also
unnecessary. In order to determine the prices of factors and their distributive
shares we do not need to know their utility values first. All we need to know
is consumers' tastes, the technological conditions of production, and the initial
distribution of ownership of ‘factors'; then the principle of maximum net rev-
enue, implying a principle of minimum cost, will do the rest. But the Aus-
trians insisted on asserting their fundamental idea at every step and, in order
to accomplish this, thought it necessary to divide up between the factors the
use value of the product just as the receipts from the sale of the product are
actually divided up between factors, the idea being that the former process (a
methodological fiction) would yield the explanation of the latter process (a
reality). Therefore, their problem of Imputation (Z urechnung) took the follow-
ing form: to find the utility functions of producers’ goods from given utility
functions of consumers’ goods. It was greatly complicated for them by their
technical deficiencies and gave rise to a considerable literature — positive and
critical — which, starting from the original contributions of Menger, Wieser,
and Bohm-Bawerk, explored various blind alleys and produced more heat than
light. It is, however, not necessary for us to go into this . 18 But whatever we

17 Some critics bluntly asserted that the Austrian theory of value, being a theory of
the evaluation of consumers’ goods, was inapplicable to the behavior of people who
produce not for the satisfaction of their own wants but for markets. This, of course,
indicates complete inability to understand Menger’s reasoning. Others found circular
reasoning in the proposition above because producers who produce for the market value
their products for the sake of the money they hope to get, which presupposes the idea
of expected prices, the very thing that is to be explained. The error involved in this
argument should be clear. I use this opportunity to mention at once the two other
vicious circles that have been charged to the Austrian theorists (often by members of
their own group), though both will have to be mentioned again. The second is: we
know only from a man’s behavior (actual choices) which one of several quantities of
goods he prefers; it is therefore circular to explain his choice by his preference. The
third is: we value money for the sake of the goods that it will buy; hence, in the
case of a purchase by means of money it is circular to hold that price is determined
by the utility values of the two things to be exchanged.

18 Professor Stigler is emphatic in expressing the same opinion. He gives, however, a
small sample of this literature (op. cit. p. 5n.). His judgment to the effect that some of

GENERAL ECONOMICS: CHARACTER AND CONTENTS

9 i 7

may think of the technical merits of the theory of imputation, it expresses a
profound truth which the simple statement that production and distribution
are matters of evaluating productive services does not convey in itself. And it
yields a satisfactory theory of costs.

Discussion of the marginal utilities of means of production in the spirit of
the theory of imputation easily leads to the recognition of the relevance to
these marginal utilities of the elements of complementarity and substitutabil-
ity 19 of factors and of their alternative uses. By this route the Austrian arrived
at what has been called the alternative-use or opportunity theory of cost 20 —
the philosophy of the cost phenomenon that may be expressed by the adage:
What a thing really costs us is the sacrifice of the utility of those other things
which we could have had from the resources that went into the one we did
produce.

Sporadically, this theory of cost had turned up in the past, especially in
J. S. Mill's Principles, but only to explain special cases which failed to fit into
the older schemata. As a general theory and as an explanation of the funda-
mental social meaning of cost — both in capitalist and in socialist society —
it was new . There should be no doubt also that it makes a much better theory
of distribution. But I want to advert particularly to the fact that it empha-
sizes a phenomenon that got all but lost in Marshall's analysis. Consider the
allocation of a requisite of production, say, labor, of a given type in a two-
commodity economy. As we go on allocating more and more labor to the pro-
duction of commodity A and less and less of it to the production of com-
modity B, marginal utilities of the commodity A will fall and marginal utilities
of commodity B will rise. We may express this by saying that the utility re-
turns from the A-production are decreasing and that costs in the A-production
are increasing: we have derived, from the marginal-utility principle, a new
‘law of decreasing returns,' which is independent of any physical law of de-
crease, and which will assert itself even in face of a physical law of increasing
returns.

the monographs on the subject have been grossly incompetent is, I am afraid, only
too justified.

19 The idea of substitutability was, of course, familiar to Thiinen. But Menger was
the first to formulate it explicitly: ‘it is . . . certain that not only can fixed quantities
of goods of higher order be combined in production in the way in which we observe
this in chemical products. . . [But] general experience teaches us that a given quan-
tity of any good of lower order can result from very different combinations of goods
of higher order.’ ( Grundsatze , p. 139 [trans. by J. A. S.]). To say the least, this fore-
shadowed the ‘law of variable proportions’ and even the concept of ‘equal product
curves.’ Moreover this formulation is superior to Marshall’s later ‘principle of substi-
tution.’

20 The latter — very felicitous — term is due to D. I. Green, ‘Pain Cost and Oppor-
tunity Cost,’ Quarterly Journal of Economics, January 1894, and has gained wide cur-
rency in the United States owing to the vigorous sponsorship of Professor Knight. The
most exhaustive treatment of this whole set of problems is to be found in H. J. Daven-
port’s Value and Distribution (1908), who preferred the equivalent term Displacement
Cost.

918 IV : FROM 1870 TO 1914 AND LATER

(c) Interdependence and Equilibrium. If we behold the bustling crowds that
work and trade in order to make a living, we shall indeed have little difficulty
in linking up their behavior with appetites for gain and appetites for goods.
But it will be by no means obvious to us that the process that generates real
income can be satisfactorily described, so far as its formal logic is concerned,
by any simple principle or that there is any inherent logic to it at all. The
history of analytic effort in this field is the history of a growing awareness,
partial at first, ever more general later on, of the presence of a logically co-
herent economic process, an awareness that first attained conscious formula-
tion in the works of such men as Cantillon, Quesnay, A. Smith, Say, and
Ricardo. But it was only in the period under discussion that the conception
of an economic cosmos that consists of a system of interdependent quantities
was fully worked out with all its problems, if not quite satisfactorily solved, at
least clearly arrayed and with the idea of a general equilibrium between these
quantities clearly established in the center of pure theory.

This was the achievement of Walras. So soon as we realize that it is the
general-equilibrium system which is the really important thing, we discover
that, in itself, the principle of marginal utility is not so important after all as
Jevons, the Austrians, and Walras himself believed. But analysis of Walras’
schema at the same time discloses the fact that marginal utility was the lad-
der by which Walras climbed to the level of his general-equilibrium system.
If the marginal utility principle ceased to be all-important after this level had
been reached, it was nevertheless all-important heuristically. This observation
sheds new light on the achievement of Jevons and the Austrians. They, too,
found the ladder. Defective technique only prevented them from climbing to
the top of it. But they did climb as high as their technique permitted. In
other words: we must see in the Jevons-Menger utility theory an embryonic
theory of general equilibrium 21 or, at all events, a particular form of the uni-
fying principle that is at the bottom of any general-equilibrium system. Though
they did not make it fully articulate, mainly because they did not understand
the meaning of a set of simultaneous equations, and though they saw in mar-
ginal utility the essence of their innovation instead of seeing in it a heuristi-
cally useful methodological device, they are nonetheless, just like Walras,
among the founding fathers of modern theory. This also holds for J: B. Clark.
Later critics were so delighted with their own technical improvements and so
anxious to renounce communion with Jevons and the Austrians that they en-
tirely failed to perceive this.

In what sense was a revolution effected? And did this revolution produce a
new theory of the economic process?

The answer to the first question will depend upon what we mean by that
much misused word. If we mean change that is both thoroughgoing and dis-
continuous, then the claim of these pioneers of modern theory — the claim to
having revolutionized the ‘pure’ part of economics — should be admitted. For
though J. S. Mill’s shaky structure invited reconstruction on the lines actually
adopted by Jevons, Menger, and Walras, and though Marshall may be said

21 This aspect is particularly in evidence in Wieser’s Natural Value.

GENERAL ECONOMICS: CHARACTER AND CONTENTS

9 1 9

to have done much the same thing by reform rather than by revolution, the
controversies of that age testify strongly to the break that had occurred. We
are apt to smile at Gossen’s boast of having accomplished a Copernican feat.
But this boast was less unreasonable than it may seem at first sight. The re-
placement of the geocentric by the heliocentric system and the replacement
of the 'classic’ by the marginal utility system were performances of the same
kind: they were both essentially simplifying and unifying reconstructions. The
comparison strikes us as ridiculous only because of the different intellectual
standings of astronomy and economics. Similarly, we smile when we learn that
the Negro soldier-statesman Toussaint L’Ouverture (1743-1803) described him-
self as the Buonaparte of Santo Domingo. But this is because France’s impor-
tance in the world is so much greater than is Santo Domingo’s rather than be-
cause there is any obviously ludicrous disproportion between the two men,
each taken with reference to his environment. 22

This bears upon the habit, which has developed especially in the United
States, of describing the ‘marginalist’ theory as neo-classic. Considering how
much of the old framework and the old attitudes was taken over by the ‘mar-
ginalists,’ we might feel inclined to approve of it. Marshall’s efforts to preserve
continuity — and still more a semblance of it — lent additional support to the
implied, and somewhat derogatory, appraisal of the revolutionaries’ perform-
ance. But so far as pure theory is concerned, there is no more sense in calling
the Jevons-Menger-Walras theory neo-classic than there would be in calling the
Einstein theory neo-Newtonian: as we know already the term Eclectics, as ap-
plied to Marshall and his followers, is still more misleading. For this, however,
he had only himself to blame.

The second question, as it stands, must of course be answered in the nega-
tive. No theory in the sense of pure theory can ever be a theory in the sense
of complete analysis of the phenomena to which it refers. Factual assumptions
are as important as is the analytic apparatus that distills results from them. 23

22 I believe, in fact, that it is impossible, after analysis of the two careers which dis-
play certain striking similarities from their splendid beginnings to their melancholy ends,
to say with confidence that less personal energy and genius went into Toussaint
L’Ouverture’s achievements than into Napoleon’s. But economics is to astronomy, as
Santo Domingo is to France.

23 The marginal utility theorists were (like most theorists to this day) only imper-
fectly aware of the formal character of their analysis. Preoccupied as they were with
what they believed to be psychic facts, they thought that they were teaching much
more about economic reality than was actually the case. I take this opportunity to
comment once more on a meaningless controversy that nevertheless seemed important
to many an able man, viz. the controversy about subjectivism and objectivism in pure
theory in general and in the theory of price in particular. Actually, the ‘subjective 7
theory must always appeal to ‘objective’ facts (data) . if it is to produce concrete results;
and any ‘objective’ theory must always state or imply postulates or propositions about
‘subjective’ factors of behavior. In other words, any complete subjective theory must
be also objective and vice versa, and differences on this score can only be due to dif-
ferences of emphasis on different parts of the analyst’s task. Yet the ‘issue’ was ac-
cepted as real and gravely discussed by all scientific parties alike.

920 IV : FROM 1870 TO 1914 AND LATER

Moreover, economic life is a unique historical process and our authors had no
explanatory schema of economic change other than the one they had inher-
ited from A. Smith; even if they had had one of their own, their marginal
utility theory would have been completely neutral to it. Finally, they had no
more explicit dynamic schemata than had their ‘classic’ predecessors and they
struggled through the inadequacies thereby created very much in the same
manner. It might seem that, if our question were reformulated in the light of
these three qualifications, the answer should be Yes: the marginal utility theor-
ists certainly seem to have succeeded in creating a use-value schema of eco-
nomic statics that was complete in itself. Unfortunately, we must qualify still
further. Not all of the problems of pure theory were capable of unique solu-
tion within the marginal utility theory. We have had examples already, namely
the theories of enterprise and of capital: as regards these, marginal utility
theory completely failed — and very naturally — to restrict the range of possible
difference of opinion. Another case of failure of the unifying power of the
marginal utility principle is the theory of interest. This is the main reason why
we shall have to enter into a separate discussion of the distributive shares after
all, although the occasion will be used to touch also upon a few other matters
(below sec. 5). Before we do this it will be useful to discuss Marshall’s attitude
to the Jevons-Menger analysis.

4. Marshall’s Attitude and Real Cost

The reader is requested to refresh his memory of what has been said in the
preceding chapter on the subject of Marshall’s attitude to contemporaneous
and earlier work closely similar, in fundamentals, to his own. In view of the
thoroughly un-Marshallian interpretation of the work of the Austrians and,
to a lesser extent, of Jevons, which has been presented in the preceding sec-
tion, 1 it is necessary to consider Marshall’s different appraisal of this work and
some of the arguments by which he supported it. 2

I submit that the impression the reader of Marshall’s Principles is bound
to receive, in spite of qualifications that Marshall inserted occasionally, is this.
Marshall maintained (1) that English ‘classic’ analysis stood in need of cor-
rective reinterpretation here and there but that there was nothing fundamen-
tally wrong with it; (2) that Jevonian and Austrian criticisms had been largely
due to failure to understand and to interpret it properly; 3 ( 3) that the posi-

1 A point of particular importance should be emphasized once more. We have seen
in ch. 5, sec. 2, that the contents of ‘note xxi’ in the Appendix to the Principles con-
stitutes the core of Marshall’s theoretical analysis. This note blocks out a system of gen-
eral equilibrium. In the preceding section it has been maintained that the theoretical
analysis of the Austrians also amounts to an embryonic — and highly defective — equi-
librium system.

2 For the sake of brevity, Marshallian criticisms of Jevons will be treated as if they
also had been directed against the Austrians and vice versa. The reader will have no
difficulty in satisfying himself that this is permissible in the instances discussed.

3 Nothing illustrates this better than does Edgeworth’s famous phrase, the echo of

GENERAL ECONOMICS: CHARACTER AND CONTENTS

921

tive contribution of Jevons and the Austrians consisted in elucidating the de-
mand side of market phenomena, though Ricardo had, of course, not been ig-
norant of these rather obvious things; and (4) that in overstressing demand
aspects Jevons and the Austrians had erred at least as much as Ricardo and
Mill had erred in the opposite direction. These positions must be considered
from three different angles. First, as regards Jevonian and Austrian criticisms
of Ricardo, Marshall’s irritation, though unjustified in part, 4 was not un-
natural. We may readily grant that Nicolaus Cusanus and Copernicus did not
prove the geocentric theory to be 'wrong’ but that they simply applied some
corrections to it. Second, as regards the performance of Jevons and the Aus-
trians, Marshall, by nature and acquirement, could not help being severe to-
ward their deplorable technique. We are no longer concerned with this. Third,
however, as regards the fundamental meaning of that performance, Marshall's
interpretation amounts to serious though of course unintentional misstate-
ment. It is on this point that our argument in the preceding sections needs
countercritical supplement.

Marshall illustrated his criticism of what he conceived to be overemphasis
on demand aspects by a famous simile. 'The "cost of production principle”
and the "final utility” principle are undoubtedly component parts of the one
all-ruling law of supply and demand; 5 each may be compared to one blade of
a pair of scissors. When one blade is held still, and the cutting is effected by
moving the other, we may say with careless brevity that the cutting is done by
the second; but the statement is not to be made formally and defended delib-
erately.’ 6 Even when we narrow down the Austrian analysis to this particular

Marshall’s voice, viz. that Marshall had dispersed the mists of ‘ephemeral criticism’
that for a time had clouded the 'eternal heights.’

4 This should be evident from our discussions in Part in. But we also know that
Marshall’s irritation was less unjustified with respect to criticisms of Mill than it was
with respect to criticisms of Ricardo. And though Marshall did not admit this in so
many words, he may be called as a witness for our view: he never espoused the spe-
cifically Ricardian elements in the ‘classic 7 'structure, such as, e.g., the labor-quantity
theory of value, which he quietly modified so that it is no longer what Ricardo had in-
tended it to be.

5 The reader should observe that this statement, though it may be held to conform
to Mill’s teaching, is thoroughly un-Ricardian. It is Malthusian.

6 Principles, p. 569. The passage is an almost verbatim repetition of another passage
on p. 428 that leads up to the statement ‘that, as a general rule , the shorter the period
which we are considering, the greater must be the share of our attention which is
given to the influence of demand [utility] on value; and the longer the period, the
more important will be the influence of cost of production on value’ (p. 429). Strictly
interpreted, this statement is of course as true as it is trite. In its general import, how-
ever, it gives a wrong lead. This can best be explained by an analogy: it is wrong to
say that foreign exchanges are determined by supply and demand in the case of paper
currencies, and by the gold mechanism in the case of gold currencies; what should be
said is that the factors behind supply and demand determine foreign-exchange rates
in any case, but that in the case of gold currencies the gold mechanism will in general

9 22 IV : FROM 1870 TO 1914 AND LATER

point — doing which implies neglect of all its wider aspects — we have still to
recognize that its essential achievement was precisely the new theory of supply
and cost that it yielded. It is in this sense only that Jevons’ saying should be
understood: ‘Value depends entirely upon utility’ ( Theory , p. 1). Hence it is
meaningless to accuse either Jevons or the Austrians of wishing to minimize
the importance of the very theorem which they were the first to deduce ra-
tionally and which Wieser called the iaw of cost.’ They stood in no need of
being told about the two blades of Marshall’s pair of scissors. What they aimed
at showing was that both blades consist of the same material — that both de-
mand and supply (no matter whether the case is one of exchanging existing
commodities or one of producing them) may be explained in terms of 'utility.’
In appearance at least, there is more to another form that Marshall gave
to what was substantially the same indictment. Both Jevons and the Austrians
were in the habit of expressing themselves in terms of causal chains, which
ran from the value of consumable goods to the value of resources as if the
utility of a quantity of a consumers’ good were first determined independ-
ently and then, in turn, determined causally the value of the producers’ goods
that went into its production. It was child’s play for a superior technician to
point out that this was inadmissible since the utility of the consumers’ good
depends upon its quantity and the latter upon its cost. Jevons and the Aus-
trians were held up to ridicule as people who, like school children, had to be
taught that ‘when three balls, A, B, and C, rest against one another in a bowl
. . . the position of the three mutually determines one another under the ac-
tion of gravity,’ because they were contending instead ‘that A determines B,
and B determines C’ ( Principles , p. 567). But Marshall of all men should
have realized that this criticism takes advantage of deficiencies in technique,
in particular of a glaring inability to understand the logic of interdependence,
and entirely fails to do justice to the substance of the position criticized. To
keep again to Marshall’s simile, what Jevons and the Austrians really did was
not the nonsense imputed to them in that passage but something very dif-
ferent; they discovered precisely that the position of the balls is to be ac-
counted for by a single principle, gravitation in the case of mechanics, utility
in the case of economics. Half the generosity lavished upon Ricardo might
have revealed the great achievement behind the poor technique and reduced
criticism to the one point that could have been justifiably made though Mar-

prevent departure from gold parities beyond the gold points. Similarly the marginal
utility principle applies to the demand and the supply sides of the value problem in
any case, both in the long and in the short run. Cost of production is not an inde-
pendent principle taking charge in the long run. But the marginal utility principle,
acting upon the data of the situation, will in the long run (granting a number of as-
sumptions) so operate as to equate exchange value to costs. Accomplished Marshallians
will think this note superfluous. But I have heard the misinterpretation in question so
often — and so often with reference to Marshall, even from competent economists such
as Bortkiewicz — that I cannot myself think it so.

GENERAL ECONOMICS: CHARACTER AND CONTENTS 923

shall never made it: that Jevons knew not enough mathematics and the Aus-
trians none at all. 7

The only other point that must be attended to in this connection is Mar-
shall’s Real Cost. If the Austrians had used this term, they, would have meant
by it the consumers’ goods (as distinguished from the satisfactions afforded by
their consumption) that we ‘sacrifice’ when we decide to produce others.
Marshall meant ‘The exertions of all the different kinds of labour that are
directly or indirectly involved in making it [a commodity]; together with the
abstinences or rather the waitings required for saving the capital used in mak-
ing it’ ( Principles , p. 418). This point turns up here because, at the time, it
was discussed within the general controversy on the nature, cause, or ‘ultimate
standard’ of value or cost. The quarrel was exclusively a Mengerian one. For
most of the other sponsors of the ‘new’ theory of value, such as Gossen, Jevons,
Auspitz, Lieben, and Clark- — not Walras though — experienced no qualms
about admitting both disutility of labor (Jevons’ term) and abstinence into their
analytic structures. Since all these authors were in no mind to rehabilitate the
‘classics,’ by pegging the independent role of costs or in any other way, this
should suffice to show that recognition of disutility and abstinence does not
impair the marginal utility position or constitute the adoption of another one.
But the Austrians were of a different opinion. Bohm-Bawerk fought hard in-
deed in order to minimize the importance of both, evidently believing that
allegiance to marginal utility theory compelled him to do so. Let us take the
measure of the problems involved.

Abstinence is, of course, very important for every economist who holds an
abstinence theory of interest. But, though holding an abstinence theory of in-
terest of course involves introducing abstinence into the general theory of
value, the question has always been dealt with primarily in connection with
the theory of interest and we shall do the same (sec. 5). As regards disutility
of labor, we have our choice: either we can take (with a given population)
the quantity of labor hours available as a datum, for example, as institutionally
fixed; or we can make it a variable to be determined, in which case our sys-
tem contains one more ‘unknown’ and one more independent equation (which
says that, for every workman, the marginal disutility of labor must in equi-
librium equal the marginal utility of his wage income). Which we choose will
depend on considerations of realism and considerations of analytic conven-
ience. 8 But the point is that our choice does not make any great difference to
our theoretical pattern. For the element of disutility acts upon the value of

7 Marshall’s severity was the more uncalled for because he occasionally fell into the
same kind of error himself. On p. 440 of the Principles we read: ‘In a stationary state
then the plain rule would be that cost of production governs value.’

8 As the reader presumably knows, the disutility equation was thrown out by Lord
Keynes on grounds of realism. Bohm-Bawerk also threw it out on a ground of realism
though a different one, viz. that the individual worker must accept the regulation
working day and cannot vary the quantity of labor he is willing to offer. But whereas
Bohm-Bawerk could have inserted the disutility equation if he had wanted to do so,
Lord Keynes’s analytic set-up made it imperative to throw it out.

924 IV: FROM 1870 TO 1914 AND LATER

products only through its (possible) influence upon the quantity of labor of-
fered, and leaves the principle of opportunity costs untouched for purposes of
allocation of the quantity that is being offered. It is always the latter that
matters in the first place, whereas disutility matters, if at all, at one remove.
Moreover, if we attach enough importance to having our value theory based
upon utility only, all we have to do is to replace disutility of labor by the
utility of leisure. 9 Hence, Bohm-Bawerk did not gain much by the limited
success of his attempt to minimize the importance of disutility. But neither
did Marshall gain much by introducing Real Cost: always excepting the special
service that abstinence rendered in his theory of interest, it can be left out
without being missed — not to speak of the difficulties inherent in the concept
of a sum of all disutilities and abstinences 'directly or indirectly involved' in
producing a commodity. Thus, we return from this excursion with the same
result that we always get when inquiring into the nature and importance of
Marshall's deviations, in what purport to be fundamentals, from the Jevons-
Menger-Walras analysis: they are negligible. 10

5. Interest, Rent, Wages

Any pure theory needs facts in order to produce concrete results. This plati-
tude must be repeated because economists are in the habit of including cer-
tain particular facts in what nevertheless they call a pure theory. Thus they
speak of a minimum-of-existence 'theory' of wages although the minimum-of-
existence theorem may be deduced from any general theory of wages, provided
we introduce the appropriate factual assumption about the behavior of work-
men. But the marginal utility theory not only needs to be complemented by
a supply of particular facts if it is to apply to concrete cases; it also needs to
be complemented by additional material in order to produce general theoretical
propositions. As has been stated at the end of Section 3, it does not, of itself,
yield any general theory of interest though it does supply, of itself, adequate
explanations of rents and wages. Since it is interest that causes the trouble,
we shall begin by discussion of the interest theories of the period under survey.

(a) Interest. We know already that the economists of that period sharpened
the distinction between entrepreneurial gains and interest. But most of them
still took the view that we have traced to Nicholas Barbon (Part 11, ch. 6, sec.
7b), namely, that interest constitutes the bulk of business gains — the part of
business gains that results from the application of physical capital and is a
return to physical capital in the same sense in which rent is a return to land
and wages are a return to labor. In this respect, it is highly significant that

9 This is to be recommended in any case. The particular problem in which disutility
plays a role, e.g. the problem of explaining why increase in wage rates sometimes re-
sults in a decrease in the amount of work done, becomes even easier to solve when we
use the concept of leisure (and put leisure on one of the axes of an indifference dia-
gram, the other axis representing wages, monetary or real).

10 In addition, it is difficult to understand how Marshall can have believed (if he
did) that introducing real cost of this type would help Ricardo’s position in any way.

GENERAL ECONOMICS: CHARACTER AND CONTENTS 925

Bohm-Bawerk, in his critical history of interest theories, dealt with Ricardo's
and Marx's theories of 'profit' without raising the question whether the returns
thus denoted were really the same thing as 'interest/ He would have answered
this question much as A. Smith or J. S. Mill had answered it. Monetary inter-
est remained for him simply the shadow of the interest that is earned by sup-
plying physical goods — which really were what, though perhaps 'in the form of
money,' the capitalist owned. This is all the more remarkable because Bohm-
Bawerk's own work was principally instrumental in dissolving this schema.

To begin with, it is not recognized sufficiently that Bohm-Bawerk's criticisms
of existing explanations of interest awoke a new awareness of the problem in-
volved in that view of the matter. It is true, more or less, that all the theories
of interest survived that had been inherited from the preceding period. Even
a theorist of Pareto's rank felt no compunction in declaring that the fact that
(physical) capital bears interest was not more of a problem than is the fact
that the cherry tree bears cherries . 1 But the standing of some of the simple
theories that used to satisfy a majority of economists rapidly declined. Few
writers Cared to go on holding that because one can produce more wheat
with the help of a harrow than without it, a net return must result from using
it: Bohm-Bawerk's admonition that the physical productivity of capital is not
enough to prove its value productivity took the wind out of the sails of the
productivity theory of interest even though it was not immediately destroyed . 2
Similarly, Bohm-Bawerk showed successfully that, in themselves, 'use theories'
of interest (Knies, Menger, Walras) were no good: there is no doubt that the
services of durable goods, such as houses or machines, are priced and that their
prices times their quantities constitute returns to the owners of these goods;
but since these goods have to be insured and amortized, it does not follow,
without appeal to some other element in the case, that these returns are net.
Disregarding a number of other theories that received their coups de grdce
at the hands of Bohm-Bawerk, we may say broadly that the only survivors that

1 Another opinion of Pareto's deserves comment. He thought that to search for
the 'cause' of interest was in itself a mistake. The interest rate, being one of the many
elements of the general system of equilibrium, was, of course, simultaneously determined
with all of them so that there was' no point at all in looking for any particular ele-
ment that 'caused' interest. In order to show the error involved in this view of the
matter it is sufficient — as it was in the case of Marshall's objection that is embodied
in his simile of the three balls resting against each other in a bowl — to remember that
the proposition, 'interest is determined by all the conditions of the system of general
equilibrium,’ fails to prove the existence of a positive rate of interest. Why the system
so works as to produce a positive rate remains a distinct question that calls for a dis-
tinct answer. It calls for an explanatory principle just as does the position of the balls
in Marshall’s bowl. And no such principle is supplied by the mere fact of the general
interdependence that subsists between all economic magnitudes. Therefore, something
might be said for Bohm-Bawerk’s distinction between the problem of the existence
of interest and the problem of the factors that determine its rate, however ridiculous
this distinction might seem to be at first sight.

2 [J. A. S. intended to write here a long note mentioning the names of Wieser,
Clark, and Knight.l

926 iv: KROM 1870 TO 1914 AND LATER

had any strength left were the Marxist exploitation theory, the abstinence
theory, and, on a distinctly lower level, several forms of bargaining-power theo-
ries. Of newcomers we shall only notice the theories of Bohm-Bawerk and
Irving Fisher.

Substantially, Bohm-Bawerk’s Criticism of Marx’s theory was successful.
Nevertheless the latter survived in the circle of Marxist orthodoxy until it was
silently discarded by later socialist theorists, who were not Marxists any longer.
Having commented upon it already (ch. 5, sec. 8) we proceed at once to the
abstinence theory. Here Bohm-Bawerk’s attack was not successful, not only in
the sense that it failed to convince but also in the sense that it was unconvinc-
ing. 3 Marshall had no difficulty in formulating an explanation of interest that
took account of abstinence 4 without being open to logical objection. In fact,
he succeeded in reviving the productivity theory as well by linking it to the
element of abstinence. If physical capital is to yield not only returns but also
net returns, something must prevent it from being produced up to the point
at which its earnings would no more than repay its cost. Abstinence qualifies —
logically — for the role of this something. We may, with Senior, call it a cost
so that employment of capital yields a return over the other cost elements.
Or we may say that that abstinence acts as a brake to the production of capi-
tal goods so as to prevent it from reaching that point — which renders Carver’s
version. 5 Bohm-Bawerk attacked both versions, as it seems to me, without
success. 6 Most writers whose views on interest display more or less affinity to

3 Bohm-Bawerk tried to show that any appeal to abstinence involves 'double count-
ing.’ He might have held indeed that he who saves makes a choice between present
and future enjoyments and that, if the latter be properly discounted for time distance,
there is no room for an additional compensation for any abstention involved. But it
should not be denied that there is room for it if the future returns upon the sum
saved are not discounted. In fact, it may be held that emphasis upon the 'sacrifice’ of
saving was precisely the method by which abstinence theorists introduced the element
of time preference, although Bohm-Bawerk refused to admit this. Actually, however,
he found double counting in the practice of abstinence theorists of counting abstinence
as cost along with the 'labor’ involved in producing a capital good. This argument I
have never been able to understand. These considerations do not salvage the abstinence
theory nor is it intended that they should. But they absolve it from the charge of
logical error and again bear witness to what we have called the logical strength of the
abstinence theory. But a theory may be wrong for reasons other than logical error.

4 As we know, he preferred, without good reason as I think, the term 'waiting’ that
was suggested by S. M. McVane ('Analysis of Cost of Production,’ Quarterly Journal oj
Economics, July 1887).

5 See Carver’s Distribution of Wealth (1904), and his earlier paper on 'The Place
of Abstinence in the Theory of Interest,’ Quarterly Journal of Economics, October
1893.

6 Again, this was because he tried to prove them wrong in logic. But this should not
induce us to join those critics of Bohm-Bawerk who spoke of misplaced ingenuity, hair-
splitting, metaphysics, irrelevant psychology, and what not. Surely if economic theory is
to be taken seriously at all, every effort at clarification of this issue should be wel-
comed. We do not solve problems by tiring of them.

GENERAL ECONOMICS: CHARACTER AND CONTENTS 927

Bohm-Bawerk’s — such as Jevons before him and Fetter after him — made no
difficulty at all about abstinence, with the exception of Fisher.

I have said that the bargaining-power theories moved on a lower level of
theoretical analysis. In fact, no first-class theorist ever held one. There is a
very good reason for this. Either the bargaining power that is to explain the
surplus called interest consists in the possession of some requisite of produc-
tion. In this case appeal to the bargaining power of the owners of this requisite
is otiose, because the real explanation of the resulting net return has still to
be sought in the role of this requisite in the economic process. Thus, neither
Marx nor Bohm-Bawerk appealed to the bargaining power of the capitalist,
though this element might easily be recognized in both their theories. Instead,
both tried elaborately to show how the mechanisms of capitalist markets pro-
duced the surplus or premium, which the mere term ‘bargaining power’ does
nothing to explain. Or else, the bargaining power is held to consist of some-
thing distinct from the possession of a requisite. It could consist, for example,
in the power to levy taxes for the benefit of capitalists. But in this case, the
existence of such a power and its adequacy to explain the phenomenon of in-
terest would have to be proved, a task no theorist who knows his business
would undertake . 7 We confine ourselves to a single example of a theory of this
type, the mark-up theory of Lexis. Interest exists because businessmen are in a
position to charge prices for whatever they sell that are higher than their costs.
If by costs we mean expenses, this is of course- so but does not prove the exist-
ence of a surplus over expenses plus compensations for the services of owned
factors evaluated at equilibrium prices. In order to establish the existence of
such a surplus, general enough to account for interest, it is no doubt possible
to fall back upon imperfections of competition; but this would imply the
thesis that there is no interest in perfect equilibrium and perfect competition
which in turn would require adequate proof . 8

The outstanding performance of the period that dominated discussion and
exerted formative influence even on many of its fiercest critics was Bohm-
Bawerk’s. It has been emphasized already (see above, sec. 2c) that this per-
formance centered in a highly simplified picture of the manner in which, given
a certain supply of labor and of subsistence, interest and wage rates are simul-
taneously determined and in turn determine the organic composition of capi-
tal . 9 It has also been emphasized that this central schema is in part independ-

7 Thus, the political power of the farming interest in the United States certainly
explains, among other things, the processing tax introduced for its benefit in the early
days of the Roosevelt administration. This tax may be held to have increased the
farmers’ ‘profits’ or ‘rents.’ But it evidently cannot be invoked as a fundamental ex-
planation of either. The same applies to protective duties.

8 It is perhaps unnecessary to re-enter upon a discussion of theories of net returns
(whether of interest or rent) that rest on nothing but a misuse of the concept of
monopoly and see monopoly gain in every case of a scarce factor on the ground that
such a factor is, in capitalist society, not equally accessible to all.

9 This Marxist concept is quite appropriate here. The word Capital, also, is used
here in the Marxist sense. I think that this conveys Bohm-Bawerk’s idea better and

928 IV: FROM 1870 TO 1914 AND LATER

ent of, and in part but imperfectly co-ordinated with, Bohm-Bawerk’s causa]
explanation of interest, a fact that we have ascribed to the unfinished state of
his work. Now we are concerned with this causal explanation. It runs in terms
of goods: Bohm-Bawerk strongly believed that money does not play any other
role in this matter than that of a technical device that occasionally gets out
of order . 1 , 0 The fundamental proposition is that interest arises from an exchange
of present against future consumers’ goods and is essentially a premium (Agio),
attaching to the former. Thus defined, the problem consists in indicating the
reasons why the market where present consumers’ goods are exchanged for
(claims to) future consumers’ goods so works as to produce normally such a
premium or, in other words, why people are normally prepared to promise, for
the delivery of present goods, delivery of greater quantities of goods of the
same kind and quality at some future time . 11 As the reader presumably knows,
Bohm-Bawerk adduced three such reasons. First, a man may be prepared to
return to a lender more than he received, because he expects to be better off
in the future . 12 Second, a man may be prepared to promise to repay more than
he receives because most people do not experience future enjoyments with the

more briefly than would his own terminology. In addition, it defines both the extent
to which there is similarity between the two schemata and the extent to which Bohm-
Bawerk surpassed the Marxist schema by treating a problem not explicitly treated by
Marx. It should be observed however, first, that a system of relations much more
complicated than Bohm-Bawerk’s would be necessary in order to do justice to this
problem; and, second, that if we introduce durable plant and equipment explicitly,
we realize immediately that Bohm-Bawerk’s schema is essentially a long-run one for,
in the short-run, plant and equipment are simply given, as are natural agents, and can
be assigned a marginal productivity, not in the Jevons-Bohm-Bawerk sense but in the
ordinary sense.

10 More precisely, he held a crude quantity theory: the whole of the money (taking
account of velocity) buys the whole of the goods. There is a striking parallelism be-
tween this proposition and another: the whole of the subsistence fund buys the whole
of the labor supply. Both propositions are reminiscent of 'classic’ theories (quantity
theory and wage-fund theory), not at their best. But the necessary corrections can be
inserted without great difficulty.

11 To repeat, whatever else may be objected to in this way of positing the interest
problem, there is no point in objecting to it because it involves psychology. If we
throw out Bohm-Bawerk’ s argument on this ground, we must consistently also throw
out Lord Keynes’s and even Marx’s (see, e.g., Marx’s argument on the motives of
accumulation).

12 There is much more to this reason than critics are in the habit of conceding. It
applies not only to the case of the student who has a well-disposed aunt in delicate
health: in a progressive society a majority of people may be correctly expecting larger
income streams in the future; whereas, for a retrograde society, Bohm-Bawerk is sub-
stantially right in assuming that the correct anticipations of dwindling income streams
will not make that premium negative for any normally conditioned person so that
the positive premia, which some may still be prepared to pay, will take effect even
in this case.

GENERAL ECONOMICS: CHARACTER AND CONTENTS 929

same pungent sense of reality as they experience present ones . 13 Individuals,
classes, and nations differ greatly in this respect, and the differences in the
intensity with which they realize the future is one of the most important of
the factors that determine their fate, a truth that cannot be too strongly im-
pressed upon modern economists. But Bohm-Bawerk, like Bentham and Jevons
before him, held that some undervaluation of the future in this sense is a gen-
eral characteristic of normal man. Observation of actual behavior, especially in
the public sector, goes far toward supporting this contention . 14 Third, a man
may be prepared to pay a premium for present goods because command of
present goods may enable him to embark upon physically more productive
processes of production that require a ‘longer' period of production in Bohm-
Bawerk’s sense (technological superiority of present consumers' goods; see
above, sec. 2c), so that a present stock of consumers’ goods may mean more
consumers’ goods in the future. A generation that has witnessed the Russian
Five Year Plans should have little hesitation in placing at least limited confi-
dence in this argument. Of course, it is necessary to emphasize the phrase ‘to
embark’ much more than it has been emphasized by Bohm-Bawerk, who in
dealing with this ‘third reason’ committed several errors . 15 For unless we do so

13 In the first case — the case of favorable expectations — borrowers undervalue future
as compared with present goods, because they expect in the future to be further
down on the same curve of marginal utility of income. In the second case — the case
of systematic undervaluation of future enjoyments that are expected to give pleasure
of the same intensity when they shall have become present enjoyments — borrowers
have a different curve of marginal utility of income for the present and for each of
the subsequent income periods.

14 This could be established only by an extensive discussion of historical evidence,
which space does not permit us to enter upon. For it is quite true that our common
impression to the effect that general undervaluation of the future does exist in mod-
em society may be in part a simple consequence of the existence of interest and that,
hence, the task of establishing that there is also independent undervaluation, capable
of ‘causing’ interest, is not so easy, especially since apparently contradictory evidence
is not lacking. Such a discussion would also have to take issue with the many objec-
tions that have been raised. A particularly interesting one must, however, be men-
tioned. Some writers seem to believe that, if there existed systematic undervaluation
of the future, society would have to plan for economic doom or general liquidation.
But this is precisely what society actually does, and it is one of the most profound
problems of economic analysis to show why capital equipment nevertheless expands
instead of dwindling. This problem is obscured by the practice of postulating that the
economic engine is being maintained, or is maintaining itself, as a matter of course.

15 Most of them have been straightened out by Wicksell and his disciples (see es-
pecially Wicksell’s contribution, ‘Zur Zinstheorie (Bohm-Bawerks dritter Grund)’ to
Wirtschaftstheorie der Gegenwart, vol. m, 1927). In general, however, these errors
have been allowed to play an unduly great role: unlike the sympathetic critics of Marx
or Ricardo or Keynes, the critics of Bohm-Bawerk never took the trouble to distinguish
his essential ideas from their ill-tailored garb. I take the opportunity to advert to two
difficulties that I experience in trying to present his teaching fairly. The first is lack
of space. The second is that I have the strongest reason a theorist can possibly have
for disagreeing with Bohm-Bawerk, viz. the reason that I have a different theory of

930 IV: FROM 1870 TO 1914 AND LATER

we are likely to be caught in the gears of the synchronization argument: Bdhm-
Bawerk’s third reason would, in itself, not account for any persistent surplus
from the continued repetition of a process of given 'length/ once it has been
introduced and the whole economy is adapted to it; it is only the successive
'extensions’ of the period which would keep interest alive, even if there were
no other reason for its survival . 16

As it stood, this explanation of interest was not accepted by any economist
of note. Even Wicksell added so many qualifications and developments to it
that he cannot be listed as a follower in any strict sense. Nevertheless Bohm-
Bawerk’s theory of interest exerted not only the kind of influence that is im-
plied in stirring up discussion and stimulating thought but also a much more
direct one. This was due to the fact that it admits of a simplification that one
may accept without committing oneself to the details of Bohm-Bawerk’s ana-
lytic structure. This simplified version reads like this: interest arises from the
interaction of ('psychological’) time preference with the physical productivity
of investment. And in this diluted form, Bohm-Bawerk’s theory became not
only one of the interest theories of the period but the most widely accepted
one of all, though each author added special features of his own that did not
as a rule meet with the approval of any considerable number of other authors.

interest of my own. But I wish neither to force my own views upon the reader nor
to criticize Bohm-Bawerk from my own standpoint. I therefore accept his ‘version’ of
the problem; and speak of ‘error’ only in cases where a statement or analytic arrange-
ment of his can be proved to be wrong or inadequate from his standpoint. [J. A. S.
carried on a famous controversy with Bohm-Bawerk on a dynamic theory of interest
in the Zeitschrift fiir Volkswirtschaft, Sozialpolitik und Verwaltung, 1913.]

16 An analogous consideration also defends the abstinence theory against objection
based on synchronization. However, there are also in both cases more delicate ques-
tions to consider into which we cannot enter. But I shall briefly notice one of them
which bothered Bohm-Bawerk himself as well as his adherents and critics. They all
were not quite sure about the relations of the ‘three reasons’ to one another. At
first sight they are all cumulative in the sense that they are all reasons for under-
valuing a future loaf of bread as compared with a present one. But this is not all of
it. If we formulate the third reason by saying that it leads to undervaluation of the
future because command over present consumers’ goods enables a man to be better
off in the future, we may assimilate this third reason with the first one, taking account
however of the circumstance that possession of present goods is a condition for being
better off in the future in the case of the third reason but not in the case of the
first. But in both cases we have furthermore to take account of the fact that, if the
second reason be operative, the greater future wealth will be ‘psychologically discounted.’
And to the extent to which this happens, the first and third motives for paying a
premium are weakened by the second. Again, on the face of it, each of the three
reasons, provided of course we believe in them, should be capable of producing a
premium even if operating in the absence of the two others. Bohm-Bawerk himself
tried to show (a) that the two first reasons will not necessarily produce a premium
without the third (see his polemic against Fisher, Exkurs XII in the 3rd ed.) but
(b) that the third reason is capable of producing a premium by itself.

r'V ; :

GENERAL ECONOMICS: CHARACTER AND CONTENTS 931

Many examples could be cited . 17 But by far the most forceful and brilliant per-
formance of this kind was Irving Fisher's Impatience Theory of Interest . 18 The
phrase is self-explanatory. But it points too exclusively toward Bohm-Bawerk’s
‘second reason.' The third reason is not absent in Fisher: it appears in the
garb of Investment Opportunity which, though stripped of certain specifically
Bohm-Bawerkian features, expresses, but much more elegantly, essentially the
same facts . 19 Also, Fisher brought out more clearly than had Bohm-Bawerk
himself an aspect of the latter's interest analysis that is perhaps the most im-
portant of all.

We have seen that a majority of the non-Marxist writers of that period con-
tinued to look upon interest as an income that stands on the same plane with
rent and wages as the payment for the services of a physical requisite of pro-
duction (plant, equipment, and so on, or else abstinence) that in turn stand,
within the sphere of production, on the same plane with the services of natural
agents and labor. The ‘agio' or premium theory of interest involves an entirely
different conception. Being a general time discount that applies to the returns
from productive services of all kinds, interest as it were preys upon them all,

17 For instance, Marshall’s cautious reference ( Principles , p. 142) to the ‘productive-
ness and prospectiveness’ of capital may be interpreted in this sense. Lord Keynes was
therefore quite right when he treated what I have called the simplified version of Bohm-
Bawerk’s theory as the one that was being. commonly accepted even in 1936 (see
General Theory, p. 165). Still more interesting is the fact that he accepted it himself.
He did indeed declare it inadequate but only in the sense that it needed to be sup-
plemented by the element of liquidity preference (ibid. p. 1 66). But, with Keynes
himself, though not with all of his followers, this did not amount to renouncing it
but only to amending it.

18 Fisher elaborated this theory (without as yet substituting the term impatience
for the terms ‘agio’ or time preference) first in the Rate of Interest (1907) and then
presented another version in The Theory of Interest (1930). Not without justification,
he wrote in the preface to the latter work that his theory was ‘in some degree every
one’s theory.’ Still more justified is the dedication to John Rae and Eugen von Bohm-
Bawerk, ‘who laid the foundations upon which I have endeavored to build.’

19 It is, therefore, difficult to understand how, in the same preface, Fisher could
have written: ‘So far as I know, no other writer on interest has made use of income
streams and their differences, or rates of return over cost per annum.’ If Bohm-
Bawerk’s numerical tables are not a clumsy method of representing points in income
(product) streams and their differences, I for one fail to see what they do represent.
I take this opportunity to touch upon a minor point. Both some critics and some
adherents (including Wicksell and Pierson) strove hard to interpret Bohm-Bawerk’s
theory of interest as a productivity theory, and Bohm-Bawerk himself, wearied by
their insistence, protested in the end but weakly (Geschichte und Kritik, 3rd ed.,
p. 705n.). But his theory is a productivity theory only in the sense in which all
interest theories are, including those of Marx and Keynes. For interest is an element
of every price; every price can be represented as the result of a demand and a supply;
and however we define capital, productive purposes must always figure among the
factors that motivate the demand for it. In any non-trivial sense, however, his theory
is not like the productivity theories properly so-called but the very opposite of them
as will be shown presently.

93 2 IV: FROM 1870 TO 1914 AND LATER

upon the returns fropi the services of physical capital goods not less than upon
any others. It is, therefore, something that differs in nature from all productiv-
ity returns properly so-called , 20 not only from rents of natural agents and wages
of labor but also from the productivity returns of capital goods. Bohm-Bawerk
did not bring this out well, though his theory of 'capitalization' (of the man-
ner in which the values of land and capital goods are determined) 21 suffices to
prove that this was in fact his view. But Fisher's terminology did. In order to
underline the novelty of this view, let us again notice its affinity, in this re-
spect, with the exploitation theory of Marx; given the appropriate ideology .

and phraseology — it might have been presented as a novel exploitation theory.

A minor consequence of this was that returns from physical capital goods
could no longer be diagnosed as interest in the fashion set by Barbon and sanc-
tioned by A. Smith. Several circumstances combined to suggest their assimila-
tion with the rent of natural agents (see below, subsec. b). A much more im-
portant consequence was that interest now entered the theories of rent and
wages in an entirely new manner. In fact, this is the most important reason
why we have once more to take up these subjects instead of resting content
with a simple reference to the theory of imputation or of marginal productivity
sans phrase . 22

(b) Rent. Disregarding minor issues and various blind alleys, we shall survey
developments in this field in three steps. First, we shall consider the theory of
rent that was to explain the incomes derived from the ownership of natural
agents, no matter whether they are supposed to be 'indestructible' or not. Sec-

20 I say 'productivity returns properly so-called’ because there is an ambiguity in
the term 'productivity' as there is in the term 'requisite' that tends to obscure the
point I am trying to make. In a sense, time is a requisite of production, hence pro-
ductive. So, in capitalist society, is money. And for some purposes the concept of
marginal productivity may be applied to both. But neither is a requisite and pro-
ductive in the same sense as is labor or land or a shovel. Bohm-Bawerk averred that
his subsistence fund was productive in the first sense but not in the second, exactly
as Marx would have done. But both he himself and his followers and critics confused
the two meanings.

21 This theory was developed by Wicksell as well as by Fisher, but it constitutes
one of Bohm-Bawerk’s most characteristic contributions. Before him the treatment of
this problem was dominated by the cost aspect. Of course, business practice had been
familiar with the discounting process as applied to a house or machine long before.
But it was Bohm-Bawerk who introduced this practice into economic theory and gave
it its theoretical interpretation just as Marshall introduced the concepts of prime and
supplementary costs that had been familiar to every businessman and yet constituted
novelties in economic analysis.

22 In other words, 'The Relations between Rent and Interest' now became a prob-
lem that had not existed for J. S. Mill. See, especially. Professor F. A. Fetter’s paper
bearing this title in Publications of the American Economic Association , 3rd series,
vol. v, February 1904. A. Marshall, by a different route, was led to coining the con-
cept of quasi-rent which takes care of part of that problem. In addition, he recog-
nized that the concept of interest is applicable to new (prospective?) investment only;
and that capital already invested in plant and equipment yields quasi-rent and not
interest ( Principles , pp. 605-6).

GENERAL ECONOMICS: CHARACTER AND CONTENTS 933

ond, we shall consider certain generalizations of the concept of rent which
that theory suggested. Third, we shall notice a tendency to harness the con-
cept of rent into the service of entirely different purposes. Under each of these
three headings we shall observe a struggle between old and new ideas that
was an important cause, if not the only one, of waverings, hazinesses, and spuri-
ous issues . 23

First, then, as regards the rent of natural agents, it is obvious that the Jevons-
Menger-Walras analysis provided a perfectly good explanation of this rent
phenomenon and, if adequately complemented by the facts of every concrete
case envisaged, also all the 'laws’ or propositions about it we need. All that
had to be done was to take a clue from Say or Cantillon, that is, to recognize
that rent is simply a matter of pricing the services of these requisites of pro-
duction and to apply the marginal principle to the formation of these prices.
Account being taken of Bohm-Bawerkian time preference, the result would
read: the rent of natural agents tends to equal the discounted values of their
marginal products. This theory allows automatically for differences in quality
of natural agents of the same kind. And, as thus explained, rent does and
does not enter into the prices of products exactly as do wages. In fact, rent in
this sense and wages are parallel phenomena. The main purely economic dif-
ference between them is that the total supply of any natural agent may, in
many cases, be taken as fixed and hence does not react to variations in its
price, whereas the total supply of labor is in general less irresponsive. But this
difference does not affect the explanatory principle involved, which remains
the same for both cases. Moreover, it is irrelevant for the question of alloca-
tion of the supply available for any particular use of a natural agent that is
capable of serving more than one: how much land, at what rent per unit, is
available for the production of cane sugar when the same land could also be
used for the production of cotton is merely a matter of opportunity cost . 24

This theory, sponsored by the Austrians and by Walras, was however not
as readily or generally accepted as we might expect, considering its simplicity
and usefulness. There were two reasons for this and for the consequent sur-
vival of the 'Ricardian’ theory of rent . 25 On the one hand, many economists

23 As far as Marshall’s teaching is concerned, waverings and hazinesses have been
trenchantly analyzed by F. A. Fetter, 'The Passing of the Old Rent Concept,’ Quarterly
Journal of Economics, May 1901. Professor Fetter’s argument may be generalized so
as to include a large number of economists.

24 It is perhaps unnecessary to explain the treatment of the case of natural agents
that admit of only one use and of the cases (such as the case of the vineyard that
might also be used as pasture for goats) that raise similar difficulties.

25 Marx’s and Rodbertus’ theories of rent benefited but little by the dislike that
many economists displayed for the marginal productivity theory, though the former
survived of course in the circle of Marxist orthodoxy. L. von Bortkiewicz’ destructive
criticism of both was hardly necessary in order to convince economists of their weak-
nesses: see his papers on 'Die Rodbertus’sche Grundrententheorie und die Marx’sche
Lehre von der absoluten Grundrente,’ Archiv fur die Geschichte des Sozialismus und
der Arbeiterbewegung, 1910-11. But the two papers are worth mentioning, neverthe-

934 IV: FROM 1870 TO 1914 AND later

experienced an emotional resistance to a theory that seemed to treat the land-
lord’s 'unearned incomes’ on the same plane with the workman's compensa-
tion for the sweat of his brow. These sentiments were completely irrational
because there is nothing in that theory to prevent an economist from differen-
tiating as much as he pleases between the two on moral or political grounds. 26
But they were effective nevertheless and they told for the 'Ricardian’ theory,
because the latter seemed — though it really is not — much better qualified to
support an adverse value judgment on the rent of land. On the other hand,
as we have seen, 'classic' doctrines kept, throughout the period under survey,
a strong hold on the thought of many economists. Of these doctrines none
had percolated more widely, or enjoyed a more established fame, than had
the ‘Ricardian’ theory of rent. Moreover, it was easier to defend than were
other parts of 'classic' analysis because, formulated with proper care, it did
not assert anything that was positively wrong. Menger’s criticism of it ( Grund -
sdtze, pp. 144-5) w 35 justified but only amounted to saying that the necessity
of having to construct, for so important a class of phenomena, a separate
theoretical apparatus was in itself proof of the defects of the 'classic' analysis. 27
Defenders were, therefore, in a relatively favorable position. By far the most
eminent of these was A. Marshall, who made the most of this opportunity for
fighting a rear-guard action in defense of Ricardo. 28

In any case, the 'Ricardian' theory remained in the center of discussion and
continued to hold the attention even of its opponents. Not all of these came
from the marginal productivity camp. The monopoly theory of rent was bound
to lose ground in a time when general price analysis was so greatly improved,

less, because they are excellent examples of a type of theoretical work that seems to
have gone out of fashion completely.

26 Thus Walras was a strong land reformer in spite of the fact that he sponsored
the productivity theory of rent.

27 In other words, the criticism simply averred that for the Jevons-Menger-Walras
analysis Ricardo’s theory was superfluous. And so it is (see above, Part in, ch. 6, sec. 6,
on the role that the theory of rent played in the Ricardian system). To put it still
more bluntly, the ‘revolutionaries’ were in a position to scrap the whole of Ricardo’s
second chapter excepting the first sentence of the second paragraph.

28 Marshallians will perhaps condone the slight irritation that some readers of Mar-
shall may possibly feel at the length to which he went in this respect in spite of
the fact that (disregarding everything else) his great summary of his theory of distribu-
tion proves beyond reasonable doubt that he accepted the marginal productivity theory
of rent. But he refused to recognize the break with Ricardo’s general theory which
this involved and, e.g., attacked Jevons (who actually was exceptionally gentle on the
‘Ricardian’ theory of rent) for holding that ‘rent does enter into price’ ( Principles ,
p. 4830.), as if, as meant by fevons, this proposition were definitely false. The reader
can easily satisfy himself — this would in fact be a good exercise — that this is not so.
Marshall’s corrective formulation (presented in quotes) asserts nothing that is wrong
but also nothing that invalidates the Jevonian proposition attacked. Besides, the Jevonian
proposition had been anticipated — only without awareness of its importance — by J. S.
Mill.

GENERAL ECONOMICS: CHARACTER AND CONTENTS 935

but it did not die out entirely. 29 Other approaches were also tried but none
of them met with any great success. 30

Second, extensions of the concept of rent just discussed suggest themselves
readily in view of the difficulty of drawing a logically tenable line between
what objects are, and what are not, natural agents or, which is only another
way of expressing the same thing, of agreeing on the defining characteristics
of natural agents. Thus, violating his original definition of rent (income de-
rived from the ownership of land and other free gifts of nature. Principles , p.
150) Marshall denied that mining royalties are rents. 31 Other writers were
more impressed with the analogy. But he made no difficulty about the exten-
sion — if indeed it can be called an extension at all — of the concept of rent
from rural to urban land. 32 Much more important, however, was one of his
most felicitous creations, the concept of quasi-rent or ‘income from an appli-
ance for production already made by man/ that embodies the recognition of
two facts that were particularly important in connection with the new theories
of interest: the fact that any price paid for the services of capital goods is
closely analogous to the price for the services of natural agents; and the fact
that this analogy holds particularly for the short run and decreases with the
increase in the length of the time to which a proposition is intended to apply. 33

Another class of extensions sprouted directly from Ricardian roots. A man
who still persisted in seeing point in Ricardo's emphasis upon ‘differential rent'
was likely to discover, as Bailey had done before, that such differentials were
not confined to land. We have had occasion 34 to notice Mill’s, Mangoldt’s,
and Walker’s interpretations of entrepreneurial gains as rents of differential
ability. Marshall presented the general case for the latter concept though, in my

29 F. Oppenheimer’s book on David Ricardos Grundrententheorie (1909; 2nd ed.,
1927) may be cited as an example.

30 See, e.g., Achille Loria’s work, Rendita fondiaria . . . (1880).

31 Moreover he did so on the untenable ground that royalties do enter into the
price of the mineral mined in a sense other than that in which does the rent of
agricultural land.

32 Also see Edgeworth’s work on the subject (republished in vol. 1 of his Papers)
and Wieser’s Theorie der stddtischen Grundrente (1909). The latter reads like an
application of Ricardo’s theory of rural ground rent, Ricardo’s marginal land being
replaced by the ‘peripherical’ urban land that yields no higher rent when used for
building than it would in its optimal agrarian use.

33 There is, of course, no sharp dividing line between quasi-rent and rent proper.
If we assume that the greater part of a landlord’s income is also quasi-rent, then we
may say that, at any given moment, the bulk of capitalist income (in the Marxist
sense) is quasi-rent. Also there is no sharp dividing line between quasi-rent and wages.
A physician’s income is in part quasi rent though usually classed with wages. The
‘rent’ or ‘quasi-rent’ yielded by a piece of land that has been reclaimed by the owner’s
labor is, in part, at least, in the nature of wages. A little reflection will show that
this is more than an otiose play with concepts.

34 [On Bailey, see above. Part m, ch. 4, sec. 3c; on the interpretation of entrepre-
neurial gains as rents of differential ability, see above, sec. 2b.]

936 IV: FROM 1870 TO 1914 AND LATER

opinion, this only served to expose its emptiness . 35 Similarly, a man who has
acquired Ricardo’s habit of deducing rent from the physical ‘law of decreasing
returns from land’ may easily discover the ubiquity of this phenomenon wher-
ever factors are being applied to a fixed quantity of one of them: 36 this
amounts to generalizing Ricardo’s rent concept by generalizing Ricardian de-
creasing returns. If the fixed factor is plant and equipment — which may in fact
be taken as fixed in the short run — we shall, after a certain point, observe
decreasing physical returns to successive ‘doses’ of those factors that can be
varied in the short run, and the Marshallian quasi-rent then appears as the
exact analogue of the ‘Ricardian’ rent of land . 37

Third , 38 the aspect of the ‘Ricardian’ theory of rent that appealed most to
policy-minded economists was the aspect suggested by the words Surplus or
Residual. Strictly speaking these words, as applied to the rent of natural agents,
had lost their meaning in the Jevons-Menger-Walras analysis, which was no
longer under the necessity of explaining rent as a ‘leftover’ sui generis but was

35 Principles vi, ch. 5, § 7 and ch. 8, § 8. The statement in the text requires pro-
tection against two misunderstandings. First, it must not be understood to refer to
the entire contents of the two paragraphs just cited, which contain many a profound
remark. Second, it must not be understood to imply denial of the importance — which
on the contrary I think paramount both for economic and for sociological analysis —
of the wide range of variation of the ‘natural’ abilities of men. All I mean is that
the theory of rent contributes nothing to our understanding of the role of supernormal
abilities and that nothing is gained by calling their earnings rents except that by so
doing we are enabled to show — which was indeed Bailey’s purpose — that differential
fertility of different plots of land is entirely superfluous also in the theory of the in-
come from ownership of natural agents.

36 Let us repeat that it was in this manner that J. B. Clark found his way toward
a marginal productivity theory of distribution. At least this seems to be the natural
inference from his ‘Distribution as Determined by a Law of Rent,’ Quarterly Journal
of Economics, April 1891. But in order to be able to travel this way, he had to re-
nounce community with Ricardo, for whose teaching it was essential to hold that
the rent phenomenon is specific to the land factor.

37 More precisely, it appears as the exact analogue of the so-called second case of
Ricardian rent, which refers not to the application of capital and labor to decreasingly
fertile or more distant plots of land but to the application of successive ‘doses’ of
capital and labor to the same plots of land. It should be observed, however, that the
true importance of the quasi-rent concept is quite independent of this analogy.

38 I am not going to include here the ‘psychological rents’ that result from the
‘laws’ of decreasing marginal utility or increasing marginal disutility. One of them,
consumers’ rent, will be considered later (see below, ch. 7, sec. 6 and Appendix). In
addition, we may speak of a savers’ rent that may be derived, if we wish, from the
fact that savers’ behavior can be described in terms of a marginal equality between
the advantages of saving or consuming an additional dollar’s worth of resources, and
that there is hence a surplus of advantage on the intramarginal dollars; and of a
laborer’s rent (Marshall’s producers’ rent) that may be similarly derived from the
balance, at the margin, of the advantages of another hour’s leisure or work which
implies that there is a surplus of advantage on the intra-marginal hours of work. The
validity of these concepts is one question; their value is quite another. In any case,
these ‘rents’ must not be confused with those associated with ‘laws’ of physical returns.

I W

I&3

GENERAL ECONOMICS: CHARACTER AND CONTENTS 937

able to explain it directly and on the same fundamental principle with other
types of income. But economists soon found that they might retain the surplus
aspect all the same. Rent might he capable of being interpreted as the pay-
ment for the services of a requisite of production, but this payment was not
necessary in order to call forth the corresponding service, whereas it was in
the cases of the services of capital goods and of labor — a fact that seemed
important for questions of welfare economics and of taxation. Marshall, shift-
ing emphasis to this surplus aspect of rent, gave a lead toward expressing it
by saying that the services of natural agents were ‘costless' in the sense that in
order to have them, society need not incur ‘real cost’ (disutilities of labor and
saving ). 39 But if we elaborate this unearned-surplus aspect of rent, we discover
two things.

In the first place, we discover, as we discovered before from another stand-
point, that rent defined as a ‘surplus’ is no more confined to natural agents
than is rent defined as a productivity income. Similar surpluses, that is, dif-
ferentials over and above the payments that would be necessary to call forth
the corresponding supplies of goods and services, are scattered all over the
economic organism. Many workers* and not only movie stars, receive much
more than the amount necessary to induce them to do what they are actually
doing, and in many cases they would offer more service if they were paid less
per service unit. Even if we carry the hypothesis of perfect competition as far
as it is possible without getting ludicrously out of contact with facts, there
are plenty of situations of advantage, some short-lived, others more durable,
in which such surpluses are earned. Under conditions of monopolistic compe-
tition, let alone straight monopoly , 40 such situations must be still more fre-
quent. Finally we may include gains from situations of advantage that are
created by ‘collusion’ (contrived scarcities) or by specific 41 institutional pat-

39 The reader will observe that this is something different from saying that the
payment for such services does not ‘enter into the price of products.’

40 Again, the reader will perceive the essential difference between subsuming monop-
oly gains under surpluses of this kind and explaining the rent of land as a monopoly
gain: the two have nothing to do with one another. But any difficulty the reader
may have in realizing this bears witness against the advisability of calling these sur-
pluses rent. It constitutes in fact a typical instance of unnecessary confusion being
created for no better reason than a preference for terms that, like rent, have acquired
derogatory associations. If it were not for this, it would be readily recognized that
‘surplus’ does all that is needed and that the term ‘rent,’ in this connection, is re-
dundant.

41 By emphasizing the word ‘specific’ I mean to convey that mere reference to the
general institutions of capitalist society, such as private property, covers an economist’s
failure to explain a return more often than it affords explanation. This is why, much
to the displeasure of critics of a certain type, competent economists of all times have
always looked askance at work that uncritically used the phrase Institutional Rent.
The case is different, of course, where the existence and the modi operandi of specific
institutional factors can be fully established. Examples are afforded by protective duties
(including measures of some of our states that in effect amount to protective duties),
certain features of recent labor legislation, and so on.

93 ^ rV: FROM 1870 TO 1914 AND LATER

terns. A tendency has asserted itself in our own time to combine all such sur-
pluses under the heading of rent. Though the incomes from ownership 0 f
natural agents are included, they only form a special case of rent in this sense
the theory of which has but little in common with the theory of rent surveyed
in the first part of this subsection.

In the second place, however, we also discover that part of the surplus gains
under discussion divide up into two classes between which there is an ana-
lytically significant difference. Consider a natural agent, perfectly homogene-
ous in quality, perfectly divisible, and perfectly transferable between the dif-
ferent uses (industries) that it is capable of serving, and let us assume perfect
competition all round. Each of these uses will then be governed by what we
have called opportunity cost. The users of the factor may therefore have to
pay all that its services are worth to them, in which case no surplus attaches
to its use . 42 And the owners may receive, from each group of users, no more
than they could receive from any other. They derive no surplus over oppor-
tunity cost, though the whole of their receipts may be, in another sense, a
surplus over Marshallian red cost . 43 In another class of cases this is not so.
It is unnecessary, I hope, to adduce examples in which owners of requisites
of production, whether or not they be natural agents, earn surplus gains over
opportunity costs: technological difficulties of 'transforming savings’ into cer-
tain types of capital goods suffice to create, for the owners of the latter, gains
over opportunity costs that are also gains over real costs which, at least in the
short run, even otherwise quite unimpeded competition may be inadequate
to remove 44 The distinction between surplus gains over real costs that are
also surplus gains over opportunity costs, and surplus gains over real costs that
are not, is sufficiently important to be recommended to the reader’s attention,
especially because the former do not, and the latter do, play an essential role
in the process of allocation of resources . 45

42 This does not hold for marginal quantities if the intramarginal 'surplus’ is ab-
sorbed by payments to other factors. [J. A. S. questioned this note and the sentence
to which it applies.]

43 This proviso should suffice to negative any idea of using opportunity cost for
apologetic purposes.

44 The wording of the sentence above is inspired by a passage in Pareto’s Cours
(2nd vol., J 745 et seq.). Pareto’s share in this generalization of an aspect of the old
rent concept, which was to gain popularity in the Anglo-American literature of our
own epoch, deserves to be mentioned in spite of doubts as regards the analytic prog-
ress thereby accomplished. Not that the facts envisaged by the Paretian theory of rent
are unimportant. But I can see no point in grafting them upon the quite heterogeneous
facts that are satisfactorily described by the marginal productivity theory. See, however,
the work of one of Pareto’s disciples, Professor G. Sensini, La teoria della ‘ rendita ’
(1912).

45 See especially Joan Robinson, The Economics of Imperfect Competition (1933),
ch. 8. Mrs. Robinson may be considered to be the chief authority on the 'new' theory
of rent at which we have glanced. Four references on the subject of this subsection
are added to enable interested readers to fill the many lacunae of our sketch: A. S.
Johnson, 'Rent in Modem Economic Theory,’ Publications of the American Economic

GENERAL ECONOMICS: CHARACTER AND CONTENTS 939

(c) Wages. Longfield’s and T'hiinen’s old marginal productivity theory of
wages was the new thing in the 1880’s and 1890’s and, at least among leading
theorists, the accepted thing for the rest of the period and beyond it. Bohm-
Bawerk’s amendment, namely, that the real wage rate, in perfect equilibrium
and perfect competition, should be equated to the Discounted Marginal Prod-
uct of Labor rather than to the Marginal Product of Labor gained some votes
after 1910, in the United States mainly because Taussig threw the weight of
his authority into the scale. 46 We need not stay long to discuss the types of
wage theories that preceded the vogue of the marginal productivity analysis,
partly because most of them did not amount to much and partly because we
have learned the necessary minimum about them already. 47 Suffice it then to

Association, 3rd series, in, November 1902; B. Samsonoff, E squisse d’une theorie
generate de la rente (1912); the contributions on the rent of land, especially that of
F. X. Weiss, ‘Die Grundrente im System der Nutz Werthleh re, ’ in W irlschaftstheorie
der Gegenwart (in, ed. Hans Mayer, 1928-32); and Gerhard Otte, Das Differential-
einkommen im Lichte der neueren Forschung (1930), a work that clarifies many hazy
points and incidentally establishes the emptiness of the concept of differential rents
all the more effectively because the author does not mean to do so.

46 Bohm-Bawerk’s amendment, just like the analogous amendment in the case of
rent, is merely a consequence of his theory of interest. How far it is invalidated by
the argument from synchronization is therefore not a separate question: it is answered
as soon as we have answered it for interest. But another question arises here: how
far should Bohm-Bawerk’s (and Taussig’s) theory of wages be interpreted as a re-
habilitation of the wage-fund theory? We may indeed arrange our terminology in such
a way as to bring out a strong similarity (which Taussig was inclined to do). And
we may interpret so much into Ricardo, McCulloch, and J. S. Mill as to make them
‘forerunners.’ On the whole, however, I am inclined to think that this blurs the
essential lines of doctrinal development instead of bringing them out. In Bohm-
Bawerk’s structure, ‘capital’ plays so different a role in relation to wages and joins
forces with so many elements which the wage-fund theorists did not see that it seems
more confusing than enlightening to stress the tenuous affinity that no doubt exists.
In any case, if we are not content with Jevons and Rae as predecessors, it is the
affinity with Senior and Marx that should be emphasized rather than the one with
the wage-fund theorists properly so called.

47 The wage-fund controversy has been followed into the period under . survey in
our description of the issue in Part 111 (see ch. 6, sec. 6f). For the Marxist theory of
wages, see Part m, ch. 6, secs. 2 and 6. The use of the bargaining-power element in
the explanation of wages coincides of course with its use in the explanation of ‘profit.’
Though the wage theorists other than the marginal productivity theorists added points
of value here and there (for example they inquired with care into the relation between
wages and hours on the one hand arid workmen’s performance on the other; see L.
Brentano’s influential contribution under that title, English trans., Hours and Wages
in Relation to Troduction, 1894), for the most part they went on discussing the
‘classic’ problems. Two American works, however, took a higher flight. One was F. A.
Walker’s Wages Question (1876), which expounded the ‘residual-claimant’ theory.
The idea was really not quite new: in substance Senior had already had it ( Outline ,
p. 185 et seq.). But Walker worked it out and propagated it in his popular textbooks.
It may be best conveyed by contrast with Ricardo. Ricardo, as we know, first elim-
inated rent from the price problem so as to be left with ‘profits’ plus wages. Then

94 ° IV: FROM 1870 TO 1914 AND LATER

recall that most of these wage theorists went on killing the wage-fund theory

some of them in the mistaken belief that they were thereby gaining a point
for labor — and that, with practical unanimity, they held that wages were not
paid out of capital but out of consumers’ income (George, Walker, Sidgwick,
Brentano, and many others). Though this argument, as we also know, rests
upon a misunderstanding of the wage-fund theory, it should be noticed that
it did, in fact even though not in intent, pave the way for the marginal pro-
ductivity theory.

Let us cast at least a perfunctory glaince on the victorious onward march of
this analysis as applied to wages, neglecting all minor points. Jevons’ statement
in the brilliantly original Chapter 5 of his Theory must be mentioned first. 48
Menger’s presentation is, however, fully equal to it in spite of being still more
incomplete. Walras’ earlier formulation is somewhat impaired by the fact that
his constant production coefficients, like Wieser’s, exclude the possibility of
taking account of relations of substitution between labor and other requisites
of production within each firm. Marshall established the marginal productivity
analysis of wages in England, succeeding more completely than he seems to
have wished. But Edgeworth’s various contributions should not be forgotten
(see especially his paper on the 'Theory of Distribution/ 1904, republished in
Papers Relating to Political Economy, vol. 1). Among other things, he ex-
ploited the new catallactics for the purpose of treating special cases of wage
determination. A particularly felicitous idea of his was to invoke the theory of
international values in order to elucidate the relation between employers and
employees — treating them by analogy with different nations that trade with
one another — or between non-competing groups of workmen. Wicksteed and
especially Wicksell then greatly improved the Austrian theory.

The development in the United States was largely independent of the con-

he went on to determine wages independently (by equating them to the minimum of
existence), and profits remained as a residual (unless indeed we credit him with an
abstinence theory, which we now do not do). Similarly, Walker determined the other
shares in distribution independently so as to be left with wages as a residual. Opponents
(Taussig, e.g.) pointed out that this clashes with the facts of the modern wage con-
tract. But the decisive theoretical objection is in the methodology that such a theorj
involves, to wit in the very attempt to determine independently any elements of a
system of interdependent elements.

The other work was F. W. Taussig’s W ages and Capital (1896, London School
Reprint, 1932). It must be mentioned here and not among American contributions
to the marginal productivity theory, because in 1896 its author had not yet accepted
the latter. In fact, so far as the book is concerned, he had not even noticed it: there
is not even mention of the name of Thiinen. Its claim to historic importance rests
upon his, in great part original, attempt to graft Bohm-Bawerkian doctrine upon the
‘classic’ system. But it is recommended to the attention of the reader also for another
reason: it is a masterly performance -in a style of theoretical reasoning that has com-
pletely gone out of fashion. By perusing it, the reader, besides learning a lot, will be
able to acquire an idea what this style was like at its best.

48 It is interesting to note, however, that it does not introduce any time discount
on the marginal product of labor.

GENERAL ECONOMICS: CHARACTER AND CONTENTS 941

temporaneous development in Europe. The marginal productivity theory, in a
very advanced version that took full account of the relations of substitution
among productive factors and came 'close to the modern concept of a mar-
ginal rate of substitution/ sprang ready-made from the brain of Stuart Wood,
whose two papers on the subject should assure his position in the history of
analytic economics: 49 'A New View of the Theory of Wages’ { Quarterly Jour-
nal of Economics, October 1888 and July 1889) and 'The Theory of Wages’
( Publications of the American Economic Association, iv, 1889). Simultane-
ously with the latter (i.e. in the same volume of the Publications) J. B. Clark
published his marginal productivity theory of wages, 'The Possibility of a
Scientific Law of Wages.’ In 1892 appeared H. M. Thompson’s Theory of
Wages. Taussig, thereby joining the 'marginalists/ introduced Bohm-Bawerk’s
amendment into American wage theory ('Outlines of a Theory of Wages/
Proceedings of the American Economic Association, April 1910). For the rest,
I shall confine myself to mentioning three standard works of our own epoch
which are all based upon the marginal productivity theory of that period. The
first is P. H. Douglas’ Theory of Wages (1934), which will have to be men-
tioned again as one of the boldest ventures in econometrics ever undertaken.
The second — whose great merits are somewhat impaired by not quite ade-
quate handling of the tools of theory — is J. W. F. Rowe’s Wages in Practice
and Theory (1928). The third, so far as theory is concerned, by far the most
significant Marshallian performance in the field, is J. R. Hicks’s Theory of
Wages (1932). These stepping stones will carry the reader to the beginning of
the Keynesian controversies.

Since consideration of some of the more delicate questions about marginal
productivity must be postponed to the next chapter, this is really all that
needs to be said for the moment (see, however, the subsection on Labor Eco-
nomics below). But in view of the fact that misunderstandings persist to this
day concerning the nature and value of the marginal productivity analysis in
its specific application to wages, the reader will perhaps condone or welcome,
as the case may be, the following explanatory comments in spite of the repeti-
tions some of them involve.

First, then, let us recall what has been said above about the difference be-
tween Longfield’s and Thiinen’s marginal productivity and that of Jevons and
Menger. Longfield’s and Thiinen’s concept is the one revived by Stuart Wood
and the one that is commonly used now. The current textbook simply says
that, in perfect equilibrium and perfect competition, the money wage rate of
every kind of labor equals the physical marginal increment of the product due
to the 'last’ increment of labor applied (marginal product of labor) multiplied
by the equilibrium price of the product. But with Jevons and Menger and
also with Marshall, this was not the basic concept. Their basic concept was the
increment of satisfaction individual consumers experience from that increment

49 Justice, but not more than justice, has been done to his performance by Pro-
fessor Stigler ('Stuart Wood and the Marginal Productivity Theory/ Quarterly Journal
of Economics, August 1947), to whom the statement above in quotes is due.

94 2 IV: FROM 1870 TO 1914 AND LATER

of product. 50 Only a theory that uses this concept is a genuine imputation
theory of wages and really should be distinguished from simple marginal pro-
ductivity theories that do not use it. But both yield the same results, of course,
and if we do not care for the 'deeper meanings’ that Jevons and Menger be-
lieved the imputation theory reveals, we may deduce the usual formula for the
competitive wage rate without using that concept. 51 In many important cases
of applied wage theory we do not even need the usual formula but may treat
the determination of the wage rate simply as a matter of supply and demand.
And this is why Fleeming Jenkin must now be added to the list of the build-
ers of modem wage theory (Part m, eh. 6, sec. 6f). He used nothing but the
simple supply and demand apparatus — taking everything for granted that may
be behind it — and was nonetheless able to derive important results, for ex-
ample, about the possibilities of trade-union policy. But an important limita-
tion of his considerable performance should be noticed at once, especially be-
cause it carries over to the Marshallian analysis of wages. An analysis that uses
the simple demand-supply apparatus is essentially Partial Analysis, that is to
say, it takes as independently given the factors that determine the demand
and supply schedules. As we shall see, this is inadmissible in the case of so
important an element of the economic system as is labor as a whole. To illus-
trate the point, let us for a moment consider the most obviously practical im-
plication of this. So long as we operate with given demand and supply
schedules which do not change when wage rates change, then we shall ordi-
narily have a single equilibrium rate of wages such that any increase of it
creates (or increases) unemployment. Arid practically all economists of this
period would have subscribed to the latter proposition, even for a general in-
crease of wage rates. 52

50 Denoting by U< the total satisfaction of consumer i, by X] quantity of the com-
modity 7 he consumes, and by L the labor that goes into this commodity, the concept

. 8U t 8 Xj _ . , . , . . . _ , . ...

in question is given bv — . This, barring the partials, is levons expression which

8 xj 8L

recurs in Marshall’s Principles. It should be re-emphasized that the marginal utilities
as well as the marginal physical products involved are individual marginal utilities and
marginal products of individual firms. No question of social evaluation comes in to
add to our troubles, though Wieser’s and Clark’s expositions seem to suggest this.
Nor need we meet any such thing as a marginal social product. This concept has in-
deed been introduced by Professor Pigou as a tool of his welfare economics and dis-
cussed by Professor Edgeworth (see his paper, 'The Revised Doctrine of Marginal So-
cial Product,’ Economic Journal, March 1925). But this was a special construction
for a special purpose and has no place in the explanatory theory of wages now under
discussion.

51 This usual formula (marginal physical product times equilibrium price), of course,
does not apply to any cases other than that of pure or perfect competition in all
factor and product markets. See below, ch. 7.

52 The specifically Bohm-Bawerkian version reads like this: if in a state of equilib-
rium an increase of wage rates is imposed upon the system, then another and longer
'period’ of production becomes the most profitable one; if this is adopted, however,
the existing subsistence fund suffices only for a smaller number of workmen; hence

GENERAL ECONOMICS: CHARACTER AND CONTENTS 943

Second, recalling what has been said about the formal character of the mar-
ginal productivity theory, let us ask ourselves how far this theory provides a
'causal’ explanation of wage rates. On the one hand, it is clear that, in order
to enable it to explain any particular level of wages that we observe in any
given place at any given time, it is necessary to feed into it the particular facts
of that place and time; and these facts, such as the available amounts of com-
plementary factors, and not the margins of productivity may then be called
the true or ultimate causes of that wage rate. On the other hand, it is equally
clear that wage rates, being elements in a system of interdependent magni-
tudes, are simultaneously determined with all its other elements so that even
in pure theory — that is, irrespective of the facts of any particular case — they
cannot be said to depend upon a margin of productivity as if this were an
ultimate datum. However, this is all that Marshall can have meant when he
wrote that wage rates are determined at the margin and not by the margin.
But this argument only parallels Marshall’s argument about marginal utility —
about the three balls resting against one another in a bowl — and admits of a
similar reply. 53 In any case, it does not reduce the value of the marginal pro-
ductivity theory as a tool for solving wage problems. 54

Third, he who wants to use the marginal productivity of labor as an ex-
planatory principle and as a tool for solving wage problems must, of course,
understand it and acquire some experience with it. If he fails to fulfil these
conditions, difficulties will crowd upon him which, human nature being what
it is, he will turn into so many objections, especially if, suspecting apologetic
traps, 55 he dislikes the theory in the first place. But for the period under dis-
cussion there was an excuse for this. The theory was not only not developed
in a manner that would have shown its usefulness — as it stands out, for ex-
ample, in Hicks’s Theory of Wages (1932) — but in many cases it was also
faultily formulated. Some economists even had difficulty in seeing the differ-
ence between the marginal product of labor and the product of marginal
(least efficient) labor. Others seem to have believed that the marginal produc-

the rest become unemployed. Observe that this argument far transcends the simple
supply and demand argument; and also that it is intended to hold only for an im-
posed increase of wages and not for one that results from an increase in -the sub-
sistence fund.

53 Its formulation is left to the reader as a useful exercise.

. 54 See, e.g., the treatment of the wage-minimum problem in Pigou’s Wealth and
Welfare (1912).

55 It is hoped that it is unnecessary to go into this again. I should perhaps add,
however, that the large majority of economists who defend increases in monetary
wage rates or resist reductions have very little to fear from admitting the correctness
of the theory. For their arguments will in general be based upon assertions of fact
that have nothing to do with it. Few if any will care to espouse arguments that
really conflict with it so soon as the common-sense complement of it is brought home
to them in each individual case. Moreover, the fact that the use of the marginal
productivity theory is a proposition about a rate of wages that would prevail in per-
fect equilibrium and perfect competition in itself suffices to show the vast expanse of
territory the theory leaves -uncovered.

944 1V: FROM 1870 TO 1914 AND LATER

tivity theory of wages breaks down if increased wage incomes or reduced hours
increase the efficiency of labor. 56

Fourth, in consequence of this we find that many labor problems continued
to be treated by means of the tools that had served the ‘classics.’ This holds in
particular for the machinery problem. It received plenty of attention but anal-
ysis rarely rose above the old arguments pro and con the ‘compensation theory.’
Such as it was, this discussion on technological unemployment provides, how-
ever, one of the answers to the Keynesian indictment that the theorists of that
period knew of no unemployment other than ‘frictional’: for technological
unemployment, even if essentially temporary so far as the effects of any indi-
vidual act of mechanization is concerned, may evidently become a permanent
phenomenon through being incessantly re-created. 57 The purely theoretical
question of full employment in perfect equilibrium and perfect competition
will be considered in the next chapter, and nothing need be added to what
has been said before on the supply of labor.

6. The Contribution of the Applied Fields *

We have repeatedly noticed that the economists of the period, or most of
them, approached questions of economic policy, or many of them, in a new
spirit. In this section we shall not dwell on this fact again, but rather hunt
for the contributions to analysis that resulted from their preoccupation with
practical questions- In all cases, these preoccupations advanced scientific knowl-
edge mainly by increasing our command over facts. Gains for our analytic ap-
paratus, though of course not absent, were much smaller than they might
have been. We shall briefly survey the more promising fields (except money
and cycles, which are considered in ch. 8).

But we shall not consider developments in the field of business economics
(business administration, Privatwirtschaftslehre), including accounting and
‘actuarial science.’ It has been emphasized from the first that there is really
no better reason for separating it from general economics than that a large

56 The theory of substitution, Marshall’s exposition of it notwithstanding, was far
from being common property even by the end of the period. This is the reason why
Charles J. Bullock’s paper on ‘The Variation of Productive Forces’ ( Quarterly Journal
of Economics, August 1902) in spite of various shortcomings deserves to be put on
record as a major contribution.

57 We are free, of course, to define the concept of frictional unemployment so
widely as to include technological unemployment and also the other types of un-
employment that were recognized — mainly: unemployment from imperfections of
competition; unemployment from monetary causes; and unemployment from business
fluctuations, whatever their cause — but then the indictment loses its force for, thus
defined, friction is no longer an obviously inadequate explanation of the observed facts
of unemployment. In particular, the indictment should not have been directed against
Pigou’s Theory of Unemployment (1933). For the period, see especially W. H. Bev-
eridge, Unemployment (1909).

* [The following section was unfinished and untyped at the time of the death of
J. A. S.]

GENERAL ECONOMICS: CHARACTER AND CONTENTS 945

majority of economists, believing themselves to be concerned with the affairs
of nations, used to consider the details of the economic lives of households
and firms to be outside of their sphere and also, perhaps, somewhat below it.
Actually, this material is basic to the worlc of the economist so soon as he goes
beyond the most jejune assumptions about individual behavior, and co-opera-
tion between business and general economics is a primary necessity for both.
But during the period under survey, there was so little of it that all we could
do would be to list the results of the explorations of business practice under-
taken by business economists, which failed to inspire general economists as
completely as the advance of economic theory failed to inspire business econo-
mists. 1 Let us note, however, that Marshall, by dealing extensively with the
behavior of businessmen, gave an important lead toward a merger of large
parts of business and general economics; and that Irving Fisher (in Capital
and Income) took a first step toward co-ordinating the economist’s and the
accountant’s work. 2

(a) International Trade. [This subsection was planned but not written.]

(b) Public Finance. From the comments made on this subject in Chapter 2,
we recall that the period was eminently one of what I might term comfortable
finance — the result of increasing wealth and relatively peaceful conditions, on
the one hand, and of bourgeois influence upon public expenditure and taxa-
tion, on the other. Pressure on economic activity was accordingly light — so
light as to justify exclusion from the general analysis of the determining fac-
tors of the economic process. We have also noticed that toward the end of
the period a new spirit began to assert itself in political practice, and this new
spirit did not fail to show in the writings of economists. It is not only that
leading academic authorities, such as Marshall, began to approve of what was
then considered high direct taxation — including inheritance taxes — but also
that they began to espouse what was a mortal sin against the spirit of Glad-
stonian finance, namely, a policy that went beyond taxing for revenue and
aimed at taxing in order to change ('correct’) income distribution. Adolf
Wagner for Germany and A. C. Pigou for England may serve as examples.
The counter-argument that points to possible harmful effects of high and
progressive taxation on effort and capital formation — which on the popular
level took the shape of the goose that laid the golden eggs — was much in
evidence, the more so because practically all economists of standing took a
view very favorable to saving.

More analytic effort went into two old topics that were bound to benefit
from the new theories. The one was 'justice.’ Ethical postulates changed with
the times, of course, and the 'principle of ability’ to pay and a ‘social theory
of taxation’ — including, among other things, special taxation of privilege, a

1 Nothing characterizes the situation better than does the fact that certain ele-
mentary propositions of economic theory (e.g. about increasing and decreasing aver-
age costs) weie actually ‘discovered’ by business economists for themselves.

2 An important, though later, response should be mentioned at once, Professor J. B.
Canning's Economics of Accountancy (1929).

946 IV: FROM 1870 TO 1914 and LATER

term whose coverage tended to widen — began to make converts. 3 But I do not
mean these and other canons of justice per se, but genuinely analytic perform-
ances that were induced by their advocacy. It may or may not be the econo-
mist’s business to posit imperatives; but it certainly is his business to rational-
ize given imperatives by analyzing their implications. How much there was to
be done in this line, we may infer from the fact that many economists were
completely muddled about the very meaning of such ideas as equal, propor-
tionate, and minimum sacrifice. Some thought (the error was originally Mill’s,
I believe) that equal sacrifice implies minimum sacrifice; others thought that
the 'law' of decreasing marginal utility of income suffices in itself to deduce
progressive taxation from a postulate of equal sacrifice. 4 These and other mat-
ters of this type were cleared up by a number of writers, among whom I men-
tion the outstanding contributions of Edgeworth, Barone, and Pigou. 5

The other topic was Shifting and Incidence. [This subsection was not com-
pleted.]

(c) Labor Economics. In Chapter 2, we surveyed the political conditions of
that period which were bound to impart a powerful impulse to the study of
labor problems. In Chapter 4, we registered some of the effects produced
upon the economic profession by Sozialpolitik and still more by the spirit of
Soziaipolitik. In Section 5c of this chapter, we surveyed the contribution that
economic theory made to labor economics. It remains to notice briefly the
latter’s descriptive or 'practical’ or institutional part which, owing to the
policy-minded economist’s aversion to 'theory,’ was then no better correlated
with analytic economics than, in general, it is now. 6 Broadly speaking, we may

3 E. R. A. Seligman’s Progressive Taxation in Theory and Practice (2nd ed., 1908)
must stand for a large body of literature in all countries. But both because of the
eminence of the author and because of the originality of his idea of making taxation
semi-voluntary, I also mention Wicksell’s doctor’s thesis, Finanztheoretische Enter-
suchungen (1896), the suggestions of which have been partly developed by E. Lindahl,
Gerechtigkeit der Besteuerung ( Justice in Taxation), 1919.

4 It does so if marginal utility of income decreases at a rate greater than that sug-
gested by Daniel Bernoulli’s hypothesis (see above, Part 11, ch. 6, sec. 3b). If it de-
creases at a lower rate, then the postulate of equal sacrifice of 'utility' requires that
higher incomes pay a lower percentage than smaller ones (though, of course, higher
absolute amounts).

5 F. Y. Edgeworth’s papers on problems of taxation, one of them of fundamental
importance, are republished in vol. n of the Papers Relating to Political Economy
(1925). As usual, his exposition proceeds by what I beg leave to describe as picking
out currants — such propositions as, e.g., that a tax on one of two related goods may
induce a fall in the prices of both; or that a tax on both may confer a net benefit
on the producer of one of them — so that we have difficulty in visualizing the spacious
whole that is in fact the peak performance of its field and period. E. Barone’s 'Studi
di economia finanziaria,’ Giomale degli Economisti, April-May, June, and July-August
1912, is a still more comprehensive treatise, of great power and originality, cast in
the form of three separate studies. A. C. Pigou’s various contributions were eventually
combined in A Study in Public Finance (1928).

6 This should not be interpreted to mean that the faults were all on one side.
Labor economists displayed indeed an unreasonable dislike for anything that looked

GENERAL ECONOMICS: CHARACTER AND CONTENTS 947

say that the period under discussion laid, in all essentials, the groundwork of
modern labor economics. The subject did not quite attain the status of a recog-
nized special field in the sense of modern American teaching and research prac-
tice. But it commanded the services of a rapidly increasing number of special-
ists. Principally these specialists were out for practical reform of legal institu-
tions and administrative practice, and they had their own ideas about what
it means 'to apply reason to human affairs/ But this fact-finding and their
recommendations did not fail to benefit general economics. As an example,
take the minority report of the English Poor Law Commission (1909). This
seminal performance, a belated reaction to the severe unemployment that had
prevailed in England between 1873 and 1898, taught many an economist who
stood in need of such a lesson that unemployment was at times very little
influenced by factors under the workman’s control: at all events, it was, or
should have been, important raw material on which the general economist
could exercise his analytic powers.

In addition, monographs and treatises on labor questions began to appear
in increasing quantities. Two famous monographs by Beatrice and Sidney
Webb and Herkner’s treatise or textbook are familiar samples 7 from a rap-
idly swelling literature. Statistical research was hampered by the inadequacy
of material. But some efforts were nevertheless -made in all countries. 8 As
every reader of Marshall’s Principles knows, general treatises allowed more and
more space to labor economics, also to its purely institutional aspects. Previous
textbook practice in this respect was far surpassed by the textbook of von

like analytic refinement, and an unreasonable distrust in the mysterious formulae of
the theorists’ wage analysis. They did try to make things easier for themselves by
putting theoretical arguments out of court a limine. But the theorists did not always
enter the problems of the labor economist in a proper spirit of co-operation. They
were not always anxious to profit from the latter’s facts and recommendations in order
to enrich their analysis. And some were as obnoxious as were most of the labor econo-
mists to the charge of putting the other fellow’s argument out of court a limine.
There were exceptions. Some conspicuous ones will be mentioned in the text. On the
whole, however, co-operation and consequent cross-fertilization were less in evidence
than were their opposites.

7 B. and S. Webb, The Public Organization of the Labour Market (1909); and The
History of Trade Unionism (rev. ed., 1920). H. Herkner, Die Arbeiterfrage (1894);
comparison of the contents and methods of this book with the contents and methods
of any modern American textbook on labor economics is strongly recommended.

8 For England, in addition to Booth’s survey of Life and Labour of the People in
London (2 vols., 1889:91; 17 vols., 1903) see, e.g., Robert Giffen’s papers read to the
Royal Statistical Society in 1883 and 1886 ('Progress of the Working Classes in the
Last Half Century,’ and ‘Further Notes on the Progress of the Working Classes in
the Last Half Century’). In 1895 began A. L. Bowley’s unrivaled publications on
English wages. The first of many articles, ‘Changes in Average Wages in the United
Kingdom between 1880 and 1891/ appeared in the Journal of the Royal Statistical
Society, 1895. For complete list, see bibliography appended to Bowley’s Wages and
Income in the United Kingdom since i860 (1937). Of the many attempts that were
made in the United States to overcome formidable difficulties, I mention only: Scott
Nearing, Wages in the United States, 1908-1910 (1911).

94 ° IV: from 1870 TO 1914 and later

Philippovich. We might fitly conclude these remarks by pointing again to the
greatest venture in labor economics ever undertaken by a man who was pri- J
marily a theorist, Professor Pigou’s Wealth and Welfare 9 (1912).

(d) Agriculture. [Planned but not written.]

(e) Railroads, Public Utilities, ‘Trusts,’ and Cartels. The statements with
which I introduced the subsection on Labor Economics might almost be re-
peated for what was done during that period in the fields of these and cog-
nate topics. Again, the historian of economic thought would have to notice
not only new problems but also a new spirit of dealing with them. The his-
torian of economic analysis has little to report beyond a rich crop of historical
and 'descriptive’ work, some of which has retained its interest to this day.
For the rest we must confine ourselves to a few bald comments that are neces-
sary in order to round out our sketch.

Any decent theory of cost and price ought to be able to make valuable con-
tributions to railroad economics, and railroad economics ought to be able to
repay the service by offering to general theory interesting special patterns and
problems. As has been pointed out before, there are great possibilities in a
co-operation of economists and engineers; and few fields offer such possibilities
as obviously as does the railroad business. We find something of this but not
much, though more could be unearthed from technological journals. As an ex-
ample, I mention the work of Wilhelm Launhardt, who not only investigated
the influence upon operating costs of gradients and curves but also produced a
theory of railroad rates that, among other things, contained the theorem — his
argument for government ownership is based upon it — that the social advan-
tage from railroads will be maximized if charges be not higher than — as we
should say — marginal cost. It follows from this that the whole overhead would
have to be financed from the government’s general revenue — the theorem
that has been much discussed in our own day after having been independently
discovered by Professor Hotelling. 10 This is very much more interesting than
are generalities about the desirability of nationalization or regulation which,
of course, were published in shoals.

Most of the work of which Launhardt’s is an example was, however, done

9 This work substantially embodies the main points of its author’s previous Prin-
ciples and Methods of Industrial Peace (1905). In Economics of Welfare, the suc-
cessor of Wealth and Welfare, Pigou’s labor economics are to be found in Part in
and in chs. 1, 5, 7, and 13 of Part iv.

10 W. Launhardt, Die Betriebskosten der Eisenbahnen . . . (1877). The theorem
above occurs on p. 203 of his Mathematische Begriindung der Volkswirthschaftslehre
(1885), which, for basic theory, adopts the principles of Jevons and of Walras, though
we must accept Launhardt’s claim to independent discovery ‘of a similar approach,’
since we have accepted the analogous claim of others. His treatment presents several
original points that are all of them to its credit. But his almost ruthless use of par-
ticular forms of function — by which he produces results of disconcerting definiteness —
should be studied and improved rather than condemned a limine. I add his Kom-
merzielle Trassierung der Verkehrswege (1872). The author was professor at the Tech-
nological Institute in Hanover. Neither Palgrave’s Dictionary nor the Encyclopaedia
of the Social Sciences mentions his name.

GENERAL ECONOMICS: CHARACTER AND CONTENTS 949

in France. It must suffice to mention the performances of Cheysson , 11 Picard,
and Colson. English railway economics of the period is, I believe, represented
at its best by the descriptive analyses and the little textbook of Acworth.
Professor Pigou’s treatment of railway rates is, however, more fertile in results
relevant to general economics , 12 especially as regards the issue: cost of service
principle versus value of service principle ('what the traffic will bear’). The
quantity of American railroad publications of the period was, I am afraid,
quite out of proportion to its quality. Serious analytical slips may be proved
even against works of standing that were in other respects meritorious and
most of them are quite forgotten by now. Hadley’s 13 textbook is one of the
not too numerous exceptions. All aspects of the subject, historical and institu-
tional, there receive adequate treatment. In addition, however, the book moves
on a high level of analytic correctness; and nobody will ever surpass the tell-
ing example by which he drove home the truth that discrimination may, and
often will, benefit all parties concerned, including the one that is being dis-
criminated against (the case of the two oyster-producing villages that cannot
supply a given inland market unless one pays a higher freight rate than the
other). It is, however, characteristic of a comparatively backward state of
analysis that this case was treated like a curious exception instead of being
made to follow from a more general set-up in which absence of discrimination
would constitute a special (or limiting) case.

Like railroads, public utilities should have proved both an important field
of application and an important source of particular patterns for the theorist.
Very little was accomplished, however , 14 that will bear comparison with
Dupuit’s earlier contributions . 15 The European discussions on nationalization
and municipalization present but little interest from our standpoint. Nor is
there any benefit to the analytic apparatus of economics to report from the
American discussion on rate regulation that dealt with the problem of the

11 fimile Cheysson. The misleading title of an address of his that brimmed over
with original ideas is 'Statistique geometrique,’ 1887. Railroad costs and tariffs are only
one of several subjects there dealt with in the true spirit of econometrics. The En-
cyclopaedia of the Social Sciences says of him that he contributed nothing new to
sociology or economics. A. M. Picard, Traite des chemins de fer (1887), and C. Colson,
Transports et tarifs (1890; English trans., 1914).

12 W. M. Acworth, Railways of England (1889), Railways of Scotland (1890) — still
worth reading even from the standpoint of ‘pure’ theory. Elements of Railway Eco-
nomics (1st ed., 1905). Professor Pigou’s contribution was made within the framework
of Wealth and Welfare (Part n, ch. 18 in Economics of Welfare).

13 A. T. Hadley, Railroad Transportation (1885).

14 I may illustrate the kind of thing that I should have expected to find by Mar-
shall’s Pittsburgh gas case. See A. Smithies, 'Boundaries of the Production Function
and Utility Function,’ in Explorations in Economics (1936), p. 328. Marshall’s treatise
contains a large number of similar suggestions that have never been appreciated as
they should.

15 See especially: De la Mesure de Vutilite des travaux publics (1844) and De V In-
fluence des peages sur Vutilite des voies de communication (1849), which will be no-
ticed again in ch. 7 below.

950 iv: FROM 1870 TO 1914 AND LATER

'reasonable return on the fair value of the property’ which the Supreme Court
held public utilities should be permitted to. earn. The various 'theories’ of
valuation for indemnity, taxation, and rate-regulation purposes that the legal
mind produced offer curious examples of logical muddle. Many economists did
useful work in trying to clear it up and seem, for example, after efforts extend-
ing over more than half a century, to have convinced lawyers that the attempt
to define a 'reasonable’ rate of return with reference to the value of a prop-
erty that is itself derived from expected returns, involves circular reasoning.
But this suffices in itself to characterize the level of this branch of economic
analysis.

CHAPTER 7 *

. Equilibrium Analysis

1. Fundamental Unity of the Period’s Economic Theory

2. Cournot and the ‘Mathematical School’: Econometrics

[(a) The Service Mathematics Rendered to Economic Theory ]
[(b) The Contribution of Cournot ]

3. The Concept of Equilibrium

(a) Statics, Dynamics; the Stationary State, Evolution

(b) Determinateness, Equilibrium, and Stability

4. The Competitive Hypothesis and the Theory of Monopoly

(a) The Competitive Hypothesis

(b) The Theory of Monopoly

[(c) Oligopoly and Bilateral Monopoly]

5. The Theory of Planning and of the Socialist Economy

6. Partial Analysis

[(a) The Marshallian Demand Curve]

[(b) Elasticity Concepts]

[(c) Concepts Useful for General Analysis]

7. The Walrasian Theory of General Equilibrium

(a) Walras' ’ Conceptualization
[(b) The Theory of Exchange]

[(c) Determinateness and Stability of Simple Exchange]

[(d) Walras ’ Theory of Production]

[(e) The Introduction of Capital Formation and of Money]

8. The Production Function

[(a) The Meaning of the Concept]

[(b) The Evolution of the Concept]

[(c) The Hypothesis of First-Order Homogeneity]

(d) Increasing Returns and Equilibrium
[(e) Tendency toward Zero Profits]

Appendix to Chapter 7

Note on the Theory of Utility

[1. The Earlier Developments]

[2. Beginnings of the Modern Development]

[3. The Connection with Utilitarianism]

[4. Psychology and the Utility Theory]

5. Cardinal Utility

6 . Ordinal Utility

7. The Consistency Postulate

8. Welfare Economics

1027

1032

1039

1045

1048

1053

1054

1055

1056

1057
1060
1062
1066
1069

* [Editor s note to Part iv, ch. 7. Although this chapter on Equilibrium Analysis
had been carefully planned from the beginning, it did not exist in any final form at
the death of J. A. S. It was found in a fairly large number of small segments, some
in typescript and some still in manuscript. Occasionally there were alternative versions

95i

IV: FROM 1870 TO 1914 AND LATER

952

1. Fundamental Unity of the Period’s Economic Theory

Even for the preceding period we have been able to discern a considerable
amount of agreement as regards the essentials of economic analysis and, in
fact, a kind of average or modal system of general economics, deviations from
which were the less frequent the greater they were. With much more confi-
dence can we aver for the period under survey that there existed by about
1900, though not a unified science of economics, yet an engine of theoretical
analysis whose basic features were the same everywhere. This should be ob-
vious from our survey in the preceding chapter. But it may be helpful, in view
of the different impression we get when we behold the troubled surface and
in view of the different opinion entertained by many historians, to show this
once more.

Nobody denies that, numerous differences in detail notwithstanding, Jevons,
Menger, and Walras taught essentially the same doctrine. But Jevons’ and
Marshall’s analytic structures do not, in essence, differ more than the scaffold-
ing differs from the completed and furnished house, and note xxi in the Ap-
pendix to Marshall’s Principles is conclusive proof of the fundamental same-
ness of his and Walras’ models. Wicksell’s engaging frankness reveals the two
pillars of his arch to the most perfunctory glance: the one is Walrasian, the
other Bohm-Bawerkian. J. B. Clark’s blueprint, however independently con-
ceived, embodied substantially the same principles as did Marshall’s Book vi;
Pareto and Fisher developed Walras. And, so far as professional theory is con-
cerned, these names cover practically all of what we may call the period’s pri-
mary work in 'general theory’; the teaching associated with them, as has been
shown in the two preceding chapters, shaped practically all of the secondary
or derivative work of the period, except that of the Marxists.

of the same subject. There is a brief and very early treatment of the whole chapter,
which was not used because I believed it to have been superseded by the later, more
elaborate version here published. The first four sections had been written long ago
but sections 3 and 4 were in the process of revision. The last two sections arid the
Note on Utility, which appears as an appendix to the chapter, were written in 1948
and 1949. Most of section 7 (The Walrasian Theory of General Equilibrium) was
still untyped. Section 8 (The Production Function) and the Note on Utility had been
typed, but J. A. S. had hardly read the former and had no opportunity to revise the
latter. In a sense, all the sections were unfinished in that J. A. S. indicated by short-
hand notes that he would have made changes in the text and added footnote references.

I am very much indebted to Richard M. Goodwin, who first put the various parts
of this chapter together for me. As both a student and valued colleague, he had
worked with my husband on these problems and was probably better fitted than
anyone else for this task.

I have for the most part followed his suggestions, but I have added one or two
things which turned up after Goodwin’s departure for Europe and removed some
'alternative versions’ and the early version of the whole chapter mentioned in the
first paragraph of this note. The interested scholar will find this material, along with
the rest of the manuscript, deposited in the Houghton Library at Harvard University.]

EQUILIBRIUM ANALYSIS

953

Why, then, do the structures of these leaders look so different? And why
is it that many even of those of us who do see the fundamental sameness in
them nevertheless deny the underlying unity of that period’s ‘general eco-
nomics’? The answer to the first question is: because there were plenty of dif-
ferences in technique, in details, and in views on individual problems, and
because in addition leaders and followers alike overemphasized them. The
most important differences in technique turned on the use or the refusal to
use the calculus and systems of simultaneous equations: the same ‘theory’
looks quite different in this garb and without it — especially to the man who
is not familiar with the former. An example for the differences in details and
at the same time for the propensity to overemphasize them is afforded by the
controversy on ‘real cost’ (see above, ch. 6, sec. 4). And examples of differences
in views on individual problems are the differences in the theory of capital
and the different attitudes as regards Partial Analysis (see below, sec. 6), which
Marshall elaborated and Pareto affected to despise. 1 But differences of this kind
— and controversies arising out of them— are part and parcel of the very life of
every field of knowledge: if we allowed them to obscure the sameness of fun-
damentals, we could never speak of the scholastic doctors as a group that
was united as regards methods and fundamental results; we might not even
be able to speak of a Marxist school.

With reference to the second question, it must be remembered that our
proposition of fundamental unity does not apply to the first part of the period
but only to the Classical Situation that emerged roughly around 1900. Before
that there was, of course, not more but less agreement among leading theo-
rists than there had been around 1850. The system that was established by
Jevons, Menger, and Walras in the 1870’s and 1880’s and found its classic
form in Marshall’s Principles (1890) came to most theorists as something new
and unfamiliar. Nothing, in fact, proves so convincingly that, forerunners not-
withstanding, it actually was something new, as does the resistance it met with.
While the fight was on and individual adherents were being won here and
there, Mill’s economics — to choose Mill once more as representative — was in
possession, and one more cause for dissension was being added to those that
had divided economists at the end of the preceding period. This also accounts

1 Marshall and Pareto — the latter not only with respect to the ‘literary economists’
but also with respect to Walras — are good instances of that overemphasis upon mat-
ters of comparative detail that produces, and not in laymen alone, the impression of
the presence of fundamentally different ‘systems.’ But the outstanding instance is
Cassel: the fundamental lines of his analytic structure are Walrasian. Yet in the
later editions of his Theoretische Sozialokonomie ( Theory of Social Economy, 1st
German ed. 1918; 4th ed. rev., 1927; English trans. 1923 and 1932) he did not even
mention Walras’ name. And in his first paper on general theory (‘Grundriss einer
elementaren Preislehre/ Z eitschrift fur die gesamte Staatswissenschaft , 1899) he pre-
sented a simplified version of Walras’ system for which he claimed fundamental nov-
elty on the ground that it eliminated the marginal utility theory of value though it
retained, in a different terminology, all that is essential to it. And the claim was
widely accepted!

954 IV: FROM 1870 TO 1914 AND LATER

for the fact that the laggards who clung to the old doctrines, even after victory
had been substantially won by the new, were both more numerous and more
respectable than would have been the case if the changes had been less ‘revolu-
tionary/ A random sample from the economists — or even theorists — taken
from the whole period, therefore, might well seem to refute the proposition
here advanced. But in addition there was a large number of ‘outsiders,’ that is,
of writers who championed theoretical systems of their own and condemned
professional theory without bothering to master it. And, finally, there was
something else. Then as always, the majority of economists were absorbed in
the task of investigating the facts and practical problems of the various de-
partments of public policy. This majority, which was reinforced by the his-
torical and institutional groups, had little use for ‘theory’ and did not wel-
come a new type of it. They never accepted it as an instrument of research
but looked upon ‘marginalism’ as a sort of speculative philosophy or as a new
sectarian ‘ism’ which it was precisely their business to eliminate by what they
considered truly scientific and realistic research (see ch. 4 above). Hence they
passed, in methodological and programmatic pronouncements, all sorts of
sweeping judgments upon it. On the surface, the result was bedlam, especially
in Germany and in the United States — a multitude of discordant voices, all of
which seemed to testify to the presence of an impasse. The reader must try
to understand, on the one hand, how very natural this was and, on the other
hand, that it did not mean what it seems to mean. 2 Below the phrase-troubled
surface, there was no impasse.

2. Cournot and the ‘Mathematical School’: Econometrics

It was during the period under survey that the inevitable happened: mathe-
matical methods of reasoning began to play a significant and indeed decisive
role in the pure theory of out science. Numerical or algebraic formulations and
numerical calculations had occurred of course in the earlier stages of economic
analysis: there were the political arithmeticians, the physiocrats, and many iso-
lated instances such as Briscoe, Ceva, H. Lloyd, Condillac, whom we have no-
ticed in their places, or the two authors rescued from oblivion by E. R. A.
Seligman. 1 But the use of figures — Ricardo made ample use of numerical illus-
trations — or of formulae — such as we find in Marx — or even the restatement
in algebraic form of some result of non-mathematical reasoning does not con-

2 The truth that economic theory is nothing but an engine of analysis was little
understood all along, and the theorists themselves, then as now, obscured it by dilettantic
excursions into the realm of practical questions. But it was emphasized by Marshall
who, in his inaugural lecture at Cambridge (‘The Present Position of Economics,’ 1885),
coined the famous phrase that economic theory is not universal truth but ‘machinery
of universal application in the discovery of a certain class of truths.’

1 Essays in Economics (1925), pp. 82-3. One was an anonymous author, ‘E. R./
who in his Essay on Some General Principles of Political Economy (1822) used algebra
in his treatment of incidence of taxation; the other was Samuel Gale, who wrote
An Essay on the Nature and Principles of Public Credit (1784-6).

stitute mathematical economics: a distinctive element enters only when the
reasoning itself that produces the result is explicitly mathematical. 2 Of this,
however, I know only three clear cases that antedate von Thiinen and Cournot:
D. Bernoulli, Beccaria, and, if we attach enough importance to even a glimpse
of an equilibrium system, Isnard. 3 The non-mathematical reader may wel-
come an attempt at defining more closely the nature of the service that mathe-
matics rendered to the economic theorists of the period under survey.

[(a) The Service Mathematics Rendered to Economic Theory.] We shall
presently touch upon the services that mathematics rendered in the treat-
ment of statistical material. Here we are concerned with its use in theoretical
analysis that is quantitative but not numerical. Now, the layman when he
hears of the application of mathematics to economics thinks primarily of tech-
nical operations ('calculations') that involve the use of 'higher' mathematics,
that is, the things that first come into view in the more advanced ranges of
the college student's algebra and analytic geometry and then soar out of the
range of the non-mathematical mortal. It is quite true that during {a little
more than) the last quarter of a century really advanced methods have increas-
ingly imposed themselves upon economists, methods that would be recog-
nized as either 'hard' or else very 'special' by professional mathematicians.
Prior to 1914, however, this was not so, and very few publications that ap-
peared earlier required of their readers — or even their authors— any proficiency
in technical mathematics. What was required, beyond the rudiments of algebra
and analytic geometry, was a knowledge of the calculus, and even of this the
general ideas or logic rather than the more difficult techniques, for example,
of integration. Barone was quite right when he averred in 1908 that though
mathematics was becoming indispensable to the theorist, every normal and
normally educated person could acquire what was needed of it by the spare-
time work of about six months.

The logic of the calculus may be expressed in terms of a small number of
concepts such as variables, functions, limits, continuity, derivatives and differ-
entials, maxima and minima. Familiarity with these concepts — and with such
notions as systems of equations, determinateness, stability, all of which admit
of simple explanations — changes one's whole attitude to the problems that
arise from theoretical schemata of quantitative relations between things: prob-
lems acquire a new definiteness; the points at which they lose it stanch out

2 This is why N. F. Canard (Principes d’ economic politique, 1801) and William
Whewell (‘Mathematical Exposition of Some Doctrines of Political Economy,’ Cam-
bridge Philosophical Transactions, 1829, 1831, and 1850) do not figure here. Perhaps,
however, Whewell should be considered as an intermediate case. He does not quite
deserve Jevons’ derogatory comment.

3 On Thiinen, see above, Part hi, ch. 4, sec. 1; D. Bernoulli, above n, 6, 3; Bec-
caria, above 11, 3, 4d; and Isnard, above 11, 6, 3.

The bibliographies drawn up by Jevons (Appendix 1 to his Theory ) and by Irving
Fisher (Appendix to the English trans. of Cournot’s R echerches) are not quite com-
plete but, on the other hand, much too inclusive: they list every writing known to
their authors that displays as much as a single symbol.

956 IV: FROM 1870 TO 1914 AND LATER

clearly; new methods of proof and disproof emerge; the maximum of return
may be distilled from the little we know about the form of the relations be-
tween our variables; and the logic of infinitesimals disposes automatically of
much controversial matter that, without its help, clogs the wheels of analytic
advance. 4 Did space permit, it could be shown instructively that a great part
of the controversies of that period consisted simply of controversies between
people who lacked a powerful tool of thought and people who possessed it.
But some examples have been presented in the last chapter and others will
occur in this.

Since this kind of service consists simply in sharpening the edges of our
analytic tools and therefore does not necessarily involve elaborate calculations,
a man’s mathematics does not necessarily show on the surface of an argument:
mathematical theory is more than a translation of non-mathematical theory
into the language of symbols, but its results can, in general, be translated into
non-mathematical language. This is the reason why the non-mathematical ma-
jority of economists never realized the full extent of their obligations to the
mathematically trained minority: the typical theorist never realized, for in-
stance, that he did not fully understand Marshall, who was careful to banish
his mathematics from the surface of his argument. And so this majority found
it easy to look upon those mathematical economists who did flaunt their
mathematics as a particular sect or ‘school’ that was of no particular impor-
tance to the profession at large. But mathematical economists form no school
in any meaningful sense of the term, any more than do those economists who
read Italian: all the differences of opinion that can be conceived to exist be-
tween economists at all — a certain class of errors alone excepted — may and do
exist between the mathematically trained ones. And the latter’s contributions
to the period’s dominant analytic structure were much greater than people
realize even now. Let us see. In the preceding section we have associated that
structure with nine names: Jevons, Menger, Walras, Marshall, Wicksell, Bohm-
Bawerk, Clark, Pareto, and Fisher. This makes six mathematical to three non-
mathematical economists. And if we add, as we should, von Thiinen, Cournot,
Dupuit, and Gossen, we have ten to three. Nor would the situation be changed
if we considered a wider circle of economists who wrote or began writing be-
fore 1914, for this would have to include F. Jenkin, Edgeworth, Auspitz and
Lieben, Pigou, Moore, Bowley, Cassel, also Pantaleoni, and others who are
difficult to match, so far as front-rank performance is concerned, by names
from the non-mathematical camp: a lesson to ponder on for the non-mathe-
matical reader of these pages, at least if he be young. 5

*■ So far as technique goes, the ‘new’ theories of value and distribution really amounted
to not less than the discovery of the calculus for economics — which in itself suffices
to show the absurdity of any opposition on principle to ‘marginalism.’

5 There is wide variety in the mathematical acquirements of the men who are men-
tioned above. Confining ourselves to the first six, we find that Jevons knew very
little — much less than would have been good for him to know. Walras, Marshall, and
Wicksell had had a regular mathematical training, Marshall much more of it than
he showed, Walras less than he needed. Pareto and Fisher were accomplished mathe-

EQUILIBRIUM ANALYSIS

957

But since the essentials of the marginal utility and the marginal productiv-
ity theories were worked out also by economists who were complete strangers to
‘higher’ mathematics, it was natural for these and for the non-mathematical
majority of the profession at large to think that, except perhaps for a few
otiose refinements, mathematical reasoning in economics did not add any-
thing to what could be found out without it. This view was all the easier
for them to take because they were not aware of the shortcomings of their
own products: on the contrary, in several cases of “some importance they made
virtues of these shortcomings. 6 And so we shall understand that the men who,
around 1900 or even later, were in positions of leadership or influence — and
this means in or past middle age — had no difficulty in excusing themselves
from learning what they looked upon as a difficult and uncongenial technique
that might after all turn out to be of little value. Not less understandably,
they rationalized this attitude and produced in its defense a number of meth-
odological arguments such as that the attempt to apply mathematics, the tool
of physics, to the social sciences was a mistake on logical principle, and others
of the same kind, into which, at this hour of the day, it is no longer worth
while to go. 7 These particular rationalizations have worn away although the
attitude itself has not. But the movement gained enough ground during the
period to produce that important symptom of success: the emergence of a
small crop of derivative — interpretative and introductory — works. 8 Of unfavor-

maticians. Differences of similar range persist to this day. And not less important than
the differences in training were and are the differences in natural aptitude: Bohm-
Bawerk was not a trained mathematician but, like Ricardo, he was a bom one.

6 An amusing case of this kind was a belief prevalent in the Austrian circle to the
effect that the non-mathematical Austrian theory offered ‘causal’ explanations of the
phenomenon of price, whereas the merely ‘functional’ Walrasian theory of prices
explained nothing but relations between prices, supposing these to be already under-
stood. The construction of causal chains between utility, cost, and prices which, as
we have seen, spelled miscarriage in the eyes of Marshall, spelled for the Austrians
simply a different — and superior — theory.

7 The case for the ‘Mathematical Method in Political Economy,’ ex visu of that
period, has been presented under that heading by Edgeworth in Palgrave’s Dictionary,
and by Irving Fisher, in Appendix m to his Mathematical Investigations in the Theory
of Value and Prices, where the reader also finds a selection of testimonials pro and
con, some of which convey prevalent attitudes very well. But the earliest and, in its
brevity, perhaps best of all the arguments for the ‘mathematical’ method — already
coupled with the complaint that its use is ‘anathema’ to economists — is to be found
in Dupuit’s De la Mesure de Vutilite des travaux publics (1844), which has been re-
printed with other works by Dupuit in Jules Dupuit, De Vutilite et de sa mesure (ed.
M. de Bernardi, 1933).

8 The earliest text, so far as I know, is W. Launhardt’s Mathematische Begriindung
der V olkswirthschaftslehre (1885), which taught the doctrines of Jevons and Walras
and in addition some original results of the author, especially on transportation (see
above, ch. 5, sec. 4). H. Cunynghame’s Geometrical Political Economy appeared in
1904; A. Osorio’s Theorie mathematique de Vechange , in 1913; W. Zawadski’s Les
Mathematiques appliquees & Veconomie politique, in 1914; J. Moret’s L’Emploi des
Mathematiaues en economie politique, in 1915. There were others but nothing that

958 IV: FROM 1870 TO 1914 AND LATER

able symptoms, let us notice the indifference or even hostility displayed by
eminent mathematicians 9 and the fact that there were economists who were
well versed in mathematics and yet unfriendly to 'mathematical economics’ —
the outstanding instance being Lexis.

Mention has already been made of some performances in the field of mathe-
matical economics that belong chronologically to the preceding period. But
consideration of the greatest of all, Cournot’s, has been deferred until now
because, quite neglected before, it acquired seminal importance in the period
under survey.

[(b) The Contribution of Cournot .] Antoine Augustin Cournot (1801-77)4°
after a successful career at the E’cole Normale Superieure, was not less success-
ful as an academic teacher and administrator: he was appointed professor of
analysis and mechanics at Lyons, 1834; Rector of the Academy (University) of
Grenoble, 1835; Inspector General of Studies, 1838; Rector of the Academy
(University) of Dijon, 1854. I mention these, otherwise irrelevant facts be-
cause some of his American admirers, greatly mistaking the psychology gener-
ated by the French civil service, have displayed a tendency to make a sort of
martyr of him on account of the failure of the Recherches. Almost certainly

will stand comparison with Bowley’s Mathematical Groundwork (see ch. 5, sec. 1),
which appeared early in 1924.

9 The outstanding instance is J. Bertrand’s attack upon this nascent branch of the
mathematical sciences in the Journal des Savants, September 1883. It was eagerly seized
upon, as an authoritative condemnation, by people who understood neither mathemat-
ics nor, economic theory, and hence received more attention than it deserved. Though
some of Bertrand’s strictures were quite justified, most of them were much less serious
than he. believed them to be, partly because he was inadequately familiar with the
economics involved.

10 The economic work of Cournot has been appraised by many writers, among them
Edgeworth (art. '‘Cournot’ in Palgrave’s Dictionary); and both the man and his work
in economics have been often commemorated in more recent times. See especially:
H. L. Moore, 'The Personality of Antoine Augustin Cournot,’ Quarterly Journal of
Economics, May 1.905; Rene Roy, ‘Cournot et l’ecole mathematique,’ E conometrica,
January 1933, and ‘L’Oeuvre 6conomique d’ Augustin Cournot,’ ibid. April 1939; A. J.
Nichol, ‘Tragedies in the Life of Cournot,’ and I. Fisher, ‘Cournot Forty Years Ago,’
both in Econometrica,. July 1938.

The Recherches. sur les principes mathematiques de la theorie des richesses was pub-
lished in 1838; the English translation by N. T. Bacon (1897) is prefaced by a bio-
graphical note by Irving Fisher and, in its second edition. (1927), also by useful 'Notes
on Cournot’s Mathematics.’ We shall confine ourselves to this work. (The English
trans., Researches into the Mathematical Principles of the Theory of Wealth, will be
referred to hereafter as the Researches.) But Cournot re-entered the field of economic
theory twice, both times without making any noticeable impression: he published
Principes de la theorie des richesses in 1863, and a Revue sommaire des doctrines
economiques in 1877. Neither publication is without interest, but both avoid the use
of mathematics. The mathematics in the Recherches have (some slips notwithstanding,
of which one is serious) the professional touch but are very elementary. Not even de-
terminants occur and, so far as the calculus is concerned, nothing, beyond Taylor’s
theorem.

EQUILIBRIUM ANALYSIS 959

he thought of this failure as a small disagreeable incident in an otherwise
prosperous career. Moreover, he had every reason to congratulate himself on
the reception of what he — again, almost certainly — considered his really im-
portant works. Of these, I mention his Exposition de la theorie des chances et
des probability (1843), an admirable performance that met with deserved rec-
ognition at the time and later; 11 and his three ventures in the type of phi-
losophy or epistemology that grows out of theoretical physics and was to be-
come so popular around 1900: Essai sur les fondements de nos connaissances
(1851); Traite de V enchainement des idees fondamentales dans les sciences et
dam V histone (1861); and Considerations sur la mar che des idees et des
evenements dans les temps modernes (1872).

Cournot was fairly well read in economics. But whatever the nature of the
interest that made him take up Smith or Say or Ricardo, it was certainly a
purely scientific interest that made him take up his pen. He had no practical
object in view and he made haste to assure his readers that * theory ought not
to be confounded with systems [of, I suppose, rules of policy], although in the
infancy of all sciences the instinct of system necessarily attempts to outline
theories/ And he proposed to deal with a number of problems that lent them-
selves particularly well to treatment by "that branch of analysis which com-
prises arbitrary functions, which are merely restricted to satisfying certain
conditions’ (Preface to the Researches). Neither systematic completeness nor
novelty of principle was aimed at or achieved. A few concepts and proposi-
tions that existed already but only in a hazy and confused form were neatly
restated in a more rigorous manner. And all the historical greatness of the
performance is in the surprising success that attended the execution of this
modest program.

There are three introductory chapters, of which the second (on ‘relative’
and ‘absolute’ changes in value) suggests some influence of Ricardo; and the
third presents the algebra of foreign exchanges whose importance (Jevons did
not see this, but Walras did and profited by it) consists in the circumstance
that it implies the algebra of the price mechanism in general: it is this reason
and not any great gain to be derived for the theory of foreign exchange itself
which justifies the advice not to miss it. Chapters 4-9 are the famous ones.
They are the nucleus of Marshall’s Partial Analysis, namely: the demand func-
tion; the theory of monopoly, including also the familiar theorems on taxa-
tion of monopolized commodities; the theory of perfect competition; and,
finally, the treatment of oligopoly and of a particular case of bilateral monopoly,
both of which have become the whipping boys of a larger literature (see below,
sec. 4). Chapter 10, though disfigured by a serious slip, deserves more atten-
tion than it has as yet received. Chapters 11 and 12 have been, to some ex-
tent rightly, voted out of court by the overwhelming majority of critics. But
at least the former is historically interesting because its argument anticipates

11 This is of course a layman’s tribute. But the late Professor E. Czuber of Vienna,
an authority on probability, on whose advice I studied the book forty years ago, also
expressed admiration for it. Czuber, I believe, had not even heard of the Recherches.

960 IV: FROM 1870 TO 1914 AND LATER

the post-Marshallian (Keynesian) idea of supplementing partial analysis by in-
come analysis: Cournot recognized, of course, that 'for a complete and rigor-
ous solution of the problems relative to some parts of the economic system,’
it is ‘indispensable to take the entire system into consideration’ (op. cit. p.
127), which is precisely what Walras was to do. But, exactly like the Keynesian
group of post-Marshallians, Cournot believed that ‘this would surpass the
powers of mathematical analysis and of our practical methods of calculation’
and therefore envisaged instead the possibility of treating such problems in
terms of a small set of aggregates in which Social Income and its variations
were to hold the place of honor. He did not get very far but it seemed worth
while to notice this first explicit reformulation of an old practice which we
shall have to discuss again.

In order to rate at its full value Cournot’s performance in what I have
described as the famous chapters and particularly in Chapter 4 (Of the Law
of Demand) and in Chapter 5 (Of Monopoly) it is necessary to remind our-
selves that at that time ‘literary economists’ experienced the greatest difficulty
in formulating the simple relation that became so familiar as ‘Marshall’s de-
mand curve’; that, if we neglect Verri’s forgotten contribution, Cournot cre-
ated the theory of it; and that his treatment of monopoly was an even more
striking feat of the same type, for nobody had anything useful to say on
monopolistic pricing until Marshall published his masterly version of Cournot’s
theory. If we add Cournot’s theory of the competitive mechanism and of
costs, we shall indeed see the justice in his posthumous rise from almost com-
plete oblivion to his present place in our hall of fame. But this place is in-
scribed to the master of partial analysis, who in addition was the first to show
what mathematics can do for us. I do not think it historically correct to at-
tribute to him more than a vague and nonoperational idea of general equi-
librium.

So far we have been considering the aid that mathematics was beginning to
render, during the period under survey, to what is best described as pure
theory. The specifically econometric program — mathematical theory plus statis-
tical figures — was struggling toward conscious formulation all the time but,
with some important exceptions to be noticed presently, did not quite get
there all the .same. The message of Petty and Davenant was as yet in abey-
ance; and even most of those theorists who also did statistical work did not
contemplate a wedding between the two lines of research. All the more im-
portant is it to cast a glance, on the one hand, at the relation between econo-
mists and the theory of statistics and, on the other hand, at the progress of
work that was econometrics without the name.

As regards the first, let us recall a few facts. Higher statistics grew up from
the theory of probability. Jacques Bernoulli’s theorem, which has every claim,
in a sketch like this, to stand at the beginning, induced the work that cul-
minated in the contributions of A. de Moivre, Laplace, and Gauss. The lat-
ter’s law of error and method of least squares — vigorously propagated in the
social sciences by Quetelet — became the pride and at the same time the curse

EQUILIBRIUM ANALYSIS

961

of applied statistics for more than half a century. 12 All this belongs to the
preceding period, as does the’ work of Poisson and Cournot. The period under
survey (almost) begins with Lexis’ new departure, which at first made but a
little dent in the position of Gauss’s law of error. Later on, however, before
the nineteenth century was out, a boom in statistical theory set in: to put the
reader on the track of its achievements it is sufficient to mention the names
of Fechner, Thiele, Bruns, Pearson, Edgeworth, and Charlier. Though Lexis
and Edgeworth 13 were economists, analytic economics drew very little profit,
during that period, from their contributions to statistical methodology — in-
comparably less than did astronomy or psychology or biology.

As regards the second, an important type of econometric work may be illus-
trated again by Engel’s Law, 1 * which, though published originally in 1857,
did not attract international attention before the period under survey. Even
then neither Engel himself nor anyone else seems to have realized its interest
for economic theory. It states that (in a set of families in which tastes do not
differ significantly and in which all of them face the same prices) percentage
expenditure on food is on the average a decreasing function of income. Also,
we have already met another example of such statistical ‘laws’ that might be
inserted into economic theory — Pareto’s law of the distribution of incomes
by size.

The works of Fisher and of Moore, discussed above, were indeed genuinely
econometric and the latter may be said to have given the decisive impulse that
started the modern torrent of statistical demand curves.

For this there are several bibliographies that will help the interested reader, for ex-
ample, the one by Louise O. Bercaw, Trice Analysis,’ E conometrica, October 1934,

12 The curse because it induced an incidental belief to the effect that deviations in
statistical material from the law of error are simply due to paucity of observations.

13 Let us use this opportunity to notice in passing Edgeworth’s contributions to the
subject, Economic Theory and Probability. I am unable to work up any enthusiasm
for his manner of introducing a priori probabilities into purely theoretical reasoning.
Still, his Metretike or the Method of Measuring Probability and Utility (1887) has not
perhaps received adequate attention. Also see his papers ‘Miscellaneous Applications of
the Calculus of Probabilities,’ Journal of the Royal Statistical Society, 1897 and 1898.
Of major interest was his attempt to use probability considerations for the determina-
tion of the optimum amount of a banker’s cash reserve and then, of course, for index
numbers (see below, ch. 8, sec. 4).

14 Ernst Engel (1821-96), Director of the Prussian Bureau (Amt) of Statistics was
primarily an administrator and as such highly successful. But his active mind set itself
in addition unconventional tasks that led to publications of permanent importance,
such as his monographs on the labor contract (in the journal Arbeiterfreund, 1867);
Die Industrie- der grossen Stadte (1868); Der Kostenwerth des Menschen (1883; this
was Part 1 of Der Werth des Menschen, of which the remaining parts were never pub-
lished); and others. The paper in which he first published his law’ is entitled ‘Die
Produktions- und Consumtionsverhaltnisse des Konigreichs Sachsen’ (Z eitschrift des
statistischen Bureaus des Koniglich Sachsischen Ministeriums des Innern, November
1857). It was republished in 1895 ( Lebenskosten Belgischer Arbeiter-familien) and in
the same year in the Bulletin de Vlnstitut International de Statistique.

962 IV: FROM 1870 TO 1914 AND LATER

which presents the material that appeared 1927-33 and refers to other bibliographies
that go further back. Henry Schultz’s treatise on the Theory and Measurement of
Demand (1938) is, as the reader presumably knows, the standard work on the subject
into which we unfortunately cannot go in this book. ■ Several other pioneer works be-
sides Moore’s had appeared by 1914, however, among them Lehfeldt’s ‘The Elasticity
of Demand for Wheat,’ Economic Journal, June 1914. The latter, so far as I can make
out, was the first modem follower of Gregory King.

Whatever may be thought of the immediate practical value of the many demand
curves that have been obtained, it is certain that trying to meet the problems that arise
in their construction and interpretation is one of the best methods of developing our
analytic 'powers. Precisely for theory, therefore, the subject of statistical demand curves
is of the utmost importance. The history of this type of work belongs, however, al-
most entirely in the present period. The same holds for the work in fields other than
the theory of demand, especially in the fields of statistical production functions, statis-
tical cost, and statistical supply functions. For a preliminary study, readers are referred
to H. Schultz, Statistical Laws of Demand and Supply (1928); J. Dean, Statistical De-
termination of Costs (1936); W. A. Tweddle and Richard Stone, ‘Study of Costs,’
Econometrica, July 1936; the reports of a committee of the Econometric Society pre-
sided over by Mr. E. H. Phelps Brown, ibid. April and July 1936; and Reinhard Hilde-
brandt, Mathematisch-graphische TJntersuchungen fiber die Rentabilitatsverhaltnisse des
Fabrikbetriebs (1925). Perusal of these books and papers will put the reader on the
track of methods, problems, and results that foreshadow important parts of the eco-
nomic theory of the future.

But as we have seen, while little progress was made before 1914 on the lines just
glanced at, investigations into agricultural technology, particularly into plant and soil
nutrition — quite essential to such old topics of economic theory as the law of decreas-
ing returns — and also into cattle feeding had already reached a high degree of develop-
ment during the period under survey. The first of the reports of the Phelps Brown Com-
mittee mentioned above has the particular merit of bringing home to its readers the
theoretical importance of such work and of disabusing them of the idea that the mar-
ginal productivity theory is just an armchair speculation.

But the theory of the period did not lend itself to the insertion of such
results. The majority of theorists, including some of the greatest, were com-
pletely unaware of the possibility of a theory that might eventually achieve
numerical results. Accordingly it never occurred to them to frame their schemata
in a manner that might have made them amenable to statistical treatment:
the very idea would have seemed to them fantastic. However, there were ex-
ceptions. Both Cournot and Jevons saw that possibility looming in the future.
Pareto and Marshall realized its presence. The latter’s address ‘The Old Gen-
eration of Economists and the New’ (1896) is the first pronouncement by a
leading theorist in favor of an econometric program. More important still,
Marshall theorized with a view to making his concepts numerically operative,
and his occasional appeal to statistical figures 15 has more than illustrative im-
portance. Institutionalist critics have hardly done justice to the implications of
this. Individual workers in special fields, as we know (see, e.g., Cheysson’s per-

15 See, e.g., his table of figures about the effects on yield of different amounts of
ploughing and harrowing as reported by the Arkansas Experimental Station ( Principles ,
p. 232).

EQUILIBRIUM ANALYSIS 963

formance or that of the writers on railroad transportation, above, eh. 6, sec. 6)
did however make some progress.

3. The Concept of Equilibrium *

(a) Statics, Dynamics ; the Stationary State, Evolution. We now return to a
subject which we have left in the shape it had received at the hands of J. S.
Mill. In order to make it easier for the reader to follow the exposition of this
section, I shall first restate, with a few explanatory comments, the definitions
that are adopted in this book. The first two are due to Ragnar Frisch.

By static analysis we mean a method of dealing with economic phenomena
that tries to establish relations between elements of the economic system —
prices and quantities of commodities — all of which have the same time sub-
script, that is to say, refer to the same point of time. The ordinary theory of
demand and supply in the market of an individual commodity as taught in
every textbook will illustrate this case: it relates demand, supply, and price
as they are supposed to be at any moment of observation — nothing else is
taken into consideration.

But the elements of the economic system that interact at a given point of
time are evidently the result of preceding configurations; and the way itself in
which they interact is not less evidently influenced by what people expect fu-
ture configurations to be. Thus, to keep to our example, we may conceive of
the situation in our market as determined, or at least influenced, by previous
decisions of producers which cannot be understood from the conditions of the
point of time chosen for observation but only from the conditions that pre-
vailed at the time when those decisions were taken. Hence we are led to
take into account past and (expected) future values of our variables, lags, se-
quences, rates of change, cumulative magnitudes, expectations, and so on.
The methods that aim at doing this constitute economic dynamics.

The relation between static and dynamic theory may be elucidated from two
different if related points of view. On the one hand, static theory involves a
higher level of abstraction: dynamic patterns also abstract from a good many
things; but the static pattern drops additional features of reality, namely, those
enumerated at the end of the preceding paragraph, and is still nearer to a
pure logic of economic quantities than is dynamics. On the other hand, static
theory may be said to constitute a special case of a more general dynamic
theory: this we see from the fact that we may derive static patterns from
dynamic ones by the simple process of equating to zero the 'dynamizing fac-
tors' that may occur in the latter. 1

* [J. A. S. left one early version (typed) and three incomplete 'alternative formula-
tions’ (in manuscript) of this section. Two of the later versions appear here as subsec-
tions a and b. The other two versions have been deposited with the rest of this manu-
script in the Houghton Library at Harvard University.]

1 In our example, the simplest possible set-up consists in making quantity supplied
( S t ) at time t depend, not upon the price at the moment considered, but upon the
price that prevailed some time before. If this 'production lag’ be taken as the unit of

964 iv: FROM 1870 TO 1914 AND LATER

Now, an observer fresh from Mars might excusably think that the human
mind, inspired by experience, would start analysis with the relatively concrete
and then, as more subtle relations reveal themselves, proceed to the relatively
abstract, that is to say, to start from dynamic relations and then proceed to
working out the static ones. But this has not been so in any field of scientific
endeavor whatsoever: 2 always static theory has historically preceded dynamic
theory and the reasons for this seem to be as obvious as they are sound —
static theory is much simpler to work out; its propositions are easier to prove;
and it seems closer to (logical) essentials. The history of economic analysis is
no exception.

By a stationary state, as the term implies, we mean not a method or mental
attitude of the analyst, but a certain state of the object of analysis, namely,
an economic process that goes on at even rates or, more precisely, an economic
process that merely reproduces itself. Nevertheless, when understood in the
sense we are concerned with here, it is nothing but a methodological fiction.
Essentially, it is a simplifying device. But it is also something more. When
we try to visualize how such a process might look and which of the phenomena
of reality might be present in it, we ipso facto discover which of them are
lacking. And we thus acquire a tool of analysis that helps us to locate the
sources of the latter — a service the importance of which it should be (but un-
fortunately is not) superfluous to emphasize . 3 The term evolution may be
used in a wider and in a narrower sense. In the wider sense it comprises all the
phenomena that make an economic process non-stationary. In the narrower
sense it comprises these phenomena minus those that may be described in
terms of continuous variations of rates within an unchanging framework of
institutions, tastes, or technological horizons, and will be included in the con-
cept of growth.

The reader will please observe that, in logical principle at least, 'statics’ and
‘dynamics/ on the one hand, and ‘stationary’ and ‘evolutionary’ states, on the
other hand, are independent of one another. We may describe a stationary
process by a dynamic model: this will be the case whenever we make the
conditions for stationarity of a process in any given period depend upon what
happened to the process in preceding periods. We may also describe an evo-
lutionary process by a succession of static models: this will be the case when-

time and if quantity demanded ( D t ) at time t still depends on the price (p t ) prevail-
ing at the same time t, then we may express this set-up by two equations: D t = f(p t )
and S t = F(p t _ 1 ). From this we get the static set-up by putting the lag equal to zero:

D t = fiPt ) and S t = F (Pt)-

2 In mechanics, for instance, static relations have been worked out first, dynamical
ones later, and it was only Lagrange who conceived of statics as a special case of
dynamics.

3 We neglect here a class of problems in which the concept of a stationary state — as
of a state of ‘secular stagnation’ — acquires another meaning, viz. the meaning of a
state of economic society that is actually in the offing. This is the meaning that has
come into prominence in the line of thought that may be indicated, briefly, by the
sequence: A. Smith-Ricardo-Mill-Keynes-Hansen (see Part v, ch. 5).

EQUILIBRIUM ANALYSIS 965

ever we deal with disturbances of a given state by trying to indicate the static
relations obtaining before a given disturbance impinged upon the system and
after it had had time to work itself out. 4 The latter method of procedure is
known as Comparative Statics. So far as I know, the term has been first used
by F. Oppenheimer 5 in Wert und Kapitalprofit (1916, 2nd ed., 1922).

Finally, the reader should also observe that the conceptual devices sketched
have nothing to do with any similar ones that may be in use in the physical
sciences. The widespread impression to the contrary is due to two facts. First,
though they embody nothing but habits of the human mind that are as gen-
eral as is ordinary logic, they — or similar devices — have, precisely for this rea-
son, been adopted wherever the character of the facts under analysis seemed to
suggest them. Since the physical sciences and mechanics in particular were
so much ahead of economics in matters of technique, these conceptual devices
were consciously defined by physicists before they were by economists so that
the average educated person knows them from mechanics before he makes
their acquaintance in economics, and hence is apt to suspect that they were
illegitimately borrowed from mechanics. Second, such devices being unfa-
miliar in a field where a looser conceptualization prevailed, some economists,
I. Fisher in particular, thought it a good idea to convey their meaning to the
untutored mind by way of the mechanical analogy. But this is all. We know
that actually the concept of economic statics may be traced to zoology rather
than mechanics and, what is much more important, primitive and subcon-
scious use has been made of it from the very beginnings of economic analysis.

Having thus cleared the ground, I shall endeavor to show (1) that those im-
provements in the analytic apparatus of economics were, actually or poten-
tially, slowly worked out during the period under discussion but not quickly
enough — or rigorously enough — for them to take full effect upon analysts’
practice before 1914; and (2) that the latter fact slowed up advance and ex-
plains some of the most serious shortcomings of the actual achievements.

(1) The concept of the stationary state had been, as we know, quite familiar
in the preceding period. But it was used to denote an actual state of the econ-
omy to be expected at some future time rather than as a methodological fiction :
in the latter capacity it had been used to the full only by Marx, who called it

4 For instance, this is what the old quantity theory of money did, so far as it in-
volved the proposition that an increase in the quantity of money will, ceteris paribus ,
raise price level proportionately. Obviously this assumes that ‘transitional’ phenomena
may be neglected and hence refers to an ‘ultimate outcome’ of the processes started by
this disturbance of the previous state of the economic organism. The example shows
well that this procedure must be highly questionable.

5 It should be pointed out explicitly that, as defined, dynamic theory in itself has
nothing to do with historical analysis: its time subscripts do not refer to historical time
— the simple model we used as an example tells us nothing about whether that de-
mand-supply configuration obtained in the times of President Washington or of Presi-
dent Roosevelt; and its sequences are theoretical and not historical or, as we may also
put it, it uses theoretical and not historical datings.

g66 iv: from 1870 to 1914 and later

simple reproduction. However, independently of him it began to be used in
the period under discussion for the purpose of singling out, for preliminary
analysis, a set of particularly simple problems: as such it was recognized, for
example, by Marshall, 6 who spoke of the ‘famous fiction of the “Stationary
state” ’ — though, as a methodological fiction the stationary state was not at
all ‘famous’ in 1890— used it repeatedly, and was, so far as I know, the first
to point out that we may increase its usefulness for analysis by defining it
differently (more or less strictly) for different purposes. Also he gave the lead;
followed by many and especially by Cassel, 7 for an extension of the idea to
the case of balanced progress, that is, to the case of a society in which popu-
lation and wealth grow at about the same rate and in which ‘methods of pro-
duction and the conditions of trade change but little; and, above all, where
the character of man himself is a constant quantity’ — a conception which has
acquired additional interest in our own day owing to its bearing upon the
problem of full employment in the models not only of a stagnating but also
of an expanding economy. 8 This extension of the concept of stationarity should
have separated out neatly the phenomena of evolution in the narrow sense of
the term, and so it did. But with all the leaders of the period this meant
setting these phenomena aside rather than constructing a comprehensive theory
of them.

Neither Walras, who used the phrase point de vue statique, nor Marshall,
who used the phrase statical method , failed to distinguish static theory from
the theory of the stationary state. But most writers confused them, witness
the growing popularity of the phrase ‘static state,’ 9 which is the hallmark of
this confusion. Nevertheless, though more clearly visualized than rigorously
defined, the system of economic statics did emerge during the period and in
fact constitutes its great achievement. But the nature of economic dynamics
was not even clearly visualized — -some identified it with a historical theory of
change or else with a theory that allows for trends; others with a theory of
general interdependence as against partial analysis of sectional phenomena;
still others with a theory of a modern as against the tradition-bound economy
of the Middle Ages; and a few simply with the theory of small variations of

6 See Principles, pp. 439 et seq. The crowning achievement in this line of analysis
is, of course, Professor Pigou’s The Economics of Stationary States (1935)- The first
methodologist to analyze this tool was, I think, J. N. Keynes, Scope and Method of
Political Economy.

7 Cf. Theory of Social Economy, ch. 1, J 6. Marshall’s pointer is on p. 441 of the
Principles.

8 Because of this, it will be useful to point to three modern pieces of work that re-
flect the distance we have traveled since: E. Lundberg, Studies in the Theory of Eco-
nomic Expansion (1937); R. F. Harrod, ‘An Essay in Dynamic Theory,’ Economic
Journal, March 1939; E. Domar, ‘Capital Expansion, Rate of Growth, and Employ-
ment,’ E conometrica, April 1946. .

9 With J. B. Clark, statics was simply the model of a stationary society; dynamics
was the model of evolutionary change (see especially Essentials of Economic Theory,
1907). Cassel (op. cit.) used static and stationary interchangeably.

EQUILIBRIUM ANALYSIS

967

economic quantities . 10 Many, among them Bohm-Bawerk, would not hear of
statics and dynamics at all — foi them theie was just one type of theory, which
no doubt admitted of varying degrees of abstraction but not of logically dis-
tinct 'methods.’ And there were those in whose hands the whole discussion
degenerated into a quarrel about words. All this goes to show the importance,
even for purely practical purposes, of logically rigorous definitions: for had
the nature of the statics of the day been subjected to rigorous analysis, the
problems of dynamics would have emerged almost of themselves. But all was
not mere confusion. We also find suggestions that point toward the dynamics
of our time. They were not more than suggestions, sometimes not more than
obiter dicta. I can only refer to the (relatively) clearest and most important of
them, which are all due to Pantaleoni . 11

(2) Precisely because even the most advanced thinkers of that time had no
explicit dynamic schema or method to help them, they failed to realize the
severe limitations of their static schema or method. For these reveal them-
selves only in the light of dynamic considerations. In consequence, they in-
cessantly stepped out of their statics without having a right to do so and
without being aware of it. The situation was made worse by the prevalent
confusion between static theory and the theory of a stationary — or quasi-sta-
tionary — state.

[This version breaks off at this point, obviously unfinished, with three lines of short-
hand notes to indicate how the argument was to be carried on.]

(b) Determinateness, Equilibrium, and Stability. From the workshop of
Walras the static theory of the economic universe emerged in the form of a
large number of quantitative relations (equations) between economic ele-
ments or variables (prices and quantities of consumable and productive goods

10 This is, I think, what Walras meant by phase dynamique de trouble continuel
de Vequilibre par des changements dans ces donnees (Elements, p. 302). Certainly
it is what Barone meant in his important paper 'Sul trattamento di quistioni dinamiche,’
Giornale degli Economisti, November 1894.

11 In this connection, two papers of his are of fundamental importance: 'Caratteri
delle posizioni iniziali e influenza che esercitano sulle terminali,’ Giornale degli Econo-
misti, October 1901; and 'Di alcuni fenomeni di dinamica economica,' an address be-
fore the Italian Association for the Advancement of Science, September 1909. Both are
republished in Erotemi di economic, vol. 11, 1925. The main points are these: (1)
Pantaleoni raised the question of the relation of an observed configuration of elements
of an economic system to temporally (not only logically) anterior initial conditions; so
soon as one raises this question one has raised the fundamental problem of dynamics.
(2) Though Pantaleoni’s definition of dynamics is not quite satisfactory ( Erotemi ,
p. 79), he had the decisive idea and in consequence realized that economic statics is
nothing but a caso particolare of economic dynamics (ibid. p. 76). (3) He realized that
there are two types (generi) of dynamical patterns: one that issues in a position of
equilibrium and another that does not but presents fluctuations that may go on in-
definitely (ibid. p. 77). H. L. Moore was much impressed by these ideas, the importance
of which for general theory he was perhaps the first to realize. Nevertheless, his method
was substantially one of comparative statics.

968 IV: FROM 1870 TO 1914 AND LATER

or services) that were conceived as simultaneously determining one another.
As soon as this great feat had been accomplished — as soon as this Magna
Charta of exact economics had been written, which we shall presently study
in some detail — a type of research began to impose itself that had been un-
known in pre-Walrasian economics. Pure theory there had been from the first,
or almost. But its technique had been a simple affair. The Walrasian system
of simultaneous equations, however, brought in a host of new problems of a
specifically logical or mathematical nature that are much more delicate and go
much deeper than Walras or anyone else had ever realized. Mainly they turn
upon determinateness, equilibrium, and stability . 12 They are much too difficult
and especially too technical for us. But a few fundamental points about them
must be noticed if we are to understand the nature of that period’s achieve-
ment and the way in which modern work links up with it.

For this purpose, let us consider a distinction that was very characteristic
of the analytic methods of that period, as it presents itself both in the critical
and in the constructive part of Bohm-Bawerk’s work. He was out to ‘explain’
or ‘understand’ the phenomenon of interest. This task seemed to him to in-
volve two different things. First, it seemed obviously necessary to unearth the
‘cause’ or ‘source’ or ‘nature’ of interest. Second, after this had been done
and the result had been critically safeguarded against other ‘theories,’ there
arose the problem of what determines the rate of interest. Mathematical econo-
mists, Pareto especially, poured contempt upon this methodology. But it may
be salvaged, to some extent, by reformulating it like this: since the economic
system cannot be treated as a set of undefined things, we must in fact first
define what its elements (including interest) are to mean before we can for-
mulate the exact problem of their determination in terms of certain properties
of the functions (relations) which this meaning involves. Then follows logically
the proof that the problem can in fact be solved (proof of the existence of a
solution) and, finally, the investigation into the ‘laws’ that the solution re-
veals (the properties of the solution). When we have done all this, we say
that we have ‘explained’ or ‘understood’ whatever the element or elements we
wished to ‘explain’ or ‘understand.’

More generally, and at the same time more simply, we say that we have de-
termined a set of quantities (variables) if we can indicate relations to which

12 The non-mathematical reader may, however, acquire an idea of this type of prob-
lem from Professor Hicks’s Value and Capital ; and the mathematical reader from the
Mathematical Appendix to Value and Capital, and from the papers by Professor A.
Wald, ‘Uber einige Gleichungssysteme der mathematischen Okonomie,’ Z eitschrift fiir
Nationalokonomie, December 1936 (summing up the results of two earlier and more
technical papers); Professor P. A. Samuelson, 'The Stability of Equilibrium: Compara-
tive Statics and Dynamics,’ Econometrica, April 1941, and ‘The Stability of Equi-
librium: Linear and Nonlinear Systems,’ ibid. January 1942; and Professor J. von Neu-
mann, 'A Model of General Economic Equilibrium,’ Review of Economic Studies,
1945-6 (trans. of an earlier German paper). These complement one another nicely.
Also see R. Frisch, ‘On the Notion of Equilibrium and Disequilibrium,’ Review of
Economic Studies, February 1936.

EQUILIBRIUM ANALYSIS

969

they must conform and which will restrict the possible range of their values.
If the relations determine just a single value or sequence of values, we speak of
unique determination — a case that is, of course, particularly satisfactory. The
relations may yield, however, more than one possible value or sequence of
values — which is less satisfactory but still better than nothing. In particular,
the relations may determine only a range . 13 In the light of what has been
said in the preceding paragraph, we realize that ‘determining’ a set of quanti-
ties in the sense in which we use this phrase is indeed not all that is involved
in the task of ‘explaining’ a phenomenon. But we also realize that it is an in-
dispensable and important part of — or, more precisely, an indispensable step
in — this task. And this answers the question, so often asked with a sneer,
why theorists should bother so much about ‘mere determinateness.’

If the relations which are derived from our survey of the ‘meaning’ of a
phenomenon are such as to determine a set of values of the variables that will
display no tendency to vary under the sole influence of the facts included in
those relations per se, we speak of equilibrium: we say that those relations
define equilibrium conditions or an equilibrium position of the system and
that there exists a set of values of the variables that satisfies equilibrium con-
ditions. This need not be the case, of course — there need not be a set of
values of variables that will satisfy a given set of relations, and there may exist
several such sets or an infinity of them. Multiple equilibria are not neces-
sarily useless but, from the standpoint of any exact science, the existence of a
‘uniquely determined equilibrium (set of values)’ is, of course, of the utmost
importance, even if proof has to be purchased at the price of very restrictive
assumptions; without any possibility of proving the existence of uniquely de-
termined equilibrium— or at all events, of a small number of possible equilibria
— at however high a level of abstraction, a field of phenomena is really a chaos
that is not under analytic control. Again, we derive a simple and convincing
answer to the layman’s question concerning the good we expect from all our
worry about ‘determined equilibrium’ — and to the more specific question why
this concept played such a role in the thought of Walras and Marshall . 14

13 Illustrative examples: suppose then we have to do with people who, if they ex-
perience an access of income of one dollar, invariably borrow another and promptly
spend both (in Keynesian terms this means a marginal propensity to consume equal to
2); if this goes on, the monetary values of the system will be inflated to infinity, but
the process is perfectly determined: The reader should bear this in mind because of
the frequent confusion we find of determinacy and equilibrium. Again, the reader can
easily satisfy himself that a monopolist may make the same maximum amount of
profits at two or more different prices of his product. Finally, price is in general in-
determinate in cases of bilateral monopoly. But it is indeterminate within limits which
are perfectly determinate themselves.

14 Its role in the thought of the Austrians, in Wieser’s particularly, was actually just
as fundamental. If it does not show explicitly, this was owing exclusively to their tech-
nical disabilities. Historians who shared these disabilities spoke of the ‘equilibrists’ (sic)
as a sort of school or sect. In fact, however, the writers thus labeled only brought out
more clearly what all the theorists of the period — actually also of the preceding period
— -groped for.

97 ° IV: FROM 1870 TO 1914 AND LATER

The relations from which we start, according to whether they link elements
that carry the same time subscript or different ones, may define a static or
a dynamic equilibrium. The leaders of that period used „only the former con-
cept — at least in their mathematical set-ups — and do not seem to have had
any precise ideas about the problems that center in the latter. We shall,
therefore, confine ourselves to static equilibrium except so far as description
and criticism of their analysis forces dynamical aspects upon us. It should be
emphasized, as it has been in the first part of this section with respect to the
terms 'static' and 'dynamic' themselves, that the concept of equilibrium,
whether static or dynamic, has nothing to do with any borrowing, legitimate
or not, from those physical sciences in which analogous concepts occur. They
are logical categories and as such as general as is logic itself. They occur both
in the physical and the social sciences because it is the same human mind that
works both.

Whether static or dynamic, equilibrium may be stable, neutral, or unstable.
Before we go into this matter it will be well to comment briefly — and very
superficially — on the meaning of a system of simultaneous equations and on
the conception of simultaneous determination of a set of variables. We start
again from the first two of the four steps into which we have split exact ana-
lytic procedure and which are, for the first time in the history of economics,
clearly discernible in Walras' work, namely, the enquiry into the nature of the
phenomena we are to study and the discovery of the relations which, guided
by our knowledge of their nature, we conceive to subsist between them. When
we have succeeded in expressing these relations by equations, we are ready to
take the third step: we put them together into a system (a theoretical 'model')
and ask whether there is a unique set of values of the elements that appear
in this system as variables (or 'unknowns’) that will satisfy all those equations
which must all hold simultaneously — hence the phrase simultaneous equa-
tions. So far, it is hoped, everything is plain sailing. But the answer to this
question — in most cases negative of course — is extremely difficult to provide.
Plain common sense can indeed indicate certain conditions that must be ful-
filled if such a unique set of values — a 'solution' — is to exist. Thus, the equa-
tions must be genuine equations and not mere identities (such as x is x); is
they must be independent in the sense that none must be implied- in one or
more or all of the others; 16 they must be sufficient in number; and, of course,

15 But identities that express the fact that x and y, which occur in the rest of the
system, are really identical (x = y) permit suppression of either x or y and thus may
contribute toward determinateness just as much as does an equation. Confusion be-
tween propositions that are identities and propositions that may determine equilibrium
values is a frequent source of error and controversy. See J. Marschak, 'Identity and Sta
bility in Economics: A Survey,’ Econometrica, January 1942.

16 Independence must, however, be distinguished from autonomy. In the argument
above nothing is required but that no equation should follow from the others mathe-
matically. It does not matter here whether or not, for economic reasons, one or more
equations could not hold unless others do, though this matters greatly in other re-
spects. The concept of autonomy — which is due to Frisch — is far beyond our range.

EQUILIBRIUM ANALYSIS 97 1

they must not contradict one another. 17 But these conditions are adequate and
easily verifiable only in a particularly simple class of cases to which the Wal-
rasian system does not belong. Very advanced argument involving some com-
plicated tools of modern mathematics is needed to cope with the problem of
which we shall get but a glimpse in section 7. Walras and Marshall were far
from solving it — for one thing because some of the mathematical tools re-
quired did not exist in their creative time — and cannot even have had a clear
conception of its nature and difficulty. But, as we shall also see, Walras did
more than 'counting equations/ 18

[This version too is unfinished. A single paragraph from the early version (see Ap-
pendix) follows here, because it very briefly defines stable, neutral, and unstable equi-
librium. These concepts will be touched upon again in later sections of this chapter.]

Thus we may consider stationary and evolutionary processes and we may analyze
both of them by either a static or dynamic method. We shall now introduce the con-
cept of equilibrium. The simplest and for most purposes the most important case is
that of static equilibrium. Suppose we have settled the question, what elements in an
economic universe we wish to determine and what are the data and the relations by
which to determine them. Then the question arises whether these relations that are
supposed to hold simultaneously (simultaneous equations) are just sufficient to deter-
mine sets of values for those elements (variables) that will satisfy the relations. There
may be no such set, one such set, or more than one such set, and it does not follow
that our system is valueless if there exist several. But the most favorable case and the
one every theorist prays for is of course uniqueness of the set. Such a set or such sets
we call equilibrium sets and we say that the system is in equilibrium if its variables
take on the values thus determined. It goes without saying that these values are very
much more useful for us if they are stable than if they are neutral or unstable. A stable
equilibrium value is an equilibrium value that, if changed by a small amount, calls
into action forces that will tend to reproduce the old value; neutral equilibrium is an
equilibrium value that does not know any such forces; an unstable equilibrium is an
equilibrium value, change in which calls forth forces which tend to move the system
farther and farther away from equilibrium values. A ball that rests at the bottom of a
bowl illustrates the first case; a ball that rests on a billiard table, the second; and a
ball that is perched on the top of an inverted bowl, the third case. Naturally, the condi-
tions which insure stability and the absence of which produces instability are of par-
ticular interest in order to understand the logic of the economic system. In this sense
it has been said that it is the stability conditions that yield our theorems.

17 The far-reaching importance of the latter point (which also shows that such
purely logical questions may bear directly upon hotly debated practical issues) should
be noticed in passing. If a system or model that correctly expresses fundamental fea-
tures of the capitalist society contains contradictory equations, this would be proof of
inherent hitches in the capitalist system — proof of real, instead of imaginary, 'contra-
dictions of capitalism.’

18 See Marshall, Principles, Mathematical Appendix, Note xxi in fine.

IV: FROM 1870 TO 1914 AND LATER

4. The Competitive Hypothesis and the Theory of Monopoly *

It has been stated above that the economists of the period under survey
substantially retained the habit of their 'classic’ predecessors, which was to
consider 'competition’ as the normal case from which to build up their general
analysis; 1 and that like those predecessors they overrated the range of appli-
cation of such an analysis. In fact, instances abound of writers who considered
competition as the normal case either in the sense that it covers most of
actual business practice (Walras, the Austrians); or in the sense that devia-
tions from the competitive schema, though frequent, may be taken care of
by occasional recognition (Marshall, Wicksell); 2 or in the sense that competi-
tion 'ought’ to be the normal case and 'should’ and could be enforced by ap-
propriate policies (Clark); or, finally, in the sense that the actual system,
however noncompetitive in parts, nevertheless works out, on the whole, as if
it were competitive (Cassel). Moreover, while not all of them were uncritical
eulogists of competition (see below sec. 5), nearly all of them were apt to
yield to the specific bias of the economic theorist that has nothing to do with
political preference, the bias for easily manageable patterns. And it stands to
reason that the theorist’s generalized description of economic behavior is
greatly simplified by the assumption that the prices of all products and 'fac-
tors’ cannot be perceptibly influenced by the individual household and the
individual firm, and hence may be treated as given (as parameters) within the
theory of their behavior. 3 These prices will then be determined, in general,
by the mass effect of the actions of all households and all firms in 'markets,’
the mechanisms of which are relatively easy to describe so long as the house-
holds and firms have no choice but to adapt the quantities of commodities
and services they wish to buy or to sell to the prices that rule. We may call
this the Principle of Excluded Strategy and accordingly say that the bulk of
the period’s pure theory was a pure theory of static equilibrium that excluded

* [This section was found in four parts, three in typescript (each with pages num-
bered independently) and one in manuscript with the pages unnumbered. The parts
seemed to follow consecutively except the last, which was very short and apparently
written quite early. The part in manuscript was the treatment of oligopoly, obviously
not completed. Still another shorter treatment entitled ‘Monopoly, Oligopoly, Bilateral
Monopoly,’ probably a preliminary study (not typed), has been deposited with the rest
of the manuscript in the Houghton Library at Harvard.]

1 But compare also what has been said on Mill’s qualifications and warnings, which
have not always been given due weight. Nor should we forget that Cournot built his
analysis from the monopoly case.

2 But Pareto denied emphatically that competition actually 'rules’ in our society; see
Corns, vol. 11, p. 130.

3 It is interesting to note that in 1939 Professor Hicks was just as convinced that
successful theoretical analysis is substantially confined to the competitive case as J. S.
Mill had been in 1848: abandonment of the competitive hypothesis threatens ‘wreckage
... of the greater part of economic theory’ (Value and Capital, 1939, p. 84)-

EQUILIBRIUM ANALYSIS

strategy. The all-round rise of the level of scientific rigor eventually produced
if not the term yet the substance of what we now call pure or perfect com-
petition. 4

(a) The Competitive Hypothesis. This notion had been made explicit by
Cournot at the end of Chapter 7 and the beginning of Chapter 8 of his
Researches: after having started with the case of straight monopoly (discussed
below) he first introduced another seller and then additional ones until, by
letting their number increase indefinitely, he finally arrived at the case of
‘illimited’ (unlimited) competition, where the quantity produced by any one
producer is too small to affect price perceptibly or to admit of price strategy. 5
Jevons added his Law of Indifference, which defines the concept of the per-
fect market in which there cannot exist, at any moment, more than one price
for each homogeneous commodity. These two features — excluded price strategy
and law of indifference — express, so far as I can see, what Walras meant by
libre concurrence. Pareto’s definition ( Cours 1, p. 20) comes to the same
thing. This does not however dispose of all the logical difficulties that lurk
behind the concept of a competitive market, 6 and some of these must now
be noticed briefly.

The mechanism of pure competition is supposed to function through every-
body’s wish to maximize his net advantage (satisfaction or monetary gain) by
means of attempts at optimal adaptation of the quantities to be bought and
sold. But exclude 'strategy’ as much as you please, there still remains the fact
that this adaptation will produce results that differ according to the range of
knowledge, promptness of decision, and ‘rationality’ of actors, and also ac-
cording to the expectations they entertain about the future course of prices,
not to mention the further fact that their action is subject to additional re-
strictions that proceed from the situations they have created for themselves
by their past decisions. As we shall see below, Walras was very much alive to
these difficulties and in places (e.g., in the last paragraph of the 35th legon of
the Elements ) he clearly saw the necessity looming in the future of construct-
ing dynamic schemata to take account of them. For himself, however, he saw

4 The term pure competition, which will be used in this book, was introduced by
Professor E. H. Chamberlin in his Theory of Monopolistic Competition (the preface
of the first edition is dated 1932, but the substance of the argument, in all essentials, is
contained in an unpublished Ph.D. thesis presented in 1927). See below. Part v, ch. 2.

5 The advantage of this approach is that it emphasizes the fact .that pure competi-
tion results from certain. conditions: this is much better than to posit it as an institu-
tional datum. In addition Cournot emphasized (op. cit. p. 90) that the quantity pro-
duced by each producer must be ‘inappreciable not only with reference to the total
production, D = F (p), but also with reference to the derivative F *{p) so that the par-
tial production [of every single producer] could be subtracted from D without any
appreciable variation resulting in the price of the commodity.’

6 The first author to display logical discomfort at the handling of the concept by
others was H. L. Moore (‘Paradoxes of Competition,’ Quarterly Journal of Economics ,
February 1906, and Synthetic Economics, pp. 11-17) but his own treatment of it is
not more satisfactory.

974 IV: FROM 1870 TO 1914 AND LATER

not less clearly that, absorbed in the pioneer task of working out the essentials
of the mathematical theory of the economic process, he had no choice but to
simplify heroically ( Elements , p. 479). Thus, he postulated (at first) that the
quantities of productive services that enter into the unit of every product
(coefficients of production) are constant technological data; that there is no
such thing as fixed cost; that all the firms in an industry produce the same
kind of product, by the same method, in equal quantities; that the productive
process takes no time; that problems of location may be neglected. Under
such circumstances it was but natural that he used or abused the prerogatives
of the pioneer still further by narrowing down all the possible types of re-
action to a single standard type. 7 For us the question arises: how much of this
did he mean to include in' his ‘free competition’? It has been held (by Profes-
sor Knight among others) that Walras, and the theorists of that epoch gener-
ally, intended to make ‘omniscience’ and ideally rational and prompt reac-
tion attributes of pure competition; deviations from this pattern would then
find room in the spacious folds of an entity called ‘friction,’ which would thus
emerge as a helpmate of pure competition with the assignment to pick up
whatever the latter proved incapable of carrying. It is submitted, however,
that there is no point in overloading pure competition like this, and that it
is quite possible to separate, in interpreting the writers of that epoch, their
concept of pure competition as defined in the preceding paragraph from any
further assumptions that they may have made, in general or for particular
purposes, about knowledge, promptness, and rationality of action and all the
other things mentioned above, even in those instances in which they did not
carry out this separation themselves. 8

Marshall, however, did not take this line. Just as Walras, more than any
other of the leaders, was bent on scraping off everything he did not consider
essential to his theoretical schema, so Marshall, following the English tradi-
tion, was bent on salvaging every bit of real life he could possibly leave in.
As regards the case in hand, we find that he did not attempt to beat out the
logic of competition to its thinnest leaf. On the first pages of his Principles
he emphasized economic freedom rather than competition and refrained from
defining the latter rigorously. Moreover,- throughout the Principles, he paid
much attention to the problems of individual firms — the manner in -which they
conquer their Special Markets within which to maneuver, the manner in

7 He did, however, here and there, make' some use of a none too precisely defined
Law of Great Numbers. In this he followed a suggestion of Cournot’s.

8 An example that will illustrate the importance of this point is afforded by the state-
ment that, according to pre-Keynesian theory, there could not be involuntary unem-
ployment in conditions of perfect competition, except unemployment of the ‘frictional’
type (Keynes, General Theory, p. 16). The implied criticism is entirely disposed of so
soon as it is remembered that ‘full employment’ is a property not of pure competition
per se but of perfect equilibrium in pure competition. But if pure competition implied
ideally prompt adaptation, then both full employment and perfect equilibrium in gen-
eral would practically always have to be present — ‘friction’ permitting — and it could in
fact be argued that such a theory does not fit reality.

equilibrium analysis 975

which they lose them again, and certain consequences that follow therefrom.
It is submitted that there is more in this than mere dislike of naked abstrac-
tions. There is awareness of that set of problems that later on developed into
the theory of monopolistic (Chamberlin) or imperfect (Robinson) competi-
tion, whose patron saint Marshall may indeed be said to have been. But there
is also a subtle difference in attitude toward these problems between him and
the modern exponents of this theory that is not easy to convey.

If we are of the opinion, on the one hand, that from all the infinite variety
of market patterns pure or perfect monopoly and pure or perfect competition
stand out by virtue of certain properties — of which the most important is that
both cases lend themselves to treatment by means of relatively simple and
(in general) uniquely determined rational schemata — and, on the other hand,
that the large majority of cases that occur in practice are nothing but mixtures
and hybrids of these two, then it seems natural to accept pure monopoly and
pure competition as the two genuine or fundamental patterns and to proceed
by investigating how their hybrids work out. This renders the attitude of the
theorists of monopolistic or imperfect competition. But instead of consider-
ing the hybrid cases as deviations from, or adulterations of, the fundamental
ones we may also look upon the hybrids as fundamental and on pure monopoly
and pure competition as limiting cases in which 1:he content of actual busi-
ness behavior has been refined away. This is much more like the line that
Marshall took. Should the reader feel that I am laboring to convey a distinc-
tion without a difference, he is requested to ask himself whether the defini-
tion of pure competition that has been given above really fits what we mean
when talking about competitive business. Is it not a fact that what we mean
is the scheme of motives, decisions, and actions imposed upon a business firm
by the necessity of doing things better or at any rate more successfully than
the fellow next door; that it is this situation to which we trace the technolog-
ical and commercial efficiency of ‘competitive 7 business; and that this pattern
of behavior would be entirely absent both in the cases of pure monopoly and
pure competition, which therefore seem to have more claim to being called
degenerate than to being called fundamental cases? 6 This, if I am not mis-
taken, is beginning to be widely felt today — hence the search for a ‘workable 7
concept of competition (J. M. Clark) that might well start with an analysis
of Marshall's argument. The latter was, however, singularly unfortunate in
this part of his teaching. Neither theorists nor institutionalist enemies of
theory saw the hints that they could have developed.

(b) The Theory of Monopoly. We have already surveyed the work and
views of that period’s economists concerning the practical problems of monop-
oly, oligopoly, and monopolistic practice that were thrust upon their attention
owing to the developments in the sphere of largest-scale business. Now we
must turn to the theoretical tools they provided for use in this field. Several

9 The moral of this story is, of course, that dissecting a phenomenon into logical
components and working out the pure logic of each may cause us to lose the phenom-
enon in the attempt to understand it: the essence of a chemical compound may be
in the compound and not in any or all of its elements.

976 IV: FROfyl 1870 TO 1914 AND LATER

excellent critical histories permit us to confine ourselves to the most general
outlines. 10 The chief performance was Cournot’s and the period’s work may
be described as a series of successful attempts to develop his statics of straight
monopoly and as another series of much less successful attempts to develop
and to correct his theories of oligopoly and bilateral monopoly. Second honors
are divided between Marshall and Edgeworth. 11

In order to appreciate Cournot’s performance it is necessary to recall the fact
that, as we have noticed not without surprise, practically no theory of monop-
oly had existed before him, in spite of all the talk about it, and that even his
starting point, the 'Marshallian’ demand function ( loi du debit) had not been
properly defined before 1838. Let us first observe that the demand function,
D = F(p), hence also the total revenue function, pF(p), and the marginal rev-
enue function, F(p ) -j- pF'(p) ( Researches , p. 53), are objectively given to the
monopolist who, on the one hand, can exploit a given demand schedule at his
pleasure and, on the other hand, is not supposed to be able to alter it to his
advantage, for example, by advertising or by teaching his customers new uses
of his product. For the first time, we are thus presented, by implication, with a
definition of monopoly but with one that excludes the large majority of all
the ' single sellers’ we can observe in real life . 12 The given revenue functions
Cournot then proceeded to* confront with total and marginal cost curves 13 in

10 See, e.g., Gaston Leduc, Theorie des prix de monopole (1927); the first and third
chapters in E. H. Chamberlin’s Monopolistic Competition (5th ed., 1946), where the
reader also finds an almost complete bibliography; F. Zeuthen, Problems of Monopoly
and Economic Warfare (1930); H. von Stackelberg, Marktform und Gleichgewicht
(1934, ch. 5); J. R. Hicks, 'The Theory of Monopoly,’ E conometrica, January 1935.

11 Walras’ contribution is insignificant. Along with Cournot we might, however,
have mentioned Dupuit and Ellet. Some of Edgeworth’s contributions are in the
Mathematical Psychics (1881), the rest of them, especially a translation of his im-
portant 'Teoria pura del monopolio’ ( Giomale degli Economist i, July 1897) are in his
Papers Relating to Political Economy. Also see A. C. Pigou, Wealth and Welfare
(1912) and Economics of Welfare (4th ed., 1932, Part n, ch. 15); and despite its date,
Bowley’s Mathematical Groundwork (1924).

12 Nevertheless, most economists accept this highly restrictive definition to this day
and yet persist in applying the term monopoly and the Cournot theory of it to all
cases of single sellers. The logical implications of the Cournot theory have been
analyzed by P. M. Sweezy, 'On the Definition of Monopoly,’ Quarterly Journal of
Economics, February 1937. This is Chamberlin’s Isolated Monopoly; his pure monopoly
is . . . [note unfinished],

13 These cost curves he did not consider, as he did the revenue functions, to be
given independently of the monopolist’s action: he noticed especially that a monopolist
when in control of several plants would operate only those that could be operated most
economically, whereas competing firms would tend to operate all plants so long as
any profit could be made from operating them (p. 87). Also it should be noticed that
he discussed the case of decreasing marginal cost — thus, also by implication, presenting
the correct meaning of 'decreasing cost’ that Edgeworth was to elaborate about sixty
years later. Finally, he emphasized the fact that constant elements in total cost do
not influence price, and that in particular no account is taken of cost if the whole
of it is constant and hence fnarginal cost equals zero.

EQUILIBRIUM ANALYSIS

977

order to derive the theorem, now so familiar to every beginner, that (in-
stantaneous) gain will be maximized if the monopolist sets a price for which
marginal revenue equals marginal cost (op. cit. p. 57). This theorem is, of
course, strictly static and belongs to the realm of partial analysis (see below,
sec. 6). Also it relies exclusively on the maximum criteria afforded by the cal-
culus, that is, the existence and the uniqueness of the maximum are proved,
and the manner in which the monopolist's optimum price is affected by a
change in cost is determined, for small displacements only. 14 But in spite of
these and other criticisms which cannot be presented here, 15 this was a splendid
performance, for which, as for the treatment of taxes on commodities pro-
duced under a monopoly (ch. 6), we ought to entertain the highest admiration.

In Chapter 13 of Book v, Marshall reproduced this analysis by means of a
technique of his own that not everyone will consider superior to Cournot’s. 16
But he added something that was truly his own. Cournot had indeed realized
that a monopolist’s cost structure may be more favorable than that of a com-
petitive industry. But it was left for Marshall to point out the full importance
of this possibility and to present it in the full regalia of his practical wisdom:
his argument actually amounts to denying the existence of a presumption that
the price usually set by a modern industrial monopoly is higher and the quan-
tity produced by it is lower than would be the case if the same commodity
were produced ‘under free competition.’ Again, Cournot had known, of course,
but had failed to emphasize that monopoly price is determinate in a sense
that differs from the sense in which competitive price is: under pure competi-

14 The criteria that the calculus offers for finding out whether or not a continuous
function of one variable displays a unique maximum are that the first derivative of
the function should vanish and that its second derivative should be negative; and
these criteria answer the question only for a small interval and say nothing about
whether or not the same function displays other maxima beyond that interval. How-
ever, Cournot framed his assumptions about the shape of the total revenue and total
cost functions in such a way as to make sure of a single maximum. But his proof
that a small increase in marginal cost will increase . the monopolist’s optimum price
though, according to the form of the demand curve, sometimes much more and
sometimes much less than the amount of the increase, is seriously restricted by the
assumption that the increments in cost and price are so small that their squares (and
higher powers) and products can be neglected. In § 32 of ch. 5 Cournot attempted
to free himself from this restriction by the device of splitting up the two increments,
if they are not small, into small elements and of passing ftom the old cost figure to
the new one by these small steps, to each of which his proof is supposed to apply.
It is perhaps clear why this procedure is not admissible.

15 In particular, Cournot’s proof on pp., 87-9 of the proposition that the monopolist’s
optimum price is always higher than the price undeT pure competition even though,
for equal total quantities produced, ‘the costs will always be greater for competing
producers than they would be under a monopoly’ is open to objection.

16 Marshall reasoned in terms of monopolist’s total net revenue rather than in
terms of the marginal condition (Monopoly Revenue Schedule, Principles, p. 539).
This is why the Marginal Revenue Curve that was reasserted by Chamberlin and
Robinson struck economists around 1930 as something of a novelty.

97 § IV: FROM 1870 TO I914 AND LATER

tion, firms have to accept the ruling price; monopolists are under no such
compulsion and may well set prices that are lower than the instantaneous opti-
mum, either for strategic reasons in their own profit interest or for other rea-
sons in the interest of somebody else, especially of their customers. Marshall
realized what this means. An outlook was thus opened up on a wide variety
of important phenomena and problems 17 that was soon to be lost again in
ideological mists . 18 But, like Cournot, he failed to give adequate attention to
one very important aspect of monopolistic strategy. Price Discrimination. The
theory of it had been developed in a rudimentary form by Dupuit, Walras , 19
and Edgeworth. Pigou’s presentation of this range of problems in Wealth and
Welfare indicates the extent to which discrimination was understood by the
economists of the period. We must not forget, however, that the specialists in
applied fields, notably in the field of transportation, had got further than
that . 29

17 See J J 6-8 of the monopoly chapter and in particular Marshall’s argument on
what he called compromise benefit, p. 549. Observe once more: Marshall added in
this chapter little, if anything, to Cournot’s analytic skeleton; but, as in so many
other spots, he developed from it, with a broad and deep insight all his own, an
economic analysis that almost dwarfed both that skeleton and the technically superior
performance of a later age. Even the statistical complement of the theory of monopoly
is clearly visualized.

18 However, if Marshall’s broad and deep comprehension of the monopolistic and
quasi-monopolistic phenomena of his age failed to bear fruit, his historical greatness
as an economist stands out all the better because he saw more in them than the
results of functionless rapacity or, as a leading theorist of our own day has put it,
of producers’ desire for an easy life.

19 Elements, §§ 382-4. Walras believed that discrimination is also possible in 'free
competition.’ It is, but not in perfect equilibrium of pure competition — an interesting
example of the necessity of keeping carefully distinct the properties that define com-
petition, the properties that define equilibrium, and the properties that define com-
petitive equilibrium. Walras committed no mistake, however; he saw that it is only
in the presence of elements of monopoly that discrimination does not violate equilib-
rium conditions.

20 I can find no proof of the conditions under which discrimination may improve
the situation of all parties concerned, including the one that is discriminated against.
But Hadley’s oyster case presents an interesting instance that shows this possibility.
Suppose that a quantity of oysters that fills a freight car can be sold in an inland
market. A, for $150, and that A is connected with an oyster bed at B by a railroad
whose minimum charge for the freight car is $20. The people in B are just willing
to supply a quantity of oysters that would fill half a car per day at $62.50. But
since they would have to pay for the whole car, the business would net them a loss
of $7.50 (62.50 -j- 20 — 75). There is, however, another oyster village near by, C,
whose inhabitants are also willing to sell a quantity of oysters that would fill the
other half of the car at $62.50. Road transportation from C to B costs $5. Evidently,
the business becomes possible and all parties — consumers at A, producers at C and
B, and the railroad — are 'benefited’ if these $5 are divided up between the pro-
ducers at C and the producers at B, which can be done by the railroad’s charging
differential freight rates for the same service to the people in B and the people in C.
(Arthur T. Hadley, Railroad Transportation, 1885, ch. 6, pp. n6ff.)

EQUILIBRIUM ANALYSIS 979

[(c) Oligopoly and Bilateral Monopoly.] Cournot left two other legacies,
however. The one was a theory of oligopoly 21 or, as it came to be called from
the special case that was mostly discussed, of duopoly. As stated above, he met
oligopoly on his way when, starting from monopoly, he went on to introduce
one, two, three . . . competing firms of comparable size until he landed at
'illimited’ (unlimited) competition, for which he derived correctly another of
those theorems that are now familiar to every beginner, namely that, in equi-
librium of pure competition, price equals marginal cost. At the starting point
as well as at the end point, his argument was. all right so far as it went. Hence
nothing could have been more natural than to apply the same reasoning also
to the intermediate situations. Admitting, then, for simplicity’s sake, one com-
petitor only and, also for simplicity’s sake, neglecting cost of production , 22 he
was easily led to argue that this competitor will, on finding a monopolist in
possession, offer in the market — assumed to be perfect — that quantity of the
(perfectly homogeneous) commodity which will maximize his revenue, the out-
put of the former monopolist being what it is. This former monopolist will
thereupon adjust his output to the new situation, the newcomer will then do
the same, and so on, price falling all along, as automatically as if, at each step,
the resulting total output of both duopolists were put up for auction. And
Cournot showed not inelegantly, by means of his apparatus of Reaction
Curves , 23 that under his assumptions this step-by-step adaptation of quantities

21 This term was introduced by Sir Thomas More (see above Part n, ch. 6) and
has been reintroduced by Karl Schlesinger ( Theorie der Geld und Kreditwirtschaft,
1914), U. Ricci ( Dal protezionismo al sindacalismo, 1926), and Chamberlin (op. cit.),
but was not used in the period because writers dealt only with the case of duopoly.
Cournot, since he used ‘illimited competition’ for what we call pure competition,
might be credited with the term 'limited competition.’ Pigou used 'monopolistic com-
petition.’ The term 'incomplete monopoly’ sometimes denoted the case where one
of several competitors controls so large a part of an industry’s output as to be able
to influence price by his own single-handed action, whereas the others have to accept
the price he 'sets.' See, e.g., Karl Forchheimer, 'Theoretisches zum unvollstandigen
Monopole,’ Schmollers Jahrbuch, 1908. This important case of price leadership does
not present the problems of 'genuine’ oligopoly and has in fact been tacitly excluded
by most writers on the subject.

22 Cournot’s example, two springs that produce mineral water of identical quality,
suggests an assumption that has been almost universally adopted in the later discussion
of duopoly, namely, the assumption that the cost structures of tbe duopolists are ex-
actly alike. This seems to bring out the pure logic of the duopolistic situation. Actually
it defines a very special case and represents an element of duopolistic situations that
is particularly important for the more general case of oligopoly and enables us fre-
quently to narrow down ranges of indeterminateness. Cournot’s procedure may be
excused by invoking the privileges of the pioneer. But those who dealt with the prob-
lem after him should have realized that they did not gain but lost something by
making the same assumption. As it was, only Marshall seems to have been fully
aware of this.

23 The outputs of the one duopolist, the former monopolist, being shown on the
X-axis of a rectangular system of co-ordinates and the outputs of the other duopolist
on the Y-axis, the reaction curves plot the two equations that represent the maxi-

980 IV: FROM 1870 TO 1914 AND LATER

issues into a unique state of stable equilibrium, namely, a state in which the
duopolists sell equal quantities at a price that is below the monopoly price
and above the competitive price, and which, if departed from, will be re-
established 'by a series of reactions, constantly declining in amplitude’ (op.
cit. p. 81).

Since this result — whether attacked or accepted — became the backbone of
all further work on oligopoly and the starting point of a discussion that lasted
into the 1930’s, we shall, in order to extract the moral of the story, 24 first of
all try to make clear to ourselves what we are to think of Cournot’s solution
and what we might expect, in the absence of historical information, the fur-
ther development to have been. To begin with, it should be clear that Cour-
not’s solution is not absurd. It is not true that his duopolists are supposed to
act on an assumption about one another’s behavior that is incessantly belied
by the facts, that is, the assumption that each takes the quantity offered by
the other as constant when he cannot help observing that the other keeps on
adjusting it. No such assumption is implied. All that is required is that each
chooses this particular method in order to find out how the other will react,
or that he takes the other’s output as given for the moment and as a guide
for his own next step. Equally clear, however, should it be that the behavior
selected by Cournot is not the only possible or even the ‘normal’ one. The
duopolists may agree to co-operate. Or, without any agreement, explicit or
tacit, they may still both of them set the monopoly price. 25 Or they may fight

mum revenue condition of both duopolists (for duopolist I, for instance, if Di and D2
stand for the quantities offered by both and f(D 1 + D2) for the price, f(D 1 + D2) +
Dif(Di 4- D2) = o). That is, the reaction curve for duopolist II shows the quantity
that he will offer, if duopolist I offers any given quantity (op. cit. p. 81 and Figs. 2
and 3). Both reaction curves are concave to the origin and intersect in a single point
and in a manner such that this point fulfils the condition of stability. (For full ex-
planation see also note 17 in Fisher’s introductory ‘Notes on Cournot’s Mathematics.’)

24 This will be more instructive for us than would be a presentation of its details.
For these I refer again to eh. 5 of von Stackelberg’s Marktform. und Gleichgewicht
(1934), although I cannot agree entirely with either his history of the work on the
duopoly problem or with his own theory of duopoly. See Professor Leontief’s review
of von Stackelberg’s book, ‘Stackelberg on Monopolistic Competition,’ Journal of
Political Economy , August 1936.

25 Cournot was, of course, aware of the possibility of coalition, and he was jus-
tified when, in order to deal with duopoly, he excluded this possibility. He was also
aware of the possibility that duopolists might independently decide to charge the
monopoly price, but he ruled it out on the ground that, at any given moment, one
of the two is induced to take a further step along Cournot’s chain of reactions by
the temporary advantage he thereby secures (op. cit. p. 83). This is less easy to justify.
For either both duopolists are perfectly and equally rational and are facing an ideally
perfect market, in which customers shift in response to the slightest difference in
price and in which there are no other differences between the duopolists’ offerings,
not even differences of distance or of pleasantness of service: then neither can hope
to conquer, or fear to lose, more than half the market, even temporarily, and it is
hardly possible to derive comfort from Cournot’s general admonition that ‘in the

EQUILIBRIUM ANALYSIS 981

either with a view to driving or to bribing the competitor out of business or
with a view to making him conform to a desired pattern of behavior. In do-
ing so, either or both may try to bluff. Any of these courses of action may
eventually lead to a stable situation. But there is no guarantee that it will, and
even if it does, it will in most cases do so by destroying the specifically duopolis-
tic pattern. So far, then, the only thing that can be averred about the latter
without introducing further assumptions seems to be that there is no general
solution. 26 However, we see immediately that, though the course a duopolist
or oligopolist will choose depends in part on the kind of man he is — and so far
as this is the case, all we can do is to list possible types of behavior — it also
depends in part on the general business situation and on a concern’s position
relative to its competitors, particularly on its own and their cost structures.
And this opens up a way that leads out of the impasse and to many results
that are specific to particular . situations and often do no more than narrow
the range of ‘in determinateness, ’ but are not without interest all the same.

We know already why Cournot neglected all this: in his brief sketch of the
theory of pricing he evidently wished, starting from pure monopoly, to follow
an unbroken line of reasoning that would lead up to the case of pure (‘illim-
ited’) competition without having to vary anything except the number of com-
petitors. On this line he met nothing but quantity adaptation, and hence
this pattern drifted for him not unnaturally into a key position. The criticism
that may be directed at him, therefore, is that he neglected or overlooked the
fact that, as we leave the case of pure monopoly, factors assert themselves that
are absent in this case and vanish again as we approach pure competition, in
other words, that the unbroken line from monopoly to competition is a treach-
erous guide. The next steps to take in analysis — when from the 1880’s on econ-
omists discovered Cournot’s solution and began to take interest in it — should
therefore have been to realize this situation, to recognize those factors that
shape price strategy, and to work out the theory of the more important ones —
all of which would have opened up the fertile region of the pricing problems
of modern industry including, among other things, the problem of ‘delivered
prices’ or of locational price differentiation. This would have wedded pure

moral sphere men cannot be supposed to be free from error’ because the error in-
volved would, under his assumptions, be too obvious. Or the situation does not fulfil
some or all of those conditions: then the whole of Cournot’s reasoning becomes in-
applicable. The reader should note the interesting fact that we have here the possi-
bility of a unique and stable solution at the monopoly price precisely so long as there
is no agreement between the duopolists. If they do co-operate, there arises the ques-
tion how to divide the monopoly gain which they are making jointly, a question for
which there is no unique solution or no solution at all. But if they act independently,
no such question arises.

26 This is often expressed by saying that, generally, the problem is indeterminate.
But, as Pareto has pointed out, in all cases in which insolubility proceeds from the
incompatibility of the duopolists’ aims, it is more correct to speak of overdeter-
minateness ( Manuel , p. 597).

982 IV : FROM 1870 TO 1914 AND LATER

analysis to 'institutional’ fact and would have produced a richer and more
useful theory of price.

Actually, with a lag of more than half a century, we have more or less
reached this position, although much remains to be done. Professor Chamber-
lin’s work may be mentioned at once as an outstanding landmark on this
road . 27 But during the period under survey there is but little to record that
foreshadows this development. As examples, I mention Marshall’s frequent
emphasis on the fact that if the duopolists (oligopolists) operate individually
under a 'law of increasing returns,’ then the one who can expand with the
greatest relative advantage stands a chance 'to drive all his rivals out of the
field,’ which implies, although Marshall does not say so , 28 the recognition of
a particularly important type of price leadership ; 29 I mention also the attempt
made by Edgeworth 30 to treat duopoly as a limiting case of related demand
for monopolized commodities. For the rest, however, most of the work done
comes under the heading of sterile criticism or equally sterile defense of the
Cournot solution. J. Bertrand was, so far as I know, the first to make an at-
tack upon it that challenged it on principle but so inadequately 31 that I
doubt whether it would have made much impression if Marshall, Edgeworth,
Irving Fisher, Pareto , 32 and others had not, though wholly or partly for other
reasons, repudiated Cournot’s solution. By the end of the century, there was,

27 The chief importance of Chamberlin’s Monopolistic Competition seems to me
to lie beyond the problem of pure oligopoly. But in his ch. 3 he also dealt with
this problem according to the adage: 'duopoly is not one problem but several.’ That
is to say, he recognized the necessity of a systematic analysis of all possible types of
behavior. I do not quite see the reason why von Stackelberg described this position
as 'eclectic’ since his own position, though different, comes ultimately to the same
thing so far as this point is concerned.

28 The passage, which appears in the first edition on p. 48 5n., underwent a num-
ber of changes later on. If this means that Marshall was not quite pleased with it,
we can only agree.

29 Price leadership instead of monopoly may result if the strong firm cannot, or
does not wish to, drive out all its rivals. This shows that it is unwise, though it
may be logically unobjectionable, to disregard incomplete or partial monopoly en-
tirely in any treatment of oligopoly.

30 In his paper, 'La teoria pura del monopolio/ Giomale degli Economist i, 1897,
trans. in Papers Relating to Political Economy, vol. 1, pp. 111 et seq.

31 Journal des Savants, September 1883. Bertrand imputed to Cournot the hypothe-
sis that each duopolist tries to undercut the other, which involves a misunderstanding
of Cournot’s argument and points toward a result that is, if anything, worse than
Cournot’s.

32 C ours 1, p. 67, and, differently, in Manuel, pp. 595 et seq. The latter treatment
is repeated in his Encyclopedia article and simply amounts to the 'proof of the over-
determinateness of the problem’ mentioned already. But (Manuel, pp. 601 et seq.)
Pareto did point toward the multiplicity of possible patterns, some of them deter-
minate, which we recognize now, and has thus some claim to be considered as the
precursor of the modem theory of oligopoly.

EQUILIBRIUM ANALYSIS 983

among leaders, only Wicksell 33 left to defend it, and by 1912, in Wealth and
Welfare, Pigou was able to write that indeterminateness, or, more precisely,
the existence of a range of indeterminateness of the quantity of resources de-
voted to production in duopolistic situations, was 'now accepted by mathe-
matical economists/ Though this attitude is in fact acceptable when the prob-
lem is posited in full generality, that is, without any information whatever ex-
cept that there are several sellers (or buyers), each of whom may influence
price and output significantly, die reader will realize also that this is not more
than a first step, which invites further analysis in the light of additional in-
formation (hypotheses). He will, therefore, not be surprised to learn that,
given the basic weakness and sterility of the criticisms, the Cournot solution
experienced a renaissance during the 192C/S which merged into the situation
adumbrated above.

[The manuscript breaks off at this point. Since J. A. S. at the beginning of this
subsection (4c) said that Cournot left two other legacies of which one was a theory
of oligopoly, the following three paragraphs, concerned with Cournot’s contribution
to bilateral monopoly, seem to follow logically. This short treatment had been writ-
ten much earlier, was already typed, and had many penciled notes in shorthand.]

Cournot left also another legacy. In Chapter 9 of the Researches he dealt
with a case that differs from duopoly but bears a fundamental similarity to it.
Two different commodities, each controlled by a monopolist, are jointly de-
manded by competing producers of a third commodity and serve no other
purpose whatever. This case opens up an outlook on a wide variety of indus-
trial configurations which we are far from having fully explored as yet. More-
over, Cournot’s treatment teaches important lessons about how to deal with
problems of this kind and about useful simplifications that can be introduced,
as temporary expedients, in order to make headway. These two merits are of
seminal importance. But for the rest, Cournot’s treatment is open to objec-
tions similar to those that have been raised against his treatment of the
straight duopoly problem. He lets the prices of the two commodities be inde-
pendently determined by the condition that each monopolist endeavors to
maximize his own net revenue, assuming this time that the price of the other’s
commodity is given; that is to say, he postulates a behavior which is only one
of many possible ones and which moreover, even if realized, does not always
lead to a position of stable equilibrium. Edgeworth, Bowley, and Wicksell are
the most important of the authors who carried the discussion further. But the
most valuable materials for the analysis of problems of this type are to be
found in Marshall’s Book v.

For bilateral monopoly we have a theoretical prototype, namely the theory
of isolated exchange. The indeterminateness of the latter case had been well
understood by several authors of the eighteenth century; for example, Bec-

33 See the brief argument in Lectures 1, pp. 96-7, and the somewhat more elaborate
one in his review of Bowley’s Mathematical Groundwork (Economisk Tidskrift, 1925,
German trans. in the Archiv fur Sozialwissenschaft und Sozialpolitik, October 1927
[with an introduction by J. A. S.]).

984 IV: FROM 1870 TO 1914 AND LATER

caria. Carl Menger and, following him, all the Austrians emphasized this re-
sult because it was part of their argument that was to establish the' determi-
nateness of competitive equilibrium price. The easiest way of satisfying one-
self of this is to study Bohm-Bawerk’s horse-market case, in which the price
of a horse would remain indeterminate within the limits of the buyer’s and the
seller’s utility estimates until increasing numbers of buyers and sellers even-
tually narrow down the range to a point . 34 What the Austrians strove to ex-
press was expressed much more correctly and elegantly by Edgeworth in his
Mathematical Psychics of 1881, 35 where the apparatus of indifference and
contract curves was used precisely for the purpose of analyzing the range of
indeterminateness in bilateral monopoly. A. Marshall popularized the result
by means of his apple and nut market ( Principles , p. 416 and Appendix-, note
xii). There he also added Berry’s result , 36 namely, that if the marginal utility
of one of the commodities exchanged be constant — a case of some value as
an approximation if the commodity in question be money — then the quantity
bought of the other commodity will be uniquely determined ‘by whatever
route the barter may have started .’ 37

This relation between the theory of bilateral monopoly or oligopoly to the
case of isolated exchange teaches us to see the main problem in the deter-
mination of the factors that limit the range of indeterminateness. About this,
however, the theory of isolated exchange has really little to say. In all cases
of this kind that arise in modern industry, particularly in modern labor mar-
kets, determinateness of the ranges between which exchange rates may be ex-
pected to fall — sometimes even unique determinateness of individual exchange
rates— will depend on the particular circumstances of the case which must
be introduced by special assumption. Success will depend on our ability to
find hypotheses which, though not of general application, will yet cover a

34 In the case of a market that deals in units as big as horses the range is of
course never strictly narrowed down to a point. But the reader will readily see that
in principle this does not make any serious difference.

85 See also his article in the Giornale degli Economist i, March 1891.

86 Giornale degli Economisti, June 1891.

87 In general this is not so, however. And in analyzing the markets of reality we
must take account of the fact that the deals carried out at the beginning of the market
will influence the prices and quantities that are exchanged later on in the same mar-
ket. This applies to pure competition as much as it does to bilateral monopoly or
oligopoly. Though the practical importance of this is in many cases much reduced by
the fact that every individual transaction is normally a link in a chain of stable rela-
tions that teach each party to understand the conditions under which all the other
parties act, it is quite true that in order to arrive at uniquely determined prices and
quantities in a competitive market it is necessary to make certain assumptions that
look very artificial at first sight. This is the meaning of the Walrasian ‘bons’ and of
the Edgeworthian ‘recontract’ (see N. Kaldor, ‘A Classificatory Note on the Deter-
minateness of Equilibrium,’ Review of Economic Studies, February 1934). As is per-
haps not superfluous to note, bilateral monopoly or oligopoly thus merely brings out
with particularly unmistakable distinctness some of the logical difficulties that pervade
the whole of the pure theory of markets.

EQUILIBRIUM ANALYSIS

985

considerable number of cases or describe individual ones of particular impor-
tance. But again, as in the case of duopoly and oligopoly, we meet two formi-
dable difficulties: in practice, behavior is shaped, much more than by the ob-
servable data of a situation, by expectations that change rapidly in the tur-
moil of capitalist development; and even if this were not so, behavior could
never be fully understood from the objective factors of the given situation
without taking account of the kind of people who are in a position to make
strategically important decisions and whose numbers are in most cases so
small as to make modes unreliable.

5. The Theory of Planning and of the Socialist Economy

We know already that most of the leading theorists of that period were
by no means the unquestioning addicts of laissez-faire they have sometimes
been made out to be. For the purposes of this chapter, however, it is still
more important to emphasize that neither were they all of them uncondi-
tional eulogists of pure competition. Walras, though his land-nationalization
scheme does constitute a qualification, reproduced indeed the old proposition
that a state of pure competitive equilibrium all round guarantees a maximum
of satisfaction for all parties concerned. But he did so in a novel and rigorous
manner that brought into full daylight all the assumptions involved, though he
does not seem to have realized how much he reduced its practical impor-
tance thereby. Marshall did realize this. Not only did he point out the trivial
truth that the proposition in question assumes 'that all differences in wealth
between the different parties concerned may be neglected’ ( Principles , p. 532),
but he went on to show that even if we disregard this trivial truth, 1 we can-
not assert that the prices and quantities of competitive equilibrium are neces-
sarily the ones that maximize aggregate satisfaction — granting for the sake
of argument that there is meaning to this concept — as compared with the ones
that other arrangements might produce. This he illustrated by cases in which
‘welfare’ may be increased by subsidizing the employment of resources in in-
dustries where expansion of production is attended by more economies than
it is in others. 2 We shall return to this and cognate subjects in the digression

1 As Marshall well knew, this trivial truth means much less in practice than it
seems to mean at first sight. For it takes no account of the possible ulterior effects
of inequality upon the Social Dividend, which may be very important if the latter’s
development is considered over time. As in the special case of the free-trade argument
we must distinguish between welfare effects ex visu of a given point of time and
welfare effects ex visu of historical developments that may be impeded by social ar-
rangements that increase ‘welfare’ at a given level of the Social Dividend. But an
analysis whose rigorous core is confined to statics invites neglect of this distinction
and overemphasis upon the situation existing at a given moment. (See, below, the
discussion on Welfare Economics in the Appendix to this chapter.)

2 This formulation agrees with Mrs. Joan Robinson’s ('Mr. Fraser on Taxation and
Returns,’ Review of Economic Studies, February 1934) and R. F. Kahn’s (‘Some
Notes on Ideal Output,’ Economic Journal, March 1935). Marshall’s own exposition
(Op. cit. pp. 533-6) is open to objection on several counts (particularly from the

986 IV: FROM 1870 TO 1914 AND LATER

appended to this chapter. Meanwhile I am content to point out that meas-
ures of the kind envisaged by Marshall come within the range of any reason-
able definition of planning. No doubt he only scratched the surface. But any
proposition that avers that a piece of planning can 'improve' upon the work-
ing of ideally perfect competition means a breach in an old wall and is there-
fore of great historical importance. No mere criticism of capitalism on ethical
or cultural lines — however important in other respects — could have accom-
plished precisely this. Others, Edgeworth and Pareto among them, were not
slow to widen the breach . 3

Of far greater importance was another achievement. Three leaders, von
Wieser, Pareto, and Barone, who were completely out of sympathy with social-
ism, created what is to all intents and purposes the pure theory of the socialist
economy, and thus rendered a service to socialist doctrine that socialists them-
selves had never been able to render. As we know, Marx himself had not at-
tempted to describe the modus operandi of the centralist socialism which he
envisaged for the future. His theory is an analysis of the capitalist economy
that is no doubt geared to the idea that this economy, by means of the in-
evitable 'breakdown' and of the ‘dictatorship of the proletariat’ resulting from
this breakdown, will give birth to the socialist economy; but there is a full
stop after this and no theory of the socialist economy that deserves the name
follows . 4 Most of his disciples, as we also know, evaded the problem instead
of meeting it, though some, Kautsky in particular, did display awareness of
its existence by pointing out that the socialist regime, after the revolution,
would be able to use the pre-existing capitalist price system as a provisional
guide — an idea that points in the right direction.

Now the Austrians were in the habit of using the model of a Crusoe econ-
omy for the purpose of explaining certain fundamental properties of economic

standpoint of those who abhor the use of the consumers’ surplus concept) but I be
lieve that the statement in the text above renders what he really meant and that the
usual criticism is hardly fair to him. The main point of this criticism was first made,
not against him but against Pigou’s formulation of his doctrine, in a review, ‘Pigou’s
Wealth and Welfare,’ by A. A. Young ( Quarterly Journal of Economics, August 1913).
It turns on Marshall’s suggestion that subsidies to industries that realize (relatively to
others) large economies in expanding might be advantageously raised by taxes on the
product of industries that 'obey the law of diminishing returns.’ Though valid within
static theory, the objection can be met by considerations that lie outside its precincts.

3 Wicksell also attacked the doctrine of maximum satisfaction. But he held (Lec-
tures 1, pp. 141 et seq.) 'that free competition is normally a sufficient condition to
ensure maximization of production ’ (my italics). This is not correct either, although
the extent of the error depends on what we mean by '‘normally.’ But his position
was nevertheless far ahead of that of Walras.

4 It is indeed possible to assemble from Marx’s writings a number of hints that go
beyond the phrases of his day, e.g. the hint at the necessity, in the socialist common-
wealth, of an elaborate bookkeeping system. But substantially he confined himself to
such phrases as that, of course, workmen will be anxious to produce most efficiently
so that, we are led to infer, there really will be no scarcity problem (no problem of
‘economizing’ factors) at all.

EQUILIBRIUM ANALYSIS

987

behavior. Therefore, it was particularly easy for them to realize that there was
nothing specifically capitalist about their basic concept of value and its
derivates such as cost and imputed returns: these concepts are really elements
of a completely general economic logic, of a theory of economic behavior that
may be made to stand out more clearly in a model of a centrally directed so-
cialist economy than it can in the capitalist garb in which it presents itself
to the observer whose historical or contemporaneous experience is with a capi-
talist world. For instance, when we are trying to describe how Crusoe allocates
his scarce resources in order to maximize the satisfaction of his wants or, in
other words, to formulate the rules he follows in transforming these resources
into objects that will satisfy his wants, we discover immediately that his econ-
omy may be characterized by certain 'coefficients of transformation’ which
fill the same function that prices fill in competitive capitalism. If we consider
a socialist economy, it is still more obvious that, for instance, maximization of
satisfaction requires that the ratio of marginal utilities for each pair of con-
sumers’ goods must be identical for all comrades; that in every line produc-
tion must be so organized as to make the technologically optimum use of all
means of production; and that the marginal value productivity of all scarce
means must be the same in all their uses or, at all events, must in every use be
at least as great as it would be in any other. But all this amounts to saying
that any attempt to develop a general logic of economic behavior will auto-
matically yield a theory of the socialist economy as a by-product. The first to
realize this explicitly was von Wieser ( Natural Value , 1st German ed., 1889).

Pareto, in the second volume of his Cours (1897), 5 excelled Wieser in clear-
ness and skill of presentation, if not in insight, and has more claim than any
other individual to being considered as the originator of the modern pure
theory of the socialist economy. 6 Actually, however, his contribution has been,
overshadowed by that of Barone, who presented the whole of the subject in a
famous piece of work that, so far as essentials are concerned, has remained
unsurpassed to this day. 7 Many economists of our own day have added details
and some further developments. I mention O. Lange and A. P. Lerner and
for the rest refer the reader to A. Bergson’s paper mentioned in footnote 6.

Barone’s performance consists in a nutshell in this: after having presented
on Walrasian lines 8 the system of equations that describes economic equi-
librium under conditions of pure competition in a private-property economy,
he wrote down the analogous system of equations for a socialist economy of a
certain type. Whereas in the private-property economy incomes, simultane-

5 See, e.g., p. 94 of the second volume. He carried his argument considerably fur-
ther in ch. 6, 52-61, of his Manuel (1909).

6 The development of this theory has been described by Abram Bergson in his con-
tribution ‘Socialist Economics’ (in the Survey of Contemporary Economics, ed. H. S.
Ellis, 1948) in a manner that leaves nothing to be desired.

7 Enrico Barone, T 1 Ministro della produzione nello stato collettivista,’ published in
the Giomale degli Economist i, 1908, trans. in F. A. von Hayek, ed., Collectivist
Economic Planning (1935) as ‘The Ministry of Production in the Collectivist State.’

8 There are, however, several original points, two of which will be mentioned below.

988 IV: FROM 1870 TO 1914 AND LATER

ously with all the other variables of the system, are determined by the eco-
nomic process itself — so that, as we have said before, production and dis-
tribution are but different aspects of one and the same process — there is of
course a separate problem of distribution in the socialist commonwealth. That
is to say, society must first of all decide by a separate act, for instance by a
clause in its constitution, what the ‘incomes’ or relative shares in the social
product of the individual comrades are to be. Then a central social agency or
ministry of production could be created for the management of the economic
process, and a unit of account could be introduced. A definite amount of such
units could be allocated to every comrade, which he is free to spend accord-
ing to his tastes on the consumers’ goods that the commonwealth produces
or to ‘save,’ that is to say, to hand back to the ministry of production in
consideration of a premium that the latter is prepared to pay for deferment
of consumption.

We thus derive demand functions for consumers’ goods and supply func-
tions of labor and saving, and the reader will have no great difficulty in see-
ing how, guided by these functions and by its own technological knowledge,
the ministry will cause appropriate quantities of consumers’ and investment
goods to be produced. This arrangement is, of course, not the only possible
one and can be varied in many ways. For instance, we may exempt provision
for investment from the range within which comrades are permitted free
choice, and subject it to the decision of the ministry or of a parliament, just
like expenditure for national defense. Also, we may either offer the comrades
equal ‘incomes,’ and then postulate that they must accept the ministry’s di-
rections as to the kind and amount of work which they are to do, or else we
may devise a system of differential income rates so as to call forth the free
offer of the kinds and amounts of work that are to be done in every line,
thereby introducing ‘wages’ and labor markets. Barone blocked out a theory
of a socialist commonwealth that assumes freedom of choice all around as to
consumption, as to saving (investment), and as to employment. But whether
we follow him in this or not, the formal similarity between a socialist order
of things and the order of things that would obtain in a perfectly competitive
capitalist society stands out strongly. It is not even lost in the case of dicta-
torial socialism: the perfect dictator would in fact behave according to a
pattern of which the prototype is the Crusoe economy. But also the nondic-
tatorial socialist commonwealth can be run on principles other than the prin-
ciple of consumers’ sovereignty. It is quite thinkable, for instance, that com-
rades should not get what they actually wish to have but what some experts
or bureaucrats think that they should have. However, theoretical difficulties do
not arise in any of these cases but only in the case of federalist socialism,
where there is no central agency and each industry is controlled autonomously
by the workmen attached to it: in this case the problem becomes oligopolis-
tically indeterminate.

The essential result of Barone’s or any similar investigation is that there
exists for any centrally controlled socialism a system of equations that possess

EQUILIBRIUM ANALYSIS 989

a uniquely determined set of solutions, in the same sense and with the same
qualifications as does perfectly competitive capitalism , 9 and that this set enjoys
similar maximum properties . 10 Less technically, this means that so far as its
pure logic is concerned the socialist plan makes sense and cannot be disposed
of on the ground that it would necessarily spell chaos, waste, or irrationality.
This is no small thing and we are within our rights when we emphasize again
the importance of the fact that this service to socialist doctrine has been ren-
dered by writers who, since they were not socialists themselves, thereby vic-
toriously vindicated the independence of economic analysis from political
preference or prejudice. But, at the same time, this is all. We must not for-
get that, just like the pure theory of the competitive economy, the pure
theory of socialism moves on a very high level of abstraction and proves much
less for the workability’ of the system than laymen (and sometimes theorists
also) think. In particular, the proposition about the maximum properties of the
solution that characterizes the equilibrium of a socialist economy is of course
relative to its institutional data, and avers nothing concerning the question
whether this purely formal maximum is higher or lower than the correspond-
ing maximum of the competitive economy — especially if we refuse to go into
the further questions, whether the one or the other institutional set-up is less
exposed to deviations from its own ideal or more favorable to ‘progress.’ These
questions are so much more important in practice than is the question of de-
terminateness or ‘ratipnality’ per se, that it is sometimes not easy to tell
whether the later critics of the socialist plan, especially von Mises , 11 really
meant to deny the validity of the Pareto-Barone result. For it is quite possible
to accept it and yet to hold that the socialist plan, owing to the administrative
difficulties involved or for any other of a long list of reasons, is ‘practically un-
workable’ 12 in the sense that it cannot be expected to work with an efficiency
comparable to the efficiency of capitalist society as revealed by the index of
total output. But although pure theory contributes little to the solution of

9 See below sec. 7. In fact, it can be shown that the case for unique determinate-
ness (which, of course, implies consistency) is somewhat easier to establish for cen-
tralist socialism than for a private-property economy, even if perfectly competitive.

10 Of course, so far as the competitive regime fails to achieve a true maximum, the
socialist plan would also have to deviate from the competitive pattern.

11 L. von Mises, ‘Die Wirtschaftsrechnung im sozialistischen Gemeinwesen,’ A rchiv
jilr Sozialwissenschaft und Sozialpolitik, 1920; trans. in F. A. von Hayek, ed.. Col-
lectivist Economic Planning (1935) as ‘Economic Calculation in the Socialist Com-
monwealth.’

12 See A. Bergson, op. cit. While we cannot go into this set of problems, it is
necessary to point out that there is also a purely theoretical anti-socialist argument
(sponsored by Professors von Mises, von Hayek, and Robbins), which is definitely
wrong, namely the argument that, although there exists a determined set of solutions
of the equations that describe the statics of a socialist commonwealth, there is, with-
out private property in means of production, no mechanism by which to realize them.
They can be realized by the method of ‘trial and error’ described below.

990 IV: FROM 1870 TO 1914 AND LATER

these problems , 13 it helps us to posit them correctly and to narrow the range
of justifiable difference of opinion. We thus arrive at the same conclusion as in
the case of non-socialist planning; ever since Marshall, the theoretical possi-
bility of improving the purely competitive mechanism by public policy should
no longer be a matter of controversy; but it is of course still possible — as
Marshall well understood — to criticize either particular measures or even the
whole idea of planning on such grounds as lack of confidence in the political
or administrative organs that are available for the task. (It seems as if Marshall
had been alone in understanding this situation.)

6. Partial Analysis

The unwieldy system of the innumerable quantities that make up the
budgets of all the individual households and firms — microanalysis, to use
Frisch’s phrase again — invites simplification, for instance, by combining them
into a few comprehensive social aggregates — macroanalysis. But there is also
another method that, for some purposes, achieves simplification just as ef-
fectively. When we are interested in those economic phenomena that can be
observed in small sectors of the economy, for example in individual ‘industries’
of moderate size and, in the limiting case, in individual households or firms,
we may assume that nothing that happens in these small sectors exerts any
appreciable influence on the rest of the economy. This assumption does not
necessarily imply that the latter remains unchanged, although this is what we
mean when using the ceteris-paribus clause; but it does imply that, if some
external influence be exerted upon the small sector under consideration, then
this sector adjusts itself without exerting, in turn, more than a negligible ef-
fect on the rest of the economy or any element of it (Principle of the Negli-
gibility of Indirect Effects): a change in wage rates, for instance, that occurs
in a small sector, whether brought about by the conditions of this sector or
imposed from outside on it alone, may be treated as if it did not affect na-
tional income or market demand schedules at all. This postulate defines the
method of Partial Analysis. Though it has been used since the beginning of
time, it acquired a novel definiteness and an apparatus of its own at the hands
of Cournot, von Mangoldt, and, in the period under survey, Marshall, who,
as we have already noticed, became and remained for many economists pri-
marily the master of partial analysis . 1 The method appeals to our common

13 It does contribute something, however. First, it removes an objection by virtue
of which the critic might excuse himself from entering at all into a discussion of the
practical details of the socialist plan. Second, it shows up certain relevant properties
of the latter, e.g. that it would be free from the class of wastes that are inherent
in imperfectly competitive situations such as the economic warfare between oligopolists.

1 In addition to developing the appropriate conceptual apparatus, Marshall also
developed the general philosophy of the method which turns upon the principle of
the negligibility of indirect effects. See especially Industry and Trade, 3rd ed.. Appen-
dix A, p. 677. There he did not hesitate to invoke the authorities of Newton and
Leibniz, with the Nautical Almanack thrown in. With due respect both for Marshall

sense, which tells us that, so long as we are content with an approximation,
we need not take account of at least the great majority of effects and counter-
effects that, on principle, the slightest alteration in the conditions of, say, the
production of pins exerts upon national income and through national income
upon the demand for gasoline. But the same common sense should also tell
us that the postulate, which is so powerful a simplifier, severely restricts the
method’s range of application and in fact removes from it all the relations
that cannot be observed in small sectors but only in the economy as a whole . 2
Therefore, while it is understandable that partial analysis has been and is being
widely used, it is equally understandable that it has been condemned from the
first by theorists of the sterner type, especially by Walras and Pareto . 3

[(a) The Marshallian Demand Curve.] The standard tool of partial analysis
is Cournot’s or Marshall’s market demand curve. It represents the quantity of
a commodity that buyers are willing to purchase at a given price as a function
of this price alone: 4 all the other factors that affect their willingness to pur-
chase, especially their incomes, are taken care of by the shape of the demand
curve. Moreover, the marginal significance to them of the income unit ('mar-
ginal utility of money’) is not supposed to vary as they move along the de-
mand curve so that the purchases they have made at any price P 0 have no
influence upon their willingness to buy additional quantities at any price

and for his admirable attempt to display, in this case, the intimate relation that no
doubt exists between scientific methods in all their fields of application, we cannot
deny that the argument for the principle mentioned does not carry the same weight
in economics that it carries in astronomy.

2 The wage-rate problem illustrates how neglect of these restrictions may produce
error and futile controversy. The results of partial analysis concerning the effects of
variations of wage rates in small sectors are completely inapplicable in the case of
variations of wage rates in large sectors or the whole of the economy: propositions
that are true for small sectors may be nonsense for the economy as a whole.

3 Walras attacked the partial analysis of Cournot, von Mangoldt, and Auspitz and
Lieben ( Untersuchungen tiber die Theorie des Preises, 1889, of which the first chapter
had been printed and distributed in 1887 and which contains industrial total cost
and expenditure curves plotted together with the curves of their derivatives) in an
article reprinted as A ppendice n to the 4th ed. of the Elements. He showed there
that neither a demand nor a supply curve that represents quantity demanded or sup-
plied as a function of the price of that commodity alone can ever be accepted as
exact because to change the price of a commodity amounts to disturbing the whole
of the existing equilibrium situation, every element of which must be correspondingly
readjusted; and that, if we wish to uphold the method as one of approximation,- we
meet with the difficulty that the assumptions which it is necessary to make for this
purpose are, in strict logic, contradictory. Pareto repeated these arguments with added
emphasis. And they have been re-emphasized time and again.

4 Usually we put the independent variable, in this case the price, on the X-axis of
a rectangular system of co-ordinates and the dependent variable, in this case the quan-
tity, on the Y-axis. This is in fact usually done in the French literature. But Marshall
chose the X-axis for quantity co-ordinate and the Y-axis for price co-ordinate, and
this is usually done in the Anglo-American literature.

992 iv: FROM 1870 TO 1914 AND LATER

P i < P 0 . If the significance people attach to a unit of their incomes should
vary for reasons other than that they spend more or less upon the commodity
in question, then the individual and market demands are displaced and/or
altered in shape (they ‘shift’). In his Principles (pp. 171 et seq.) Marshall
developed the theory of these demand curves carefully, laying in fact the
whole foundation for the demand studies of the future. But he hardly empha-
sized enough the severity of the restrictions to which their validity, even as
approximations, is subject. Actually they can be used only for commodities
that are relatively unimportant — absorb but a small part of buyers’ total ex-
penditure — or for relatively very small variations in the prices of important
ones. 5 It is in such cases only that demand curves of individual households
may be treated as ‘translations’ of the law of diminishing utility into terms of
price (op. cit. p. 169) without having to be redrawn for every price and that
Marshall’s development of Dupuit’s invention, consumers’ rent, acquires its
true meaning.

[(b) Elasticity Concepts .] The concept of consumers’ rent will be discussed
below in the Appendix to this chapter. I take this opportunity to introduce
Marshall’s price elasticity of demand (embryos of which are, as we have seen,
contained in Cournot’s and Mill’s treatises). The behavior at any point of
any continuous and differentiable ‘curve’ is rendered by its slope or differential
coefficient at that point: if the ordinate (the price in our case) be denoted by
Y and the abscissa (the quantity in our case) by X and if x 0 identify the

point in question, the expression is

. Fuller information is conveyed

by higher derivatives but this does not concern us here. Our expression
has, however, the disadvantage that it is not a pure number and that its
value is not invariant with respect to the units in which the price y and the
quantity x are measured. A simple device for remedying this is to divide the
increments dy and dx by the respective price and quantity to which they
refer. Thus we get: dy/y -4- dx/x or: xdy/ydx, which is called the flexibility of
price. If, however, we wish to express the sensitivity of quantity demanded
to small variations in price, we had better choose the reciprocal of this, that

5 Marshall himself was of course aware of the fact that the ‘marginal utility of
money’ is not in general constant with respect to variations of expenditure upon any
particular commodity: this awareness is obvious from his mathematical notes 11 and
vi in the Appendix to the Principles and from the text of the Principles itself (see
especially p. 207). But in chs. 3 and 4 of Book in he argued nevertheless on the As-
sumption of constancy (where in these chapters he allows ‘marginal utility of money’
to vary, it is because people's money incomes change). And this involved no great
error because he was careful to make tea the standard example on which to reason
and by which to illustrate — a commodity of sufficiently small importance to pass
muster as an instance in which partial analysis, even in its strictest acceptance, is
a tolerable approximation and actually neglects nothing but quantities of the second
order of smallness. Both adherents and critics have overlooked this. Incidentally, they
also overlooked that the requisite small importance can practically always be enforced
by sufficiently narrow definitions of commodities: if meat is not unimportant enough,
we may consider the demand for lamb chops.

EQUILIBRIUM ANALYSIS 993

is, dx/x 4 - dy/y - ydx/xdy, the 'elasticity/ And since this expression is essen-
tially negative because quantity demanded falls when price increases and vice
versa, at least with the Marshallian demand curve, we might prefix a minus
sign so as to have a positive number: —ydx/xdy is, then, what Marshall called
elasticity of demand and what is now called, more precisely, price elasticity
of demand. The cases must be rare in which so modest a contribution has
met with such applause (see, for example. Lord Keynes’s eulogy in Essays in
Biography, p. 228). We may as well continue this report of the history of
'elasticity’ concepts — the word is infelicitous for it raises in the beginner’s
mind quite unjustified associations — to avoid the necessity of having to return
to it in Part v.

First, Marshallian elasticity of demand refers to a point on the demand
curve — it is 'point elasticity’ — and is therefore applicable, with increasing in-
accuracy, only to infinitesimal changes in price and quantity. Hence, the wish
to have a measure that will apply to finite stretches of the demand curve.
This problem of 'arc elasticity,’ first posed by Mr. H. Dalton, has been the
subject of a discussion to which Professor A. P. Lerner made the leading con-
tribution, 'The Diagrammatical Representation of Elasticity of Demand,’ Re-
view of Economic Studies, October 1933 (see also Professor R. G. D. Allen’s
analytic treatment and Lemer’s reply, 'The Concept of Arc Elasticity of De-
mand,’ 1 and 11, Review of Economic Studies, June 1934)- But it must not be
forgotten that point elasticity serves tolerably for variations of a few per cent
of price whereas arc elasticity, intended to serve for larger variations, is much
more likely to violate the restriction to which partial analysis is subject.

Second, reasoning in terms of elasticities presents the same advantages that
it possesses in the case of the Marshallian demand curve in many other cases.
Accordingly a rich crop of elasticity concepts has matured — we speak of elas-
ticities of the total, average, and marginal cost functions; of income elasticity
of quantity demanded; of elasticity of substitution (Hicks, J. Robinson); and
so on. Income elasticity presents a new problem: no difficulty arises when we
express the elasticity of an individual’s demand for a commodity with respect
to his income; but if we express the elasticity of aggregate demand for a com-
modity with respect to national income, we run up against the fact that given
changes in the latter have different effects upon quantity demanded, accord-
ing to the manner in which the increase or decrease of national income is
distributed among buyers or potential buyers. This problem has been treated
by Professor Marschak and by Mr. P. de Wolff (see, e.g., the latter’s 'Income
Elasticity of Demand,’ Economic Journal, April 1941). Finally we may no-
tice R. Frisch’s ‘elasticity calculus’ (see R. G. D. Allen, Mathematical Anal-
ysis for Economists, 1938, pp. 252-3).

Third, in introducing the concept of income elasticity we have already
stepped out of the domain of the Marshallian demand curve but without
leaving the domain of partial analysis. We do the same thing or, at all events,
we practice partial analysis while recognizing that the sector studied is actually
an element of a more comprehensive system, when we use the concept of
'partial elasticity,’ for example, of partial price elasticity. In itself, the conces-

994 IV: FROM 1870 TO 1914 AND LATER

sion we make in this case consists only in replacing the ordinary differential
coefficient that enters into the elasticity expression by a partial differential co-
efficient in order to indicate that we are not simply ‘freezing’ the rest of the
economy but that we are holding its elements constant at a certain level. But
once we have gone as far as this we may equally well express the elasticity
of demand for a commodity with respect to variations in the price of any
other commodity (‘cross elasticity’) or, successively, with respect to variations
in the prices of all commodities, factors as well as products. This has been
done systematically by H. L. Moore (see his Synthetic Economics, 1929) and,
for the elasticity of substitution, by Hicks and Allen (see the latter’s exposi-
tion, op. cit. pp. 503 et seq.). In those cases elasticity concepts become tools
of general analysis, that is, tools that may be used for the purpose of exploring
relations in which we are primarily interested because they also assert them-
selves in the economy as a whole.

[(c) Concepts Useful for General Analysis.] It follows that partial analysis
is not separated from general analysis by any sharp dividing line but rather
shades off into general analysis as we extend the scope of the concepts that
have been in the first instance, conceived for its purposes. The best illustra-
tion of this is Marshall’s Book v. Primarily, it is the classic of partial analysis,
the theory of the individual industry that is small relative to the economy
as a whole. 6 Industrial demand curves are there matched with industrial sup-
ply curves from which they are supposed to be independent. 7 The theory of
these supply curves is a development of Cournot’s theory of costs and is sub-
ject to restrictions that are still more severe than those that partial analysis
places upon demand curves. 8 But Marshall clothed his schema with such a
mass of luxuriant detail as to give it an importance not really its own and to
make it the backbone of a study of all non-aggregative industrial processes,

6 This implies of. course the existence of perfect markets — markets in which there
is but one price for all buyers — and hence the existence of well-defined and perfectly
homogeneous ‘commodities,’ the production of each of which defines an ‘industry’
that faces a definite market demand curve. Marshall and all the economists of his
age were not fully alive to the difficulties inherent in these concepts that have induced
Professor Chamberlin and others to abandon the idea of ‘industrial demand curves’
altogether. But, neither were they blind to them.

7 The principle of the negligibility of indirect effects requires that the variations
in the quantity produced by any industry must not affect the incomes earned in
the same industry so strongly as to shift the demand curve for its product, let alone
the aggregate demand for all products.

8 This is why Barone, who has done more than anyone else to clear up this situa-
tion, did not use supply curves of products as freely as did Marshall. Instead he con-
fined himself to speaking of supply curves of individual factors, in order to avoid the
assumption that the prices of the latter are given and do not change relatively to
one another as we move along supply curves of products, an assumption that is ad-
missible in special cases but not in general. See ‘Sul trattamento di quistioni dinamiche,’
Giornale degli Economisti, November 1894. Pigou also, from his own standpoint,
realized this restriction more explicitly than did Marshall himself. See in particular
his ‘Analysis of Supply,’ published in the Economic Journal as late as June 1928.

EQUILIBRIUM ANALYSIS 995

a role which it has been made to play right into our own time. 9 And in doing
so he developed concepts that are also valuable in general analysis or, as we
have put it before, serve the purpose of exploring relations in the economy
as a whole. An example is the concept of quasi-rent: the fact that ‘appliances
made by man’ may behave exactly like natural agents for longer or shorter
periods of time, though displayed by Marshall in connection with his partial
analysis, is of course just as important in a general analysis of the Walras
type. 10 But the most important example is the ‘principle of substitution' which
creeps in quite modestly (op. cit. p. 420) a propos of producers’ substituting
less expensive for more expensive combinations of factors and eventually rises
to the proud position of ‘Th linen's great law of substitution,’ which pervades
and controls the whole economic process and opens one of several possible
roads toward the recognition of the universal interdependence of economic
quantities. 11 From the standpoint, and within the precincts, of partial analysis,

9 In developing this schema Marshall no doubt put a greater burden upon it than
it is actually able to bear. The most important instance of this practice may well
be mentioned here. This schema works best when a monotonically falling market de-
mand curve for the product of a small industry is made to intersect with an industrial
supply curve that is monotonically rising in the operative interval. But Marshall was
evidently reluctant to confine himself to this construction, which seems to leave out
of account the fact that in practice firms and industries operate on falling supply
curves most of the time. He therefore admitted such falling supply curves and intro-
duced for their explanation his famous concepts of internal and external economies.
But it should be clear that supply curves which do depict these phenomena deal with
an irreversible process and are therefore not at all like the ordinary supply curves on
which a firm can . travel back and forth. They depict historical processes in a gen-
eralized form. This led to a well-known difficulty about the equilibrium of an in-
dustry under conditions of pure competition: whenever a falling supply curve inter-
sects with a demand curve from below, that is, in such a way that, to the left of
the point of intersection, marginal costs are lower and, to the right of the point
of intersection, marginal costs are higher than are the demand prices for the respec-
tive quantities, Marshall would say that the point of intersection is a point of stable
equilibrium, whereas it is quite clear that there is no reason for any individual firm
to call a halt at that point unless we admit some element of monopoly. But the
difficulty is quite gratuitous. In the case of both internal economies and external
economies the industrial supply curve is displaced (shifting downward) and there is
no point whatever in calling the curve that depicts this displacement a supply curve.

10 Marshall’s handling of this concept, just as his handling of the rent concept, was
somewhat impaired by inconsistencies. But it was, as we have seen, one of the most
important tools he produced in his attempts to grapple with the difficulties inherent
in the ‘element of time.’ Similarly, his theory of long and short periods grew out of
considerations about small industries, or even individual firms, but is also of general
applicability (see Principles, p. 519); and still more obviously is this the case with
Marshall's theory of expectations (see, e.g., pp. 422 and 446) and risk.

11 This becomes obvious if we add to the technical or factor substitution introduced
on p. 420 of the Principles, the still more fundamental product substitution practiced
by consumers. Though Marshall also recognized the latter he never fully co-ordinated
the two in the manner that was developed before him by Carl Menger. In conse-
quence, Marshall’s principle of substitution never appeared in his work and the

99 6 IV: FROM 1870 TO 1914 AND LATER

this universal interdependence was demonstrated by numerous investigations
into the theory of joint and composite demand and supply and of the values
of related commodities in general which produced some of the most illumi-
nating passages of Book v of the Principles and which were further developed
by Edgeworth. In fact, it stands to reason that the comprehensive but gaunt
and colorless idea of the universal interdependence that subsists between all
elements of the economic system — and so easily provokes sneers about every-
thing’s depending upon everything else — can be brought home and made
alive to the many by means of concrete cases about the relations between
the values of beef and mutton or again of tea and sugar — the relations between
the values of 'competing’ or 'completing’ commodities (Fisher). And this can
be done without violating the restrictions inherent in the methods of partial
analysis. We do indeed in such cases, sometimes with a slight disregard of
strict logic, go beyond direct effects and take into account also indirect ones;
but still we do so only within small sectors that do not produce significant
effects upon the whole economy, at least not effects significant enough to af-
fect the quantities, such as national income, that determine the setting of the
small sector. In such cases the relations, in the small sector which can be
managed by partial analysis, illustrate or exemplify to a limited extent the
relations in the whole of the economic cosmos . 12

But they do so only up to a point Beyond this point the methods and
results of partial analysis remain inadequate and may become even mislead-
ing. Marshall realized this. It is very instructive to observe how carefully he
watched his step wherever his argument rose into the realm of the ‘general’
theory of distribution . 13 However, it is obvious from his appendix (note xxi)
that, had he wished to go further, he would have sought the necessary comple-

work of his group in its true light, namely in the light of a special proposition
within the theory of marginal utility: however emphasized, it remained, as later on
with Cassel, a supplementary principle that was added to, instead of being derived
from, the fundamental theory of values and costs.

12 Of Edgeworth’s many contributions in this line — contributions that treat partial
analysis cases but illustrate general relations by doing so — I shall mention only one:
his famous taxation paradox which the reader had better study in Professor H. Hotel-
ling’s version, ‘Edgeworth’s Taxation Paradox and the Nature of Demand and Supply
Functions,’ published in the Journal of Political Economy, October 1932. The extent
to which partial and general analysis may co-operate in the sense explained in the
text, shows up well in Marco Fanno, 'Contributo alia teoria dell’ offerta a costi con-
giunti,’ Giomale degli Economists October 1914, and in a later work of the same
author which belongs here, 'Contributo alia teoria economica dei beni succedanei,’
Annali de Economia, 1926.

13 See in particular Principles, pp. 587 et seq. and the manner in which he arrived
at the ‘general theorems’ on pp. 609 and 611. As regards the former passage it is
noteworthy that he did not postulate the existence of social production functions
(i.e. production functions that are to apply to the economy as a whole) but, after
having carried out his analysis within the individual industry or even firm, confined
himself to stating that ‘the substance of the problem is the same in every industry’
(p. 588). We shall return to this in sec. 8.

EQUILIBRIUM ANALYSIS

997

ments of partial analysis in the methods of general microanalysis of the Wal-
rasian type rather than in a separate body of aggregate analysis (macroanalysis).

We shall see (Part v, ch. 5) that it is the latter solution which appeals to
many economists of our own day, especially to members of the Keynesian
group. These divide up economic theory into a theory of the individual firm
and a macroeconomic theory that is to take care of the relations between
aggregate consumption, investment, employment, 5 and so on. It is therefore
worth our while to point out, first, the historical connection that exists in
this respect between Marshall and his apparently so rebellious followers of
the 1930’s and, second, the extent to which this combination of the theory of
the individual firm and macroanalysis has been anticipated during the period
under survey.

As regards the first point, the fact that Marshall made the small industry
his cheval de bataille in Book v of his Principles should not be allowed to ob-
literate the not less important fact that much of his analysis of industries was
really carried out in terms of the economy of the individual firm, 14 and that
even beyond what this implies Marshall assembled practically all the bricks
and all the mortar required for the theory of the individual firm, including
even a fairly complete assortment of all those circumstances that prevent the
sweeping generalizations of pure theory from working out in real life and
have been repeatedly adduced as objections against his own generalizations
(see in particular Principles, Book vi, ch. 8 and the notion of normal profit
there developed, especially pp. 696 and 700). Therefore, so soon as the con-
cept of the industry gave way under modern criticism, the one of those divi-
sions of economic theory lay ready at hand while the desirability of the other
imposed itself much more obviously on his pupils than it would have imposed
itself upon pupils of Walras.

As regards the second point, it cannot be too often repeated that Marshall
himself gave no lead toward macroanalysis. But macroanalysis itself and its
combination with microanalytic explanations of individual behavior were old.
Quesnay’s tableau is a macroanalytic description of a stationary circuit flow
of economic life, and Quesnay supplemented it, as we have seen, by a micro-
analytic theory of exchange. In the following period, Ricardo did much the
same thing: his distributive shares are aggregates but the reason why they
behave as they are supposed to do is derived from a fragmentary micro-

14 The bridge between the theory of the small industry and the theory of the
individual firm was his Representative Firm (later on reformulated, by Pigou, into the
Equilibrium Firm). This curious construct embodies a most interesting attempt to
resolve or to circumvent the difficulties that arise when we try to describe industrial
processes by means of concepts developed from the life of individual firms. It is
neither an average nor a marginal nor a leading firm but one in the position and
structure of which the conditions of the industry are at any given time reflected in
such a manner that certain propositions hold with respect to it that do not hold
with respect to any actually existing firm or with respect to any industry as a whole.
Marshall’s authority as a teacher secured mechanical acceptance of the concept. But
it received neither the criticism nor the development it deserves.

998 IV: FROM 1870 TO 1914 AND LATER

analysis. During the period under survey Bohm-Bawerk also did much the
same thing: he started with a theory of individual behavior and with a theory
of exchange that is based upon it; but, on the highest floor of his building
there is almost nothing left but aggregates such as (value of) the sum total of
wage goods, (value of) total output, and an aggregative 'period of production’
to boot. Similarly, Wicksell reasoned on a social production function without
displaying any symptoms of critical discomfort. And there is hardly any need
for adding that this Quesnay-Ricardo-Bohm-Wicksell method is also that of
Lord Keynes.

7. The Walrasian Theory of General Equilibrium *

In this section we shall analyze the logical structure of Walras’ system of
the conditions or relations (equations) that are to determine the equilibrium
values of all the economic variables, to wit: the prices of all products and

* [This section on the Walrasian Theory of General Equilibrium was written in
the last year (possibly in the last few months) of the author’s life. The material in
subsections (a), (b), and (c) was found in typescript (unread by J. A. S.), whereas
subsections (d) and (e) were in manuscript. J. A. S. probably intended only 4 sub-
sections; his subsection (b) included what is now (c). The pages were not numbered
and there were no titles for the subsections, but the intended order seems perfectly
clear and agrees with the order in Walras’ table of contents ( Elements , pp. 489-91).
There was no opportunity for the inevitable minor revisions and corrections usual in
any work of this kind, but the final writing shows every sign that the author knew
what he wanted to say. He had started and abandoned many other attempts before
the final one.

He had not made up his mind, however, concerning the title and the brief intro-
ductory paragraphs. There were at least three unfinished introductions, one of which
appears below in this note and a second as the first two paragraphs of the text. There
were also three different titles suggested: the one actually used above for this section, the
one given below, and a third, ‘General Analysis: The Walrasian System.’

The following unfinished introduction may have been the last one:

‘7. Walrasian Microanalysis. In this section I shall sketch the main features of the
Walrasian system, reformulating certain points for convenience of exposition and
leaving a number of others for closer consideration in section 8 and in the appendix
to this chapter. This system that Walras embodied in a system of equations will be
discussed verbally. Barring a brief remark, we shall assume pure competition all round.

‘We consider a closed domain that does not act upon, or experience any influence
from, the outside world. In this domain there are households which sell productive
services (we neglect for the sake of brevity services that are consumed directly, such
as personal services, except those that are consumed by their owners in the form of
leisure or pleasure grounds) and purchase products; and firms that purchase productive
services and sell products. But whereas the households sell their services only to firms,
the firms sell products not only to households but some firms also produce certain
products (raw materials and equipment) for sale to other firms. In order to make the
essential problems stand out clearly, we shall at first disregard these intermediate prod-
ucts and reason as if firms did nothing but combine labor and services of natural
agents into products for sale to households and then introduce . . .’]

EQUILIBRIUM ANALYSIS

999

factors and the quantities of these products and factors that would be bought,
m perfect equilibrium and pure competition, by all the households and firms.
Let us notice at once that, since the determination of these quantities implies
the determination of individual as well as group and social incomes, this theory
also includes all that is covered by the concept of Income Analysis and that
the conditions or relations to be considered, though they are fundamentally
microanalytic in nature (they refer fundamentally to the quantities bought
and sold by individual households and firms), also include macroanalytic
aspects, for example, as regards total employment in the society 7 . It cannot be
too strongly impressed upon the reader that it is not correct to contrast in-
come or macroanalysis of, say, the Keynesian type with the Walrasian micro-
analysis as if the latter were a theory that neglects, and stands in need of
being supplemented by, income and macroanalysis.

Attention should also be drawn at once to three other points. First, I have
spoken above of prices of products and factors. But Walras’ theory of pricing,
primarily and on the ground floor, refers to prices of services of products and
factors. This amounts to the same thing only as regards products and factors
that do not serve more than once. For all the others, the problem of pricing the
products and factors themselves is a distinct problem that is solved on a sec-
ond floor, as we shall see. It would be unnecessarily pedantic, however, to in-
sist on this where no misunderstanding is to be feared. Second, I have spoken
of prices ‘that would be paid in perfect equilibrium and pure competition/
This manner of speaking is not Walrasian: Walras, much like J. B. Clark,
conceived these equilibrium prices to be, normally, the actual - level around
which prices oscillate in real life , 1 which involves a claim which I do not wish
to make. Third, Walras grouped his productive services into services of land,
labor, and ‘capital proper/ 2 but this does not spell acceptance of the old
triad of factors: actually Walras admitted an indefinite number of means of
production and services. [This piece of manuscript breaks off here.]

(a) Walras ’ Conceptualization. The description of the economic pattern

1 Like Clark, he used the analogy with the ‘level’ of a lake in order to convey his
idea — the old idea of A. Smith.

2 As we know, Walras defined capitaux, in a wider sense, as all ‘goods’ that serve
more often than once and, in a narrower sense, as durable goods that are themselves
produced ( capitaux proprement dits). Their services he called revenus, no matter
whether they are consumed by the owner (e.g. as leisure in the case of ‘personal
capital’: this leisure is still travail) or used productively. This conceptual arrangement
which Walras derived from his father, Antoine Auguste Walras (1801-66; Theorie de
la richesse sociale, 1849) and which was (substantially) adopted by Irving Fisher, has
its logical advantages but is for us important only in so far as it must be borne in
mind if Walras’ reasoning is to be correctly understood ( legon 17). For the same
reason, I repeat that the capitals, in addition to rendering services that are directly
consumed or are transformed into products, may also render a service d' approvisionne-
ment that may in turn be consumable or productive. Lemons 18 and 19 describe
minutely Walras’ set-up of the process of production and the accounting system of
his firms — matters that have not attracted the attention they deserve.

lOOO iv: FROM 1870 TO 1914 AND LATER

that Walras’ equations were to express is contained in Elements , 3 legons
17-19. The functioning of this pattern is further illustrated by the tableau
economique presented in legon 35, where he also indicated his opinions
concerning the oscillations that occur around the equilibrium state. 4 We
are introduced to his entrepreneur and, by means of a most useful anal-
ysis of a simplified accounting system, to the structure of a typical firm’s
operations. This analysis dovetails with a list of assets 5 that determines
much, if not everything, in Walras’ theoretical organon. For our present
purpose it will be useful to note, or to note again, some of the salient
features of this list of assets. As we know, the Walrasian entrepreneur is the
agent (a physical person or a corporation) 6 that buys raw materials from other

3 [Elements d' economic politique pure ou theorie de la richesse sociale (1st ed.
1874-7; 4th ed. 1900; the edition definitive, 1926, is the one quoted throughout unless
a different one is mentioned specifically).]

4 These views do not differ essentially from those of A. Smith. Walras’ analogy
of market equilibrium with a lac agite par le vent, which is so characteristic for his
belief in the reality — normality even — of the equilibrium level of values, has been
repeated by J. B. Clark. It should be emphasized once more that this uncritical be-
lief, undoubtedly held widely at that time, is untenable; but that this fact does
not render analysis of the properties of those equilibrium levels either superfluous or
practically useless (see above, sec. 3 on the ‘dreamland of equilibrium’). It should
also be emphasized that Walras (see, e.g., Elements, p. 370), though he did under-
estimate the distance between his theory and the facts of capitalist reality, was by
no means unaware of its existence. And no indictment at all can be leveled against
Pareto on this score.

5 Every object that enters the range of economic consideration, even ‘labor power’
(Marx) or the capitaux personnels (Walras), may be treated as an asset, if we halt
the economic process for a moment and list every element of it. Presently Walras
sets the process into motion when the difference between funds and flows asserts
itself, and we are told how the assets are kept reproducing themselves. There are
thirteen kinds of assets: the ‘capitals’ (all things that serve more often than once,
including land, labor power, and produced capitals) that produce ‘services’ for direct
consumption (including leisure); the ‘capitals’ (land, labor power, and produced capi-
tals consisting of plant and equipment) that produce productive services; and in addi-
tion to these six items, the produced capitals ( plant and equipment) that are ready
for sale in the hands of their producers and yield no services as yet (the capitaux
neufs ); the stocks of consumers’ goods that serve once only in the hands of the con-
sumers; the raw materials and semi-finished goods in the hands of the producers, who
are going to use them; the stocks of (transient) consumers’ goods and raw materials
in the hands of the producers who hold them for sale; and finally three types of
money stocks, namely money held by consumers to finance consumers’ transactions,
money held by producers to finance producers’ transactions, and monnaie d’epargne.
The Keynesian controversy makes the translation of the last item a delicate task. I
think that ‘money earmarked for the purpose of investment’ comes nearest to ren-
dering Walras’ meaning.

6 Although Walras blamed English economists for confusing the entrepreneurial
function with that of the capitalist and French economists for confusing it with that
of labor (entrepreneurship being a kind of labor), his theory of entrepreneurship does
not go much further or deeper than J. S. Mill’s or J. B. Say’s. All he did was to

EQUILIBRIUM ANALYSIS lOOI

entrepreneurs, hires land from landowners, personal aptitudes ( facultes per-
sonnelles ) from workmen, capital goods from capitalists, and sells the prod-
ucts that result from the co-operation or combination of their services for
his account . 7 Into this and the meaning of the concept of entrepreneurs who,
as such, neither make nor lose, we need not go again. Important is it, how-
ever, to notice three other things.

First, Walras was careful — much more so than other writers — to construct
theoretically, and to identify practically, the various ‘markets' through which
his economic mechanism works and the interaction of which constitutes his
analytic organon. Simplifying and combining as much as we can, we have the
two fundamental markets, those of the products and of the productive services,
and in addition the market that determines the prices of the capitals, hence
also the rate of new revenue and the market of means of payment. The reader
may be somewhat surprised at my emphasizing this apparently trivial matter.
But the strict association of every part of the argument with an identifiable
market, even on the highest level of abstraction, is an essential feature of
Walras' procedure that starts in each of these four cases with a theoretical solu-

isolate the "combining function' more clearly. As is shown by the fact that he ad-
mitted corporations into the circle of entrepreneurs, his conception was one belonging
to the range of ordinary business routine and is roughly equivalent to Marshall’s fourth
productive agent, organization.

7 As a result of Walras’ strict distinction between capitals ( capitaux :), i.e. goods
(including labor power) that serve more often than once, and services (or revenus ) —
a distinction which lapses in the case of goods that serve hut once — the Walrasian
theory of pricing runs on two levels: immediately (on the first level) we have to do
with the pricing of services only (which includes the pricing of transient goods). On
another level we then meet the problem of the pricing of these capitals themselves
(from which the pricing of the labor power, unless enslaved, is of course in practice
excluded). All incomes uniformly result from the sale of services, a conceptual ar-
rangement that creates no difficulty in the case of ‘land’ (permanent factors) and
labor but, in the manner to be explained, begs the question of the existence of a
net income in the case of produced and durable goods that wear out in time. For
the moment we note again that Walras really admitted an indefinite number of pro-
ductive services, although he gave in to tradition by grouping them into services of
various kinds of land, labor power, and produced capitals and thus seems to accept
the old triad of factors. We must also note that, foreshadowing later developments,
he stated at once (p. 197) that only land and labor power (plus plant and very few
items of equipment) are hired in kind. Most of the durable instruments of produc-
tion are hired by entrepreneurs not in kind but in money, which is what capitalists
save and lend, although at first, before having introduced money into the productive
process, Walras allows capital goods to be let in kind. This seems to involve a stricter
parallelism between lending money and lending capital goods than, as we shall see,
Walras was prepared to admit: actually his capitalists have money and not goods to
lend to entrepreneurs; and it is only for perfect equilibrium in pure competition that
the process is supposed to go on as if capitalists were owners of produced durable
goods. This subtle point must be kept in mind — mathematically, it makes all the
difference between an identity and an equilibrium condition — particularly if we are
to see the affinity between the Walrasian and the Keynesian system.

1002 IV: FROM 1870 TO I914 AND LATER

tion of an equilibrium problem and then investigates the manner in which
this theoretical solution works out 'practically’ in the corresponding market . 8

Second, we observe when going over Walras’ list of assets that very consider-
able emphasis is placed upon stocks or inventories: there are inventories of
new capital goods, consumers’ goods’ inventories held by households and by
firms, raw-material inventories held by both their producers and their users,
and also, as we have seen, stocks of money (cash holdings) of various types.
Since the existence of these inventories presupposes a certain past behavior
of the people concerned and since their current reproduction presupposes
certain expectations, the system — even if perfectly stationary — still depicts a
process in time and might therefore be called ‘implicitly dynamic.’ If Wal-
ras did not feel like this and if we agree with him in calling it static,
this is only because of a device that was perhaps justified by the purpose
of exhibiting the logical skeleton of economic life but is highly artificial
all the same: he tried to build up an equilibrium state ah ovo in the man-
ner in which it would be built, if smooth and instantaneous adaptation of
all existing goods and processes, to the conditions obtaining at the mo-
ment, were feasible. His households do not purchase consumers’ goods or
sell productive services outright. Nor do his firms (entrepreneurs) purchase
productive services and offer products outright. They all merely declare what
they would respectively buy and sell (produce) at prices cries au hasard , that is,
announced experimentally by some agent in the market, and are free to change
their minds if these prices do not turn out to be the equilibrium prices: other
prices are thereupon announced, other declarations of willingness to buy or
sell (and to produce) are written down on bon s — pieces of paper that do not
carry any obligation — until equilibrium values emerge, namely prices such
that no demand willing to pay them and no supply willing to accept them
remain unsatisfied. And the only mechanism of reaction to these variations of
experimental prices that Walras recognizes is to raise the prices of commodi-
ties or services, the demand for which at these prices is greater than the sup-
ply, and to reduce the prices of commodities or services, the supply of which
at these prices is greater than the demand . 9 I shall not stay in order to proffer
the obvious arguments that may be adduced in mitigation of such heroic
theorizing.

8 Each of four problems — pricing of products, pricing of productive services, pricing
of capital goods, and ‘pricing of money’ — is thus solved twice: in each case we have
first a proof of the existence of an equilibrium solution and second the proof that
this solution is the one which the market mechanism under pure competition tends
to establish or, slightly more technically, we have in each of the four cases two dis-
tinct proofs (or attempts at proofs), the one of the existence of an equilibrium solu-
tion, the other of the tendency toward it. Since the latter proof involves the state-
ment that, if the equilibrium solution be once hit upon, it would not be departed
from without the intervention of an additional force, we equate the proof of an
equilibrium tendency to a proof of the stability of the equilibrium solution.

9 Edgeworth’s method of arriving at equilibrium prices and quantities by means
of ‘recontracting’ comes of course to the same thing.

EQUILIBRIUM ANALYSIS IOO3

[Apparently there is no discussion of the last of the 'three other things’ that it
is important to notice.]

[(b) The Theory of Exchange.] Since the equilibria in the two basic mar-
kets, the consumers 7 goods and the service markets, and the way in which they
interlock — simultaneously determining one another — -are of decisive impor-
tance for the strength of the Walrasian structure we shall now consider these
two basic markets separately. For this purpose we neglect both saving and the
production of capitaux neufs, 10 a procedure which involves the assumption that
the produced capitals are just as permanent and indestructible as is 'land. 7 Fur-
ther, in order to emphasize the steps in the procedure, we shall indeed intro-
duce a numeraire — the standard commodity in terms of which all exchange
relations are to be expressed — but no money that actually circulates or is being
held. 11 Several questions that cannot be answered without impeding the prog-
ress of our argument will be reserved for section 8.

We know already that Walras based his structure on an elaborate theory
of exchange which fills two distinct roles: first it was to describe the funda-
mental features of economic logic which, with Walras, amounts to the same
thing as the fundamental mechanism of competitive markets in general; sec-
ond, it was to yield the behavior equations (maximizing equations) of the
households. As regards the first role, Walras 7 theory of economic logic issues
into a marginal utility explanation of economic value that will be discussed,
in its historical setting, in the appendix to this chapter. Here we are not in-
terested in such questions as whether there is any sense in speaking of mar-
ginal utility as the 'cause 7 of value, but immediately proceed to a discussion
of the second aspect of the Walrasian theory of exchange. We can do this
because, as has been pointed out by Pareto, 12 the concepts of marginal and
total utility are redundant so long as we merely wish to formulate equilibrium
conditions. On other features of this theory of exchange a few comments are
nevertheless desirable.

Making ample use of the concepts that we have just voted superfluous,
Walras first developed brilliantly the theory of (competitive) exchange of two

10 For brevity, we also postulate that firms do not purchase raw materials from
one another: they all of them simply combine 'services 7 into products for sale to
households. Unfortunately, we cannot similarly throw out the services that are di-
rectly consumed by their owners.

11 This simplifying measure must not, however, be interpreted, either with reference
to Walras himself or with reference to our own presentation, as the theory that
money does not enter into the fundamental process of determining values and is merely
a technical device or 'veil. 7 All that we mean is that we shall posit this question
separately, meanwhile reserving the right to scrap or modify the results at which we
are aiming just now, if it should turn out that the intervention of money requires
us to do so.

12 Implicitly this was already seen by Antonelli, Boninsegni, and others. For Pareto’s
statement see e.g., Manuel p. 542. Equation 9 on that page does not only without
marginal utility but also without any 'index function 7 : the first 76 paragraphs of the
appendix to the Manuel render the Paretian version of Walras 7 legons 5-16.

1004 IV: FROM 1870 TO 1914 AND LATER

commodities. The point to notice is that he fully recognized the possibilities
that there may be no solution to the problem or else multiple equilibria which
in his set-up reduce to three, two stable and one unstable, whereas in general
no such situation will occur and unique equilibrium prices will practically al-
ways emerge if there are many commodities in the market.

[This piece of manuscript ends here but the next one seems to follow with no
serious break in the argument.]

[(c) Determinateness and Stability of Simple Exchange.] Since the theory
of exchange, besides providing the theoretical description of the behavior of
consumers (households), also serves to display the fundamental properties of
economic action in general (the logic of choice), there is point in raising right
here the questions of determinateness and of stability of simple exchange in
a perfectly competitive market, indirect exchange (arbitrage) being duly taken
into account and a standard commodity ( numeraire ) but no money being
used . 13 We raise these questions in the same sense as did Walras, except for
one point that will appear presently.

People — say n of them— endowed with definite tastes and possessing, to
begin with, arbitrary quantities of an arbitrary number of well-defined com-
modities, say m in all, appear on the market, in order to take advantage of the
possibilities this market may offer to them of improving upon the satisfaction
of their wants as guaranteed by their original possessions . 14 We thus accept
Walras’ manner of speaking of a tendency on the part of all participants to
maximize their satisfaction . 15 We also accept the usual assumptions about

13 The arbitrage operations are supposed to be carried out in terms of the numeraire.
It should be repeated, however, that they are supposed to be organized in such a
manner as not to deflect any quantity of the standard commodity from its uses as
a commodity. If people hold any part of the numeraire commodity this would turn
it into money.

14 Those original possessions of every participant in the market are data that are
subject to certain conditions such as that the quantities originally possessed should
all be non-negative, that at least one of them should be greater than zero, and that
the original distribution should not violate the hypothesis of pure competition. For
the rest, in leqon 14, Walras establishes that, in full equilibrium, prices would not
change if the commodities were redistributed between participants so long as the
sum of the possessions of each participant remains equivalent in terms of numeraire
(theoreme des repartitions equivalentes) . I mention this theorem, which space does
not permit us to discuss, to give an example of Walras’ awareness of the necessity
of establishing every point in his schema by formal proof. It is this awareness (what-
ever the success or shortcomings of his proofs) that made him the teacher of all
theorists of the future.

15 As already stated, this is not necessary. But it was the almost universal practice
of Walras’ generation, not only of the mathematical economists such as Edgeworth
and Marshall but also of the Austrians, most explicitly so of Bohm-Bawerk. The
questions that are now before us are not affected by our lapse into primitive utility
theory. We do not imply measurability, and maximizing an index of satisfaction would
do just as well.

EQUILIBRIUM ANALYSIS IOO5

continuity and differentiability, at least of the resulting market ‘curves/ Fi-
nally we assume for the moment, as did Walras, that the marginal utility func-
tions of every participant, for every commodity, not only exist but are func-
tions of the quantity of this commodity alone, that is, independent of what-
ever other commodities he might possess. They are all monotonically decreas-
ing. We then have: n(m — 1) Behavior Equations expressing for all n par-
ticipants the quantities (including zero quantities) they will give away or ac-
quire at any given system of exchange relations (or prices in terms of the
numeraire) by virtue of the condition that they will go on exchanging until
no further exchange can increase their individual satisfactions; 16 n equations
such that all the quantities the participants acquire and give away, each quan-
tity multiplied by its price in the standard commodity, must add up to zero,
if we give minus signs to quantities given away and plus signs to quantities ac-
quired (Individual Balance Equations); finally m equations such that, for every
commodity, the total amount of quantity given away must equal the total
amount of quantity acquired for the market as a whole (Market Balance
Equations ). 17 These are m(n + i) conditions or equations. But, as is easily
seen, one of them, for example the last one of the set of market balance equa-
tions, may be shown to follow from the rest of these and from the household
balance equations and must therefore be thrown out as not independent.
Thus we are left with m(n + 1) — 1 independent ones by which to deter-
mine the variables or ‘unknowns/ namely, the m equilibrium prices and the
mn quantities exchanged by the households. Now, we may say either that,
since the price of the numeraire commodity in itself is of necessity always
equal to unity, there are only m — 1 prices to determine; or that, since the
two first sets of equations (the behavior and the household balance equations),
considered by themselves, are homogeneous of zero degree in the prices, it is
only the exchange ratios and not the absolute prices which we can determine,
though we can then translate these ratios into absolute prices by means of the
numeraire-price identity . 18 The reader should make sure that he understands
the perfect equivalence of these two ways of putting the matter and also the

16 This means, as we know, that they will continue to exchange until the marginal
utilities to them of the quantities of all commodities that can be had for a unit
of numeraire (if the numeraire is cigarettes and the unit a package, then the mar-
ginal utilities of a package's worth of every commodity) are equal.

17 The prices for which the last group of equations is verified are the market
equilibrium prices. In the terminology foreshadowed by Walras but definitively es-
tablished by Professor Hicks f Value and Capital, p. 63) we can express this last
group of equations also by saying that, for every commodity, excess demand must
be zero

18 A function x x = f(x 2 , x 3 • - ■ x r ) is called homogeneous of zero degree if, X

being any positive arbitrary constant, the dependent variable remains the same when
the independent ones are all multiplied by X, so that x x = f(kx 2 , Xx 3 * • • Xx r ). Put-
ting now X equal to, say i/x 2 , we get x x — f(i, x 3 /x 2 x r /x 2 ), that is to say, a re-

lation in which the former independent variables of which there are r, are replaced
by ratios of which there are only r — 1.

1006 IV: FROM 1870 TO I914 AND LATER

special sense in which it is true to say, that in this set-up absolute prices (or
the ‘price level’) are indeterminate. 19

Now we ask: do these conditions suffice to determine values of these vari-
ables? This, to repeat, is the question of the ‘existence/ in the mathematical
sense, of a set of values that will satisfy the conditions. This question is
synonymous with the question whether the equations embodying the condi-
tions are capable of being simultaneously solved. But it is neither the question
whether there is any tendency in our market to establish these solutions, if
they do exist, nor the question whether these solutions or equilibrium values
are stable or not.

Of all the unjust or even meaningless objections that have been leveled at
Walras, perhaps the most unjust is that he believed that this existence ques-
tion is answered as soon as we have counted ‘equations’ and ‘unknowns’ and
have found that they are equal in number. We have already seen that he
made sure of one additional prerequisite — independence of equations. But as
we analyze his argument we discover further that, though his mathematical
equipment was no doubt deficient, his genius saw or sensed all or almost all
the other relevant problems and practically always arrived at correct results.
If he failed to answer all questions satisfactorily, there was immortal merit in
his having posited them. If his work is not the culmination of this type of
analysis, it certainly is its foundation.

He saw the possibility that our system of equations may not admit of any
solution at all. He also saw, and even proved, that the solution, if it exist, may
not be unique. All he claimed was that solutions exist normally and that,
if the commodities in the market are numerous, there will in general be a
unique solution ( Elements , p. 163). Since in his schema quantities demanded
and offered are single-valued functions of the prices and since his marginal
utility functions are monotonically decreasing, so much may be readily granted,
although Walras did not emphasize, perhaps was not fully aware, that the
unique solution, where it ‘exists/ need not be economically meaningful in the
sense that an actual system might work with it. 20

19 This merely means that, although it seems natural to put the ‘price’ of the
numeraire, p n , identically equal to unity, p n — 1 = o, we could of course just as well
put it equal to any other arbitrary figure without altering anything else in this set-up.
Walras discussed the theory of the numeraire very carefully, giving, among other
things, the rule for translating the prices expressed in one numeraire commodity into
prices expressed in another ( Elements p. 150). It should be clear that this rule does
not apply to money or does so only under quite unrealistic assumptions.

20 The occurrence of such a case, e.g. of the inability of some participants in the
market to secure a ‘maximum of satisfaction’ above starvation point, might be treated
as a special form of economic, if not of mathematical, breakdown of the system. In
itself, however, it is perfectly natural that a system that only represents the logic
of certain relations cannot, in the absence of additional information, tell us anything
about the size of the resulting shares in terms of goods. Also it cannot be repeated
too often that since so far as Walras treated only a problem in the pure logic of
simultaneous determination of variables, and therefore neglected, e.g., all lags of any

EQUILIBRIUM ANALYSIS

IOO7

We may as well ask the further question: can we not do better than that?
This question divides up into two parts. We ask first, can we state more rigor-
ously the conditions on which the existence of solutions, and especially of a
unique solution, depends within the Walrasian assumptions themselves? The
answer is affirmative. Such a more rigorous statement has in fact been pro-
vided by Professor Wald . 21 Without going into several delicate questions that
Wald’s brilliant work raises (and without subscribing to every sentence of it),
we simply note that Walras’ analysis emerges substantially unimpaired . 22 But,
second, we have to ask whether the existence theorem still stands if, as
we must, we make total and marginal utility a function of all the commodi-
ties that enter a household's budget. This is of course the real difficulty. But
the answer, under restrictions that seem tolerable, is affirmative even in this
case. It has been given by Professor Amoroso . 23 For a treatment of the whole
subject from the standpoint of the theory of demand the reader is referred
to the standard work by Professor Wold . 24

We turn to the question of stability, with which we shall include the ques-
tion of the presence of a tendency toward such unique (theoretical) solutions
as may exist . 25 It is one of the greatest merits of Walras to have distinguished

kind, the explanatory value of this part of his argument does not go beyond clearing
up one of the many aspects that even pure theory must attend to.

21 See Abraham Wald (1902-50) in the periodical Ergebnisse eines mathematischen
Kolloquiums (vols. 6 and 7, 1935 and 1936), and Wald’s non-technical report on
his investigation in ‘Ober einige Gleichungssysteme der mathematischen Okonomie/
Z eitschrift fur Nationalbkonomie, December 1936. [This article has been translated
as a memorial to Wald, 'On Some Systems of Equations of Mathematical Economics/
Econometrica, October 1951.)

22 Wald’s (justified) attack upon the manner in which Walras tried to establish
stability is another matter and will be touched upon presently. I do not think it
correct, as Wald does, to mix this up with the question of the 'existence’ of solutions
in the sense explained. I also think that Walras’ reason, given on p. 163 of the
Elements, for expecting that the solution will in general be unique, if there are very
many commodities in the market, compares favorably with Wald’s more rigorous
statement that uniqueness will exist if the marginal utility functions are such that
the utility value (marginal utility times quantity, the concept is due to von Wieser
and Fisher) is an increasing function of the quantity. See also Walras, Elements
p. 125.

23 That is. Amoroso proved in a manner with which I cannot find any (serious)
fault that, given the prices, the set of the quantities of commodities with which an
individual will leave the market is uniquely determined, not indeed always but under
acceptable hypotheses. This is only part of the thema probandum but, in the case
where marginal utilities are partial differentials, a very important one. See 'Discussione
del sistema di equazioni che definiscono l’equilibrio del consumatore,’ Annali di
Economia, 1928.

24 Herman Wold, ‘A Synthesis of Pure Demand Analysis/ three (English) papers in
the Skandinavisk Aktuarietidskrift, 1943-4.

25 I wish to re-emphasize that in general it seems to me an error to identify the
problem of the 'tendency’ with the problem of ‘stability’: a golf ball that rests on
a green has no tendency to get into the appropriate hole unless there is a player to

loo8

IV : FROM 1870 TO 1914 AND LATER

between the ‘existence’ and the ‘stability’ problems and to have paralleled the
argument about the former by an elaborate argument about the latter. How-
ever, he treated the problem of stability in a peculiar way, because it posed
itself to him in connection with what in strict logic is an entirely different
problem, namely, the problem of the relation between the mathematical solu-
tion of his equations and the processes of any actual market: first and fore-
most he was anxious to show that the people in the market, though evidently
not solving any equations, do by a different method the same thing that the
theorist does by solving equations; or, to put it differently, that the ‘empirical’
method used in perfectly competitive markets and the ‘theoretical’ or ‘scien-
tific’ method of the observer tend to produce the same equilibrium configura-
tion. Posing this problem then naturally puts the question of stability into the
foreground, that is, the question how the mechanism of competitive markets
drives the system toward equilibrium and keeps it there.

Since it is clear from the outset that the markets of real life never do attain
equilibrium, this question can only be posed for markets that are still nothing
but highly abstract creations of the observer’s mind. The people, who appear
with initial stocks of commodities and definite marginal utility schedules, are
confronted with prices cries au hasard by someone. They decide to give away
certain quantities of some commodities and to acquire certain quantities of
others at these prices. But as we know they do not actually do so but only
note on born what they would ‘buy’ or ‘sell’ at those prices should they per-
sist or, if they enter into contracts, they reserve the right of recontract. It is
easy to see that if no recontract proves necessary and if the bons are redeemed,
then the conditions embodied in the equations must indeed be fulfilled in
practice. Whenever they are not, there will be recontracting at different prices,
which are higher or lower than the original ones, according to whether there
is positive or negative excess demand in the respective commodities, until de-
mand and offer are equated in all cases ( Elements , p. 133). Whatever we
might have to say about this on the score of realism, 26 it seems at first sight
to be intuitively clear that, so long as no other mechanism of reaction is ad-
mitted than the one exclusively considered by Walras, equilibrium will be
attained under these assumptions; that, in general, this equilibrium will be
unique and stable; and that the prices and quantities in this configuration will
be those we get from our theoretical solution. 27 Nevertheless, Walras himself

hit it and sometimes not even then. But if somebody puts it into the hole it will
stay there in stable equilibrium. This should show the rationale of distinguishing be-
tween the two problems. In our case, however, the factors that make for stability of
the equilibrium situation are at the same time ‘forces’ that may account for a tend-
ency of our variables to get into the equilibrium configuration. And so we waive our
objection, which is important only for evolutionary processes.

26 See again Nicholas Kaldor, ‘A Classificatory Note on the Determinateness of
Equilibrium,’ Review of Economic Studies, February 1934.

27 This prima facie impression may account for the fact that even today theorists are
not greatly exercised about the problem as thus posed. We may combine the individ-
ual demands and offers in the m commodities into m equations of the form D i (p 1 * * *

EQUILIBRIUM ANALYSIS

IOO9

displayed hesitation on a very important point that has been strongly re-empha-
sized by Professor Wald (Z eitschrift, op. cit. p. 653). It is this. Equilibrium
values in the perfect market are established by a game of trial and error -
(tdtonnement) — prices being adjusted and quantities being readjusted in re-
sponse. For clearness, suppose that all prices except one do equate the re-
spective demands and offers. We have a rule by which to adapt the one price
that does not equate demand and offer. But if we do adapt it we thereby
upset the equilibria in all the other sections of the market, whose prices are
no longer equilibrium prices since they equate supply and demand in these
other markets only with reference to the one price that failed to do so. There-
fore we have in turn to adjust the others, and the only reason Walras gives
for expecting that the new configuration is nearer to equilibrium all round
than was the original one is that this is 'probable/ because the effects of the
adjustment of the price that was originally out of line upon the excess demand
of the corresponding commodity are direct, strong, and all in the same direc-
tion, whereas the effects of the necessary readjustments of the other prices
are most of them indirect/weaker, and not all in the same direction: in part
they compensate one another. As it stands, this attempt at proving both tend-
ency toward, and stability of, the equilibrium of the market evidently lacks
rigor. This has been increasingly recognized of late but no entirely satisfactory
solution of the problem has been offered as yet. 28 [This subsection is unfin-
ished.]

[(d) Walras ’ Theory of Production .] We turn to the second branch of
Walras’ pure theory of the economic process, namely, the theory of produc-
tion, which, as we know, is nothing but a theory of the manner in which the

p m ) — O i (p 1 • • • p m ). Of these equations we lose one owing to the fact that it follows
from the others. Of the m prices we lose one owing to zero homogeneity. Stability is
secured by imposing the condition that any price higher than the equilibrium price in-
duces negative, and any price lower than the equilibrium price induces positive, excess
demand, a condition carefully safeguarded by Walras. All the doubts that really worry
theorists, so far as they do not proceed from their qualms about the assumptions that
identify Walras’ set-up, enter only on the introduction of genuine money.

28 Readers who are sufficiently interested in these delicate questions may welcome the
following signposts on this road. First we note that Pareto did not improve the Wal-
rasian argument in this respect except for recognizing more explicitly that oscillations
in the neighborhood of values may lead away from them as well as toward them. Sec-
ond, from Pareto to Hicks, very little advance was made in this respect, however much
headway was made in others. It was Professor Hicks who formulated stability condi-
tions that were then improved by other writers, especially Samuelson and Metzler.
Samuelson was, I believe, the first to point out that the problem of stability cannot be
posed at all without the use of an explicit dynamic schema, i.e, without specification
of the manner in which the system reacts to deviations from equilibrium. Third, our
report shows that Walras did present such a dynamic schema: he specified a sequence
of steps by which the system is supposed to work its way toward stable equilibrium
for which he did not receive the credit he deserves. This schema covers not more than
a special case but for this special case a more rigorous proof is possible in spite of the
fact that he himself failed to give it.

ioio

IV: FROM 1870 TO 1914 AND LATER

mechanism of pure competition allocates the ‘services’ of all the different kinds
and qualities of natural agents, labor power, and produced means of produc-
tion . 29 This theory of allocation in turn is the same thing as the theory of
the pricing of these services, because it is the price mechanism which brings
these services into the place they actually hold in the great jig-saw puzzle and
keeps them there. Finally, we do not say more than this when we say that the
theory of production tells us which quantities of which products each firm will
decide to produce, and which quantities of which productive services it is go-
ing to buy in view of the given tastes of prospective consumers of its products
and the given propensities of these same consumers considered as ‘owners’ of
productive services. Now, the total quantities of these services, that is, the
quantities of them that are potentially available during a given period of time,
are given because their sources are. But they need not be completely absorbed
by production, nor do they necessarily go to waste if they are not. For an es-
sential feature of the Walrasian schema is that they are all of them capable of
being consumed by their owners directly . 30 Thus, their total quantities and
the propensities of their owners to consume them — possibly even to acquire
further quantities of them for the purpose of consumption — or to part with
them, constitute the second group of data, and Walras’ problem was to show
how these data interlock with those of the first set, the consumers’ tastes, so
as to produce a consistent set of quantities and values . 31

We perceive immediately that Walras strove for a solution of this problem
that was to be entirely symmetrical with the solution he had previously worked

29 Remember that these produced means of production, on the level on which we
are moving now, are being let in kind, and are indefinitely durable, postulates that we
are going to remove presently.

30 With Walras, the services that are used in production therefore have also a use
value for their 'owners.' This creates difficulties that are particularly obvious in the
case of specific instruments of production, such as machines. To assume that, poten-
tially at least, a machine can, at the will of its owner, be instantaneously turned into
an easy chair is indeed heroic theorizing with a vengeance. Only in part is this as-
sumption then relaxed in the theory of the ‘new capitals’ ( capitaux neufs). But it has
its virtue when it is the logic of the structure of the capital-goods stock which is to be
explained ab ovo. We may make it more tolerable by saying that a capitalist’s former
decision as regards the use of the capital good he actually owns has determined what
species of capital good he actually does own. It stands to reason that this attempt at
saving the situation wrecks completely the static framework of the theory. No such
assumption was made by either Marshall or the Austrians but this was only because
they were less rigorous than was Walras. Let me use this opportunity to emphasize
again that, on an infinitely higher level of rigor, Walras really reformulated the theo-
ries of production of A. Smith, J. B. Say, and J. S. Mill. The latter’s theory of pro-
duction, of course, must not be looked for exclusively in his Book 1.

31 In his Manuel, Pareto refined this set-up into his general theory of tastes and
obstacles which, in fact, leads on to a higher level of abstraction and serves especially
to bring out more clearly the logical problems that are lurking in this set-up. The
practical value of the Paretian generalization shows in the ease with which it em-
braces the case of the socialized economy. But it does not help us much on the level
on which we now find ourselves.

EQUILIBRIUM ANALYSIS XOll

out in his general theory of barter in a multi-commodity consumers’ goods mar-
ket. In fact, his theory of production may be described as an attempt to re-
solve, in the spirit of J. B. Say, the case of production into the more general
case of exchange between services and goods and, in the last analysis, simply
between services. He was aware of the costs of this attempt and was willing to
pay them. First, though he did introduce into his mechanism an entrepreneur
who was not merely a capitalist, he reduced him, as we saw, to the purely
formal role of buyer of productive services 32 and seller of consumers’ goods
without any initiative — or income — of his own. 33 In order to emphasize this,
we shall replace the term 'entrepreneur’ by the impersonal term 'firm’: it is
clear that in Walras’ thought the households were really the agents that, both
as buyers of products and as sellers of services, determine the economic proc-
ess. Second, though he was, of course, aware of the fact that production and
adaptation of production involves delays, he at first purement et simplement
neglected these delays ( Elements , p. 215), deferring partial recognition of their
role to the far-off section on circulation and money. We do the same thing
and even accept, for the moment, the apparently impossible assumptions of
constant coefficients of production, 34 absence of any overhead, and all firms in
every industry producing exactly equal amounts of product. 35 And we ask,
first of all, as we did before in the case of multi-commodity barter, whether
with all these 'simplifications’ — some of which were in the end discovered to
be complications — there exists a unique set of solutions for a system of equa-
tions that covers both consumers’ and producers’ behavior, or represents, as it
were, the chassis of economic life.

32 We have seen that Walras was fully aware of the importance of the stocks and
flows of raw materials and semifinished products that entrepreneurs buy from other
entrepreneurs. But where he posed the fundamental problem of production ( legons 20
and 21), he dealt with them cavalierly, confining himself to showing— which is indeed
easy if we neglect all sequences or lags — that these purchases by entrepreneurs from
other entrepreneurs are intermediate steps in a process, the understanding of which does
not suffer by leaving them out.

33 Let me emphasize once more that in the equilibrium of a purely competitive proc-
ess, where nobody is able to exert any influence upon the prices of either services or
products, every entrepreneur would in fact be an entrepreneur ne faisant ni benefice ni
perte: this is neither a paradox nor a tautology (i.e. it is not the result of a definition)
but, under Walras ’ assumptions, an equilibrium condition (or, if you prefer, a provable
theorem). [This point is further discussed in the next section (8).]

34 This involves really two distinct assumptions: (1) that these coefficients, namely,
the quantities of all services that enter the unit of the product, are technologically
given or that there is, for each product, only one technologically possible way of pro-
ducing it; and (2) that these coefficients do not vary in function of the quantity pro-
duced or that there are no economies or diseconomies of scale. This set-up was altered,
later on, by Walras himself. But these questions will be taken up in the next section.

35 Walras does not seem to have observed what was often urged later on, namely, that
this makes the number of firms indeterminate though it does not prevent determinate-
ness of the output of each industry. Since this is not important in our present argu-
ment, we defer consideration of this point also to the next section.

1012

IV: FROM 1870 TO 1914 AND LATER

Intuitively we realize that, with the same qualifications that we had to
make in the general case of multi-commodity exchange and with the further
qualifications that are imposed upon us by the additional assumptions made
by Walras in order to reduce the problem of production to manageability, the
answer will be affirmative. We may balk at the assumptions. We may ques-
tion the value of a theory that holds only under conditions, the mere state-
ment of which seems to amount to refuting it . 36 But if we do accept these
qualifications and assumptions, there is- little fault to be found with Walras’
solution. It comes to this: the households that furnish the services have
in Walras ’ set-up definite and single-valued schedules of willingness to part
with these services. These schedules are determined, on the one hand, by
their appreciation of the satisfaction to be derived from consuming these
services directly 37 and, on the other hand, by their knowledge of the satis-
faction they might derive from the incomes in terms of numeraire that they
are able to earn at any set of consumers’ goods and service 'prices.’ For the
'prices’ of consumers’ goods are determined simultaneously with the 'prices’
of the services and with reference , to one another: every workman, for in-
stance, decides how many hours of work per day or week he is going to
offer in response to a wage in terms of numeraire that is associated with defi-
nite prices, in terms of numeraire , of all the consumers’ goods that would be
produced with the total amount of work being offered at that wage rate.
Mathematically, we express this by making everybody’s offer of every service
he 'owns’ a function of all prices (both of consumers’ goods and the services)
and, for the same reason, everybody’s demand for every commodity another
function of all prices (both of the services and the consumers’ goods). Every-
body’s demand for the numeraire commodity follows simply from everybody's

36 Those who, like myself, do not go so far, must rate the pioneer performance as
such very highly and see a merit precisely in the fact that Walras chalked out the
work that had (in part still has) to be done in the future.

37 Cassels’ popularization of Walras’ system lacks this feature. In consequence, Cassel
had to put the (potentially) existing quantity of services equal to the quantity to be
employed in production in equilibrium. It has been pointed out by Wicksell and later
on by von Stackelberg ('Zwei kritische Bemerkungen zur Preistheorie Gustav Cassels,’
Z eitschrift fur Nationalokonomie, June 1933) that it will in general be impossible to
fulfil this equilibrium condition with constant coefficients of production. This is not
serious because the difficulty vanishes when we introduce variable coefficients, i.e.
substitutability (see sec. 8). But if we accept the constant coefficients and at the same
time refuse to accept Walras’ theory that part of the services are directly consumed
by their 'owners/ then there will be in general unemployment of some services for
which the necessary complements do not exist. These unemployable surplus services
will then, by seeking employment, depress the wages of the employed services of the
same kind, but this lowering of wages may do but little (namely, by cheapening the
products which absorb relatively much of the services in which there is a surplus) to
reduce the unemployment and thus may unstabilize the whole system, owing to in-
compatibility of equilibrium conditions. The case is of no importance. But some
Keynesians may have it in mind when arguing for the possibility of unemployment
equilibria.

EQUILIBRIUM ANALYSIS

IOI3

balance equation, which (since we are as yet abstracting from both genuine
money and saving) is exactly analogous to the balance equation in the case of
multi-commodity barter, except that in the present case the offers are offers
of services and only the demands refer to commodities . 38 From these individual
demands and offers we get the aggregate (net) offers of services and the aggre-
gate demands for products in the market, all in function of all service and
product prices. But the rest of the set-up is crippled — evidently in order to
focus attention upon the great social relation between the ultimate factors that
simultaneously shape consumption and production — by the assumption of tech-
nologically fixed and constant coefficients of production, which readily yield the
remaining restrictions that we need for the determination of prices. To de-
termine prices we need the equations, equal in number to the number of serv-
ices, which express that the quantities of the services employed in all indus-
tries must add up to the total offer of these services, and the equations, equal
in number to the number of products, which express that the coefficients of
production of the services used in each industry, each multiplied by the price
of these services, must equal the unit price of the industry’s product or that in
all industries average cost, in Walras’ case the same as marginal cost, must
equal price.

The number of variables to be determined can easily be shown to be equal
to the number of equations. As to the mathematical question whether these
can be solved for the variables — whether an equilibrium solution 'exists’ — we
have to say much the same as before: Walras did not present an answer that
will satisfy the standards of the modern mathematician, though it could be
shown 39 that he saw and either took or avoided all the hurdles that stand in
the way to an affirmative answer. Of course, we have to repeat that, in the
same sense as before, existence of a set of solutions or even of non-negative
solutions does not necessarily mean the existence of economically meaningful —
that is, practically possible, 'tolerable,’ and so on — solutions. But within his
assumptions and with qualifications already mentioned, the affirmative answer

88 Walras has often been berated on the score of the clumsiness or heaviness of his
mathematics. It is submitted, however, that the argument in legon 20, where he solves
the 'theoretical’ problem, is not inelegant, particularly as regards the manner in which
the offers of services emerge from marginal equilibrium conditions (op. cit. p. 210).
It seems to me that some critics, including some mathematical critics, stand to learn
from it. Present practice, bom of pedagogical convenience, is to make the individual
demands for products functions of their prices only and of 'income/ While this prac-
tice has its advantages, especially now when it helps the student to grasp the relation of
Keynesian to Walrasian economics, it really obscures Walras’ fundamental conception
and makes things more difficult in the end.

89 Space to do this is lacking. We must confine ourselves to repeating that his as-
sumption that services have use value for their ‘owners/ in fact, avoids the only seri-
ous difficulty which in the case now under discussion is added to the difficulties glanced
at in the case of simple multi-commodity barter, namely, the difficulty that lurks be-
hind the constant coefficients of production. Of course, the statement in the text
must be understood to hold without qualification only where marginal utilities are
exclusively functions of the quantity of the corresponding commodity.

.1014 IV: FROM 1870 TO 1914 AND LATER

stands and objections against it are much more due to the critics’ failure to
understand Walras than to any mistakes or oversights of his . 40 Also it may be
averred that, so far as this part of the Walrasian analysis is concerned, our
result is, or comes near to being, the common opinion of theorists . 41

As regards questions of stability and of the presence in the economic process
of a tendency to establish that equilibrium set of prices and quantities, the
situation is still more seriously affected than we have already found it to be
in the case of multi-commodity barter by the difficulty of accepting Walras'
assumptions . 42 We have again to rely on the method of bons. But in this case,
if the prices that are being experimentally fixed (cries) at first do not prove to
be (miraculously) the equilibrium prices, the rearrangements that are to lead
toward equilibrium involve instantaneous rearrangements of all the tentative
decisions to produce that are embodied in the bons, which is a matter of
much more difficulty than would be mere rearrangement of tentative deci-
sions to acquire or to give away existing commodities. And even if all firms
and all owners of productive services did succeed at this task, they would still
have to carry out this production program which takes time, during which
nothing must be allowed to change. Walras himself posed the problem ex-
actly as he posed it for the case of multi-commodity barter, namely, in the
guise of the question whether his theoretical problem was the one that is
actually solved in the markets of the services; and he arrived, by the same rea-
soning, at the same conclusion, namely, that a process of trial and error car-

40 One of these objections, which was of course never raised by mathematical econo-
mists, deserves mention in passing. By suitable eliminations we may represent all prod-
uct prices and quantities as functions of the prices of the services. It should be clear
that this formal truth does not constitute the latter as 'causes’ of the former, since the
service prices themselves are determined m an argument that at every step takes ac-
count of the corresponding product prices. Some economists, however, Austrians espe-
cially, inferred from this universal and simultaneous interdependence of all prices that
the Walrasian system fails to explain any prices at all: this was sometimes expressed
by calling it 'functional’ to distinguish it from the Austrian 'causal’ system. I indulge
in the hope that it is unnecessary, at this hour of the day, to go into this.

41 For a rigorous proof, the reader is referred to A. Wald ( Zeitschrift , op. cit.). The
reader may indeed derive a slightly less favorable impression from this paper, but he
should observe that Professor Wald deals with Cassels’ system rather than' with that
of Walras. The modification suggested by Zeuthen and K. Schlesinger, which Wald
mentions on p. 640, has merits of its own but is not necessary in order to make
Walras’ system tractable.

42 However, if we do accept them, stability may be proved, if anything, more con-
vincingly than it can in the barter case. This has been done for a pattern that admits
substitution by Professor Hicks ( Theorie mathematique de la valeur, 1937) and others,
particularly by L. M. Court ('Invariable Classical Stability of Entrepreneurial Demand
and Supply Functions,’ Quarterly Journal of Economics, November 1941). Both re-
introduce the entrepreneur whom we have eliminated and therefore put their proofs
into the form indicated by the title of the latter paper. Historically, it is important to
note that, however superior in technique, these and other contributions do no more
than spell out the suggestions that are already present, although some of them only
implicitly, in Walras’ analysis.

EQUILIBRIUM ANALYSIS

IOI5

ried out under conditions of pure competition and with only the one mech-
anism of reaction allowed — prices being increased where there is positive and
reduced where there is negative excess demand — will 'probably' insure that each
step in adjustment actually does lead toward, and not away from, equilibrium.

I have thought it necessary to put this matter fully before the reader. Lest he
should thereupon turn away from Walras' construction on the ground of its
hopeless discrepancy from any process of real life, I wish to ask him whether
he ever saw elastic strings that do not increase in length when pulled, or fric-
tionless movements, or any other of the constructs commonly used in theo-
retical physics; and whether, on the strength of this, he believes theoretical
physics to be useless. In the footnote below, I add one or two other comments
that may reduce the reader’s discomfort. It remains true, however, that both
Walras himself and his followers greatly underestimated what had and has
still to be done before Walras’ theory can be confronted with the facts of
common business experience . 43

43 First of all, the reader should observe that his discomfort stems mainly from his
familiarity with an economic process that is incessantly disturbed by technological
revolutions. In any process that, without being strictly stationary, is at least not too
far removed from stationarity, households and firms would have a reliable stock of rou-
tine experience that would help them greatly to perform the tasks that look so im-
possible at first sight: the tentative prices, to which they are to react by formulating
tentative programs of production and consumption, are not really cries au hasard, as
Walras has it, but are rather informed guesses to be corrected, as a rule, by relatively
small adjustments. It is only in order to bring out the logic or rationale of the deriva-
tion of demand and supply functions that Walras refuses to avail himself of this fact.
We can leam from Marshall how to put flesh and skin on Walras’ skeleton, although
it does remain true that a more realistic theory raises a world of new. problems that
are beyond Walras’ (and also Marshall’s) range. Second, the elements of reality that
do enter Walras’ schema are indeed overgrown by other elements which we must try
to conquer in due course. But the former are nevertheless observable or verifiable even
where they take such unfamiliar forms as tdtonnement by means of bons. Third, it
should not be said that in Walras 7 system all the burden of adaptation is put upon
prices alone: quantities are adapted to, prices as prices are to quantities, and it is only
an abbreviated manner of speaking which accounts for the impression alluded to.
Fourth, there is realism in some of the items of Walras 7 ' set-up in which , we should
least expect it. Thus, a little reflection will show that workmen’s demand for the
'services 7 of their own labor power (i.e. for leisure) is actually a very important factor
in the shaping of the process of production. Though it would be absurd to deny this
for the present age, there never was a time in which this demand was completely in-
effective, and the surface fact that a laborer accepts a fixed working day which he is
powerless to alter (‘he must accept it or die 7 says a contemporary economist) contra-
dicts Walras 7 analytic arrangement very much less than it seems to. Finally, fifth,
classroom experience induces me to add that propositions such as Walras 7 law of cost
or full employment in perfect competition are indeed properties of his system when in
perfect equilibrium. But they are unobjectionable when properly understood (on the
full-employment proposition see the remark at the end ot this section) and, above all,
they are theorems that follow from the postulates that define the system and not
postulates that are imposed upon it (so that they could cause overdeterminateness).

ioi6

1016 iv: FROM 1870 TO 1914 AND LATER

[(e) The Introduction of Capital Formation and of Money.] The rest of
this section may be cast into the form of an answer to the. question how the
fundamental schema of consumers’ and producers’ behavior is affected — or
possibly upset — by the introduction of capital formation and of money.
Though both subjects have been touched upon in the preceding chapter and
will again have to be treated in the next, they must also receive attention here
to enable the reader to appreciate Walras’ structure as a whole and to realize
the extent to which he anticipated modern work in these fields in some re-
spects and prepared the ground for it in others.

In the Walrasian system, the theory of capital formation is, on the one
hand, the foundation of the theory of interest and, on the other hand, itself
rests on the theory of capital-goods prices. At first we consider only the prices
of produced capital goods. So far, we have a theory for the prices of their
services only and even this was arrived at by means of an assumption which
we must now drop, namely, that the quantities of produced capital goods are
given once and for all, and they never wear out or perish by accident. Accord-
ingly, we now deduct an allowance for depreciation and also an insurance
premium. 44 What remains is the ‘net revenue’ yielded by the capital goods.
We have noticed before that Walras took the existence of such a surplus over
depreciation and insurance as an undeniable fact which he made no effort to
establish. 45 However, if we accept this for the sake of argument, then we can
proceed at once to construct the theoretical market for capital goods which,
according to Walras’ laudable practice, we need in order to determine their
prices. 46 In this market capitalists — and not as entrepreneurs (firms) — demand
new capital goods which the firms that produce them offer in response to that
demand.

The new capital goods that are being demanded and produced may not suf-
fice, just suffice, or more than suffice to make up for the loss the existing
capital stock currently suffers from accident or wear and tear. The last of
these three cases defines saving, which, expressed in terms of the numeraire ,
is therefore the excess of net income, the total net value of the services
sold by households, over consumption, the total value of the products bought
by households. Hence, exactly as in Keynes’s General Theory , current saving
is tautologically equal to current ‘ investment .’ Saving is here merely a word
that identifies a particular kind of demand, namely, the demand for capital
goods. So far there is no meaning to the phrase ‘offer or supply of saving’ un-
less we wish to denote by it that part of the households’ services that is of-

44 Walras considered both as technologically determined constants. This is, of course,
unsatisfactory but should be considered as another of the privileges of the pioneer.

45 Neither did Pareto, Barone, and others in the direct line of succession make such
an effort. But Wicksell and Fisher filled this gap with Bohm-Bawerkian material.

46 The market we are describing now is nothing but a theorist’s construction that
Walras himself later on abandoned to replace it by the stock market. To criticize this
theoretical device on the score of lack of realism would spell misunderstanding.

EQUILIBRIUM ANALYSIS

1017

fered against capital goods 47 instead of being offered against bread or beer,
and to say that current saving can get out of step with current investment
has no more sense than to say that saving can get out of step with itself. Hence,
equality of current saving and current investment is an identity and not an
equilibrium condition. The equilibrium condition is that the sum total of
saving in a given period should be equal to the costs to the capital-goods-pro-
ducing firms of the capital goods (produced and) sold in the period, since
these firms, like all others, are subject to Walras' law of costs.

Now — and this is not as in the system of Keynes’s General Theory — the
only motive that capitalists can have in this set-up for demanding capital
goods is in the net revenue expected from them, no matter whether this net
revenue consists in the use value to them of the durable objects acquired or
in the yield in numeraire to be collected from letting them to firms (or to
people who wish to consume their services directly). From this follows an-
other equilibrium condition which must be fulfilled by their prices: these
prices must, under ideal conditions, be proportional to their net yields or else
arbitrage operations would set in to enforce this proportionality. But this may
be expressed by saying that our capital-goods market is really a market of
streams of perpetual net revenues, from which standpoint all capital goods
are on the same footing irrespective of their physical shapes. In order to em-
phasize this aspect, Walras created an ideal or imaginary commodity that rep-
resents ‘perpetual net revenue.’ This gadget — another purely theoretical con-
struct 48 — enables us to endow each household with a marginal utility and a
demand function for ‘perpetual net revenue,’ 49 and to replace all the (un-
known) prices of the capital goods by a single price, which then helps to de-
termine them, namely, the price of a unit of ‘perpetual net revenue’ per unit

47 Remember that capital goods are goods that serve more than once. It would be
more correct to define them as goods which (or parts of which) survive the period of
account.

48 Pareto, Barone, and others accepted this ideal or imaginary commodity and simply
called it 'saving’ (risparmio) . Notice that this construct may also be harnessed into the
service of theoretical schemata other than Walras’. Even in Walras’ schema, it ac-
quired a new — and more realistic — connotation where he introduced money, as we
shall see presently. For the moment, the concept does not mean anything but the
total heap of all new capital goods, expressed in terms of numeraire, and only serves
to isolate one aspect of them but has no separate existence: if Walras nevertheless
speaks of a market of capital numeraire, this market is — unlike the market of capital
monnaie, which we have not introduced as yet- — not distinct from the market of the
capital goods themselves.

49 The marginal utility functions are conceived as monotonically decreasing func-
tions of the quantity of this ideal commodity alone, as in the case of all other com-
modities. But the demand functions for these commodities are, also as in the case of
all other commodities, functions of all the prices of all products and services. Note
that this implies that they are also functions of the incomes: the difference in this
respect between the theories of Walras and of Keynes (General Theory) is not that
Walras neglected the influence of income but that Keynes neglected the influence of
the prices of the products.

ioi8

IV : FROM 1870 TO 1914 AND LATER

of time — a profound move on the analytical chessboard. This single price re-
sults from the condition of proportionality mentioned above, which may be
reformulated by saying that the total demand for new capital goods (identi-
cally equal to saving) must be distributed between the industries that produce
these new capital goods in such a way as to equalize their net value products
(in terms of numeraire) per unit of cost (in terms of numeraire ). 50 Thus the
single price in question is simply the reciprocal of the rate of ‘perpetual net
revenue’ ( taux du revenu net perpetual), which is a factor of proportionality,
common to the values of all capital goods and readily identified — so long as
there is no money — with the rate of interest.

With infinite care, to which justice cannot be done here, Walras developed
this theory for both the cases of produced durable goods such as homes, the
services of which are to be directly consumed, and of produced durable goods
that are to be used in production, supplying the marginal utility (maximizing)
conditions for static equilibrium 51 and arriving, as regards determinateness
and stability, at results analogous to those arrived at in the cases of multi-
commodity exchange and of production. If space permitted comment, it would
have to be similar to the comments submitted in those cases. We must be
content to state without proof that Walras’ system is not — we are still follow-
ing an analysis that abstracts from genuine money — upset by the facts, as
stylized by him, of capital formation and by the excursion that the theory of
it involves into ‘progressive’ or else ‘retrograde,’ that is, non-stationary, states.
But let us summarize what else we have got so far.

First, we have a theory of the prices (values in terms of numeraire) of capital
goods which we have not had before. In the first instance, this was a theory
of the pricing of new capital goods. But this theory is then readily extended to
the cases of existing produced capital goods and of non-produced capital goods
(‘land’; Walras even extends it to labor power) by the simple device of apply-
ing to them the same ‘rate of perpetual net return’ (or of interest ) 52 that
emerges in the case of new capital goods . 53 Second, as a by-product of the
theory of capital-goods prices we have a theory of interest which now enters

50 Remember that, with Walras, marginal and average costs are of necessity equal.
The correction that is necessary, if this is not so, is obvious.

51 He realized, of course, that, with positive saving, the economy under study was no
longer stationary. But he also realized that its theory may still be static, if the pro-
pensities to save ( dispositions a Vepargne) and the propensities to consume ( dispositions
h la consommation) remain unchanged during a certain time (Elements, p. 244; this is
perhaps the most convincing passage for showing that Walras fully grasped the distinc-
tion between a static theory and a stationary process (see above, sec. 3).

52 Let us note that the most important modem sponsor of this identification —
which implies the belief that the existence of the ‘rate of perpetual net return’ is an
undeniable fact that does not require either proof or verification — is Professor F. H.
Knight.

53 From this it might be inferred, though not quite conclusively, that Walras asso-
ciated the fact of interest with a ‘progressive’ society and was not unaware of the
possibility that it might vanish in a retrograde, if not a stationary one. I take this op-
portunity to refer the reader to the brilliant papers of Professor C. Bresciani-Turroni,

EQUILIBRIUM ANALYSIS

IOI9

all demand and supply equations. From these, then, a comprehensive theory
of its role in the economy may be read off . 54 The prices of the capital goods
themselves do not enter any of the final equations of the Walrasian system
other than those that describe their own conditions of supply and demand qua
products. Third, since saving is merely a species of demand, there cannot be
any question of equalizing its 'demand and supply’ by varying the rate of in-
terest or anything else. What is equalized by virtue of an equilibrium condi-
tion — not merely set tautologically equal — is the amount that people have de-
cided to save and invest and the costs of the new capital goods. Now if this
equality is not realized, this means that the values of new capital goods will
be above or below their costs to the firms that produce them and therefore
will have a motive to expand or restrict their production. But there is another
aspect to this. Suppose that the values of new capital goods have risen above
their costs. If for the sake of argument we assume that the expected net yield
of the capital goods has not changed, this implies that the rate of perpetual
net return has fallen, in other words, that a unit of perpetual net return will
be more expensive for the capital-goods purchasing capitalist than it was be-
fore: it is this rise in the numeraire prices of new capital goods which brings
home to the capitalist the implied fall in his rate of net return. In still other
words, it is not the fall in the rate of interest which plays any direct causal
role, but it is the rise in the values of capital goods which reduces (tautolog-
ically) the rate of interest . 55 Of course, the rate of interest thereupon also as-
sumes an active role so far as it enters the demand and supply functions of all
products and services. Yet it is important to notice that, in this analysis, it
plays a passive role in the first instance because this puts a different com-
plexion on its significance in the economic process and serves especially to put
the capitalists’ reactions in a different light: they are reactions to the increase
in the price of a particular type of goods the capitalist demands and not re-
actions to the decrease in the price of a service he renders . 56 Finally, it follows

on The Theory of Saving,’ Economica, February and May 1936, which shed a lot of
light on .the theory of saving and its history.

54 This was a stroke of genius. But its validity, of course, depends on Walras’ con-
ception of interest. It is in order for me to observe, neglecting my principle of effacing
myself in this book, that the admiration I keep on expressing for the ingenuity, nay,
greatness of Walras' analysis, should not be understood to imply agreement in every
respect.

55 The individual capitalist’s loss may, of course, be compensated, in part, wholly,
or more than wholly, by the gain he will then make on the stock of capital goods
he owns already. This fact, however important in other respects, is not relevant here.

56 Without mentioning Walras, Cassel adopted the same view — for him also sav-
ing consists in demanding capital goods or in applying productive services to their pro-
duction. But he failed to understand how, on introducing genuine money, Walras
shifted his standpoint radically, as we shall see in a moment. Another matter may be
adverted to here. An increase or decrease in the prices of assets to be acquired is less
likely to be neglected than would be a decrease or increase in the price of a service:
this provides a possible argument against the view so frequently voiced at present that
moderate variations in the rate of interest do not seem to have any noticeable in-

1020

IV: FROM 1870 TO 1914 AND LATER

from the preceding argument that, sharply renouncing allegiance to the Turgot-
Smith theory of saving, Walras’ analysis agrees with Bohm-Bawerk’s in yield-
ing the result that the prices of consumers’ goods and prices of capital goods
will, within the assumptions of this analysis, in principle move in opposite
directions.

At last, we introduce money and monetary transactions. Deferring Walras’
other exploits in the field of monetary theory and policy to the next chapter,
we must see right now how he fitted money into his schema of the economic
process, how he determined- absolute prices in money as well as in numeraire,
and whether he was right in claiming that his monetary economy enjoys the
same properties of determinateness and stability that may be attributed to his
numeraire economy. For this purpose it will suffice to deal with the case of
a money of given quantity that consists of a material of negligible use value 57
and to note briefly that Walras, who in the first edition (1874-7) of his
Elements had based his monetary analysis on the concept of the economy’s
‘monetary requirements,’ 58 adopted in the second edition the concept of the
‘amount of cash people desire to hold’ ( encaisse desiree ), 59 which was, how-
ever, not made part and parcel of his pure theory of general equilibrium — not
fully amalgamated with it — before the fourth edition (1900). 60 It is there that

fluence. Also, since the use of assets for capitalists consists in reaping their yields, the
Walrasian theory leaves room for the possibility that an increase in the price of capi-
tal goods may cause demand for them to expand just as . . . [note incomplete.]

57 As we shall see in the next chapter, Walras also analyzed the cases of mono-
metallism, bimetallism, and monometallism ‘regulated’ by the issue of token money.
But his fundamental analysis is carried out for the case of a government paper money
of given quantity. Observe at once that this means only that the material money is
made of has no use value but not that this money itself has none: this will be ex-
plained presently. But observe also that the simplification which consists in not hav-
ing to attend, when discussing fundamentals, to the problems that are raised by the
value, as a commodity, of the money material is bought at the price of having to
postulate an arbitrarily fixed quantity of money. In this trivial sense, our question is
answered already: since this quantity is arbitrary, absolute prices cannot be determined
uniquely. But the question we ask is not this one: we ask instead whether the price
level and all the other monetary and non-monetary quantities in the system are uniquely
determined when the quantity of money has been fixed.

58 Circulation a desservir — an old concept already familiar to Petty. Walras himself
(preface, p. ix), borrowed this concept from the physiocrats. The encaisse desiree ap-
peared first in the Theorie de la monnaie (1886).

59 We are in the habit of associating this ‘cash-balance approach’ with Marshall, who
developed it independently during the 1880’s. See on the significance of this approach
and cognate matters Professor Marget’s scholarly articles, ‘Leon Walras and the Cash-
Balance Approach to the Problem of the Value of Money,’ Journal of Political Econ-
omy, October 1931, and ‘The Monetary Aspects of the Walrasian System,’ ibid.
April 1935.

60 Or, more exactly, before he presented, in the bulletin of the Society vaudoise des
Sciences Naturelles, his paper on ‘Equations de la circulation’ (1899). This is much
later than Marshall may be assumed to have arrived at roughly similar results (see
J. M. Keynes’s Marshall biography. Essays in Biography, pp. 196-206). But not only

EQUILIBRIUM ANALYSIS 1021

the whole of the Walrasian structure of pure theory appears in all its logical
beauty.

The ground floor of this structure is the theory of the ‘market’ of consumers’
goods. On the second floor we find the theory of production and the ‘market’
of production services, not separated from, but integrated with, the first mar-
ket. On the third floor we have the ‘market’ of capital goods similarly inte-
grated with the two others. And on the fourth floor there is another ‘market,’
integrated with the other three, of ‘circulating capital,’ that is, of the stocks
or inventories of goods — new capital goods for sale at the establishments of
their producers, and consumers’ and producers’ inventories of all kinds — that
are necessary to keep things going . 61

Thus, after having determined, in his theory of production, the equilibrium
(; numeraire ) prices and quantities for both consumers’ goods and productive
services— all of which, once determined, are to remain unchanged while the
goods are being produced — Walras lets actual delivery of these services and
of (equivalent) goods begin at once, that is, before the program of production
decided on ‘in principle’ has been carried out. Of course this presupposes that
households and firms are from the outset in possession of stocks of goods (in-
ventories) which are now introduced among the data of the general-equilibrium
problem . 62 As we have already seen, Walras treated them formally as he had

did Marshall not publish these results until twenty years after Walras’ paper, but also
he never formulated the logic of them as rigorously and completely as did Walras.
Still it should be borne in mind that, in principle, all that follows applies to Mar-
shallian as well as to Walrasian economics.

61 In order to facilitate the mathematical treatment, Walras extended the meaning
of coefficients of production in a manner that is interesting because a similar device
has been recently adopted by Professor Leontief in his input-output analysis. Briefly
and concretely, if we have a product (A) which has, with respect to the capital-goods
service (K), a coefficient of production a k , then this a k is to include not only the quan-
tity of (K) that is necessary to produce a unit of (A) but also the quantity of (K) that,
if the production of (A) is increased by a unit, is required for the concomitant in-
crease in stocks held by producers (Walras, Elements, p. 298; W. W. Leontief, ‘Input
and Output Analysis . . .’ American Economic Association, Papers and Proceedings,
May 1949, pp. 219-20).

62 These stocks exist of course in specific forms, such as wine in cellars of handsaws
in workshops. In reality, these specific goods need not at any given moment be, even
approximately, what the maximizing conditions for the subsequent period would re-
quire. Here, so it seems to us now, we have the essentially dynamic problem how the
economic process adapts itself to situations that are inherited from the past and are
always out of date when they have to be acted upon. But Walras eliminated this prob-
lem by the heroic assumption that stocks, like capital goods, are exactly as if they had
been produced in the past with a view to conditions obtaining in the present. This
is the meaning of his phrase, constructing the equilibrium system ab ovo. We may
render it by saying that he created an economic world in which every element fits
perfectly into its niche, even if, owing to the fact that production takes time, it had
to be produced when nobody could have known exactly what the niche would be
like. There is point in such a construction. But, once more, it is but the first mile-
stone on a long road.

1022

IV : FROM 1870 TO I914 AND LATER

treated the capital goods: there are the stocks themselves and, in addition,
there are the services they render currently, namely, the services d’approvi-
sionnement. Hence stocks and their services have to be priced separately, but
the price of each stock stands to the price of its service in the same relation
as the price of the service of each capital good stands to the price of the
capital good itself. 63 Note that the introduction of stocks and the services of
stocks constitutes Walras’ method of synchronizing the economic process: on
condition of paying the price of the service — that is, an interest charge on the
circulating capital involved — households are now able to 'transform’ their pro-
ductive services immediately into consumers’ goods. But this is evidently no
mere detail but an essential feature of the general equilibrium system to
which, by way of anticipation, Walras already adverted in his theory of pro-
duction ( Elements , p. 215).

With the stocks enters money. It is simply a particular item in the list of
inventories and also renders a service d’approvisionnement, which acquires a
price, like any other service, by virtue of its marginal utility functions. 64 This

63 This conceptual arrangement, presupposing as it does the existence of a net price
of each service d’ approvisionnement , is open to the same objection that may be raised
against the postulate of the net yield of a capital good. But as soon as we admit the
existence of such a service d’approvisionnement that is capable of having a net price
(i.e. a price greater than depletion of the stock plus insurance), we cannot object to
the distinction of stock and service on the ground that this spells double counting.
In fact, since Walras derives the prices of stocks, via the rate of interest, from the
prices of their services — i.e. in a manner equivalent to a discounting process — there is
here a remarkable affinity with Bohm-Bawerk’s schema although, almost tragically,
those two great men completely misunderstood one another. But the affinity becomes
obvious if we state the matter like this: the households receive the products they want
at once (instead of receiving them at the end of the period of production), and they
pay interest in order so to receive them. See next sentence in the text.

64 This price must not be confused with the price of money itself. Let p' denote the
price of money in terms of the numeraire, jt' the price of its service d’approvisionne-
ment, and i the rate of interest, then, according to the rule for the value of capital
goods that do not wear out (such as land), we have jt' = p'i. If money serves as
numeraire, p = 1 and Jt = i.

As regards the marginal utility curves for the services of money and stocks in general,
it must be observed, however, that they are not 'given’ in the same sense as are the
marginal utility curves for beer or bread: in Frisch’s terminology, they are not as
autonomous as are the latter, and they are valid only for a structure of production and
for habits of payment which the economic process itself keeps on changing. Walras
saw this difficulty but he comforted himself by pointing out that in practice house-
holds and firms normally know 'very approximately’ how great a revolving fund of
goods and money they need. This is true, but the theorist who avails himself of this
fact must indeed point out, as did Walras, that he is excluding uncertainty by special
hypothesis. Incidentally we may. remark that Walras thus disposed, without intending
to do so, of the later theory (J. R. Hicks) that there would be no need for holding
cash in the absence of uncertainty of any kind and that, therefore, the phenomenon
of money depends for its existence on uncertainty. Walras, within his schema, had no
opportunity to do justice to the importance of the element of uncertainty. But he

EQUILIBRIUM ANALYSIS

IO23

price emerges in a special market, which Walras called the capital market
(marche du capital ) — in distinction to the market of capital goods ( marche des
capitaux) — and which is an 'annex’ of the market of all productive services
(Elements, p. 245). All suppliers of services are now paid, and buy products,
in money. Capitalists save no longer by exchanging productive services against
capital goods but they save in money and we have a quantity called monnaie
d’epargne in addition to the two quantities of transaction money (monnaie de
circulation) in the hands of households and of firms. The latter borrow money
and buy new capital goods. The equilibrium price of the 'commodity’ in this
market, namely, of money’s service d’approvisionnement, is determined by the
condition that people’s demand for this service — represented by their encaisse
desiree — be equal to the total amount of money in existence. Having deter-
mined this equilibrium price we may choose money itself for numeraire and
then restate the condition by saying that the rate of interest should be such
as to equalize the encaisse desiree and the total amount of money in exist-
ence. 65

So far, the 'existence’ of a unique set of solutions or of equilibrium values
for the Walrasian system is not affected at all by the introduction of money:
the situation in this respect remains, qualifications included, much as we found
it in the case of the numeraire economy. This could be proved but should be
intuitively clear from the fact that Walras fits in money by a device that
amounts to setting up its service d’approvisionnement as just one more service
(of no direct utility) to be traded in — which evidently no more changes the
logic of the situation 66 than would the introduction of any other additional
commodity or service. It should be added, however, that owing to the nature

showed that meeting uncertainty is not essential for money to circulate and to be
held, so that there is no warrant for the proposition that a money economy is neces-
sarily dynamic. This does not amount to denying that all the really troublesome prob-
lems about money arise in evolutionary processes.

65 It should cause no surprise that we find ourselves suddenly in close proximity to
the Keynesian theory of interest (the 'own-rate' theory, see General Theory, p. 223).
The affinity stands out particularly well — and so does the difference — if we observe
that, within Walras’ schema, there is only room for the first of Keynes’s three motives
for holding cash, viz. the transaction motive, whereas there is no room for the other
two, viz. the ‘precautionary’ and the 'speculative’ motives (General Theory, p. 170).
The saving schedule thus coincides with the supply schedule in the capital market. But
the two other motives can be readily inserted into Walras’ picture. If we do so, then
the savings schedule no longer coincides with the supply schedule of loanable funds.
But this does not invalidate the Walrasian theory: it only amounts to supplementing
it by additional hypotheses. See on this O. Lange, The Rate of Interest and the
Optimum Propensity to Consume,’ Economica, February 1938, and Franco Modig-
liani, ‘Liquidity Preference and the Theory of Interest and Money,’ Econometrica,
January 1944. The argument of these writers is not invalidated by D. Patinkin’s criti-
cisms in 'Relative Prices, Say’s Law, and the Demand for Money,’ Econometrica, April
1948, although it is open to others.

66 This has been denied of late, precisely on the ground that Walras excluded
money from the things or services of things that have marginal utility functions, i.e.

1024 IV: FROM 1870 TO 1914 AND LATER

of the service that money is supposed to render, the price of its service enters
the demand and supply equations that determine the prices of all the other
commodities and services in a peculiar way. This may be seen most easily by
observing that variations in the price of the service of money — or, choosing
money for numeraire, interest — affect directly the values of capital goods and
stocks (inventories) and through these all the other prices and quantities in
the system, including those of the productive services such as wages and the
quantity of labor demanded and offered. This is important to keep in mind:
any variation in any price affects all other prices, offers, and demands, but vari-
ations in the price of money have an additional influence of particular impor-
tance. Hence money prices are not simply translations of prices expressed in a
numeraire that is not money into prices expressed in another numeraire that
is not money: money prices are not proportional to numeraire prices; they are
prices adjusted to a new condition, that is, the condition that governs equi-
librium in Walras’ capital market. We may still formulate this monetary equi-
librium condition as we did above, namely, that total encaisse desiree should
be equal to the total quantity of money in existence, but we must keep in
mind that the encaisse desiree depends, among other things, on the total
numeraire value of transactions and that the latter also depends on the price
of the service of money and cannot remain constant if this price — or the rate
of interest — changes. In other words, we cannot fulfil the monetary equilibrium
condition by treating as given not only the existing quantity of money but also
the total encaisse desiree, and letting monetary equilibrium come about by ap-
propriate variations in the rate of interest alone. If this fact is realized and
acted upon, then we may aver indeed that the Walrasian argument deter-
mines a consistent set not only of relative but also of money prices or, if you
wish, the price level.

Walras himself realized this situation and must therefore be credited with
having created a theory of money that is complete, consistent, and perfectly
adequate, within its own assumptions, to determine absolute prices in terms of
money. 67 But at the critical point he failed to go through with it. On the
ground that the influence of variations in the rate of interest upon the sum
total of transactions, hence upon the encaisse desiree, is only ‘indirect and
feeble’ ( Elements , p. 311) he decided to neglect it altogether and then pro-

from the set of things that qualify for commodities. But this view is based on nothing
but a misunderstanding of Walras’ decision to consider at first a kind of money, the
material of which has no value as a commodity (Elements, p. 303) in order to defer
the problems that arise if money is made of a material that has an appreciable value in
consumption or production, such as gold or silver. This question has nothing to do
with two other cognate ones: (a) whether the concept of a ‘service of money’ is ad-
missible; and (b) whether Walras did or did not emphasize the parallelism between
monetary and ‘real’ processes too strongly.

67 This theory has in particular nothing to fear from the man of straw some con-
temporary economists have baptized Say’s Law. Nor is it affected by zero homogeneity
of demand and offer functions although in Walras’ theory, as in any other, it must
of course remain indifferent whether people calculate in dollars or in cents.

EQUILIBRIUM ANALYSIS

1025

ceeded to base much of his reasoning about applied monetary theory on the
simplifying assumption of its absence. This assumption, quite apart from the
question whether it is factually justifiable or not, 68 would change the whole
situation if we were to take it as part of Walras’ rigorous theory. Then, as
Walras himself observed, the equation of monetary circulation would indeed
be 'external to the system of equations that determine economic equilibrium’
(ibid.), and then there would be some warrant for saying that Walras’ system
is essentially a 'real' or numeraire system, complete as such, on which he threw,
as a separable piece of apparel, the 'veil of money’ (see, however, next chap-
ter). 69 Money interest and money prices would then be no longer determined
simultaneously with the relative prices and would in general be inconsistent
with them. 70 In view of the spirit as well as the wording of Walras’ text, it is,
however, much more natural to say that, for the purposes of applied monetary
theory, Walras decided to abandon his method of general analysis and to
adopt that of partial analysis. This means that he decided to adopt an approxi-
mation to which the standards of rigorous analysis do not apply. 71

But the question of stability (and of the presence of a tendency in the sys-
tem to realize the equilibrium values of its elements) is now much more dif-
ficult to answer than it was before. This is not owing to any change in the log-
ical situation that the introduction of money has brought about — which is much
as it was in the numeraire economy — but to the fact that in a money economy
it is more difficult to accept Walras’ general pattern of the economic process.
Of this Walras was perfectly aware. Proof of it is his emphasis upon the in-
stability of bank credit (e.g. Elements, pp. 353-4). Apart from this it stands
to reason that the insertion of a monetary capital market offers the economic
engine new opportunities for stalling which are absent in a numeraire econ-
omy: we may exclude uncertainties in obedience to Walras’ directions; but in
the case of a 'commodity’ which is as volatile as money and which can be

68 It seems to me beyond question that in general it is not. It may, however, serve
some particular purposes.

69 This assumption is the second reason (in addition to Walras’ careless statement
on p. 303 of the Elements, that money is to be considered as an objet sans utilite
propre) that may be adduced in favor of writers who interpret Walras in that sense.
There is a third one. Walras’ exposition does without money as long as possible
and thereby creates the impression that the theory of money is indeed something
to be plastered upon the facade of a building that had been completed beforehand.
Closer analysis shows, however, that this is no more than an expository device which
is of a piece with his method of abstracting from the facts of production in his presen-
tation of his theory of exchange. The great master of 'universal interdependence’
should be free from suspicion on this score.

70 This is obvious. If a change in the rate of interest involves, in principle at least,
rearrangements of all real and monetary magnitudes in the system, then- the postulate
that the encaisse desiree should remain untouched is equivalent to introducing another
condition that will in general make the system overdetermined and, in this sense,
spell contradiction.

71 The main motive seems to have been a wish to gain possession of a simple form of
'quantity theory.’

1026 IV: FROM 1870 TO 1914 AND LATER

so easily redirected at a moment’s notice, we cannot help thinking of them
all the same. Under these conditions the practical value of the final result, at
which we arrive nevertheless, is no doubt much reduced. It reads: both for a
numeraire and for a money economy, Walras’ system of the economic process
is determined and stable, though he did not quite succeed in proving this rig-
orously; for a process which is stationary except for positive or negative invest-
ment on traditional lines, it is hitchless in the sense defined above, and full
employment of resources is in fact one of its properties; conclusions other
than these can be arrived at only by introducing hypotheses at variance with
those of Walras. 72 If in the last analysis Walras’ system is perhaps nothing but
a huge research program, it still is, owing to its intellectual quality, the basis
of practically all the best work of our own time.

8. The Production Function

All that remains to be said about the period’s work on the higher levels of
theoretical analysis may be grouped conveniently around the two sets of data
that were the two pillars of the classical temple of 1900, the given tastes of
consumers and the given technological possibilities within the horizon of pro-
ducers. The former topic will be dealt with in the appendix to this chapter,
the latter best fits in here. In both cases we shall be only supplementing what,
for a lower level of analytic rigor, we have already learned before. In both

72 This may be illustrated by the question of the possibility of underemployment of
labor in equilibrium that has played so conspicuous a role in the Keynesian controversy.
In the Walrasian system such underemployment is possible only if the Walrasian supply
conditions of labor are replaced by the hypothesis that wage rates are ''rigid down-
wards’ at a figure higher than the Walrasian equilibrium figure. But we may add the
further hypothesis that, if rigidity be removed, the fall in wages that would ensue
fails to attain equilibrium because this fall may so reduce Anns’ receipts or, even
without doing so, create such pessimistic anticipations as to induce shrinkage of opera-
tions all round so that the falling wage rates would never catch up with the ever-
falling equilibrium level. We may reach a similar result, given some wage rigidity, by
assuming that capitalists, while bent on saving without any regard to returns, are un-
willing to accept the current returns to investment and wish to hold whatever they
have decided to save 'in the form of immediate, liquid command (i.e. in money or its
equivalent)’ (Keynes, General Theory, p. 166). Whatever we may think of the realistic
virtues of such assumptions, the point to be kept in mind is that, even if accepted,
they would not invalidate Walras’ theory within his assumptions. In particular, they
would not prove that the Walrasian 'condition of full employment’ — which is not a
postulate but a theorem — makes his system overdeterminate and, in this sense, self-
contradictory. It should be added again that economists who wish to establish a tend-
ency in the capitalist economy to produce perennial unemployment have nothing to
fear from a proof that, on so high a level of abstraction, perfect equilibrium in perfect
competition would involve full employment. Nor has this proof itself anything to fear
from the ubiquity of unemployment in a world that is never in perfect equilibrium and
never perfectly competitive.

EQUILIBRIUM ANALYSIS IO27

cases I shall carry the story to the present situation. In both cases I shall have
to be sketchy to the point of incorrectness . 1

[(a) The Meaning of the Concept .] We begin by recalling the concept of a
production function as it is commonly used today. Suppose that a busi-
ness man A contemplates producing a well-defined commodity X at the rate
of x per unit of time in a single plant that is to be constructed for this pur-
pose. This may require a unique set of rates of inputs per unit of time — such
as v 1? v 2 , • • • v n of the equally well-defined services Vj, V 2 , • • * V n — that are
technologically fixed like the Walrasian coefficients of production and define
for us economists the only 'process’ or 'method’ of production that is avail-
able. As a rule, however, there exist several or even infinitely many such
processes or methods of production by which x can be produced. Each of
them is identified by a distinct set of time rates of inputs — again, for us econo-
mists: should it happen that two or more technologically different processes use
exactly the same combination of rates of inputs in order to produce x, they
would be the same process for us. Mr. A will choose between these possibili-
ties with a view to minimizing the total cost of producing x and hence reject
from the outset all those processes that use more of all the (scarce) services
Vi, V* ■ • • V n than does another. Among the rest, which we may call the
eligible choices, he will choose according to the price situation he expects to
prevail in the factor markets during the period for which he plans.

The complete list of all those eligible choices, with which A or his consult-
ing engineer is fully familiar, defines A’s or his engineer’s technological hori-
zon . 2 Allowing the v’s to vary continuously and smoothly 3 and letting x vary
continuously and smoothly also, we may express a man’s technological horizon
by setting up a transformation function of the form, x = f(v lf v 2 , * * • v m ),
which we call the production function and which associates with any given set
of the v/s(i = 1, 2, ••• n) a definite maximum value of x which it is possible
for him to produce with the given set. Any change in the technological hori-
zon, for example, caused by the discovery of a new process or even by some
known process becoming commercially available which was not so before, de-
stroys this production function and replaces it by another. All this is quite
simple, and it should be fairly obvious which properties we are to assign to
the production function on the various levels of abstraction that are prescribed

1 My inability to present an account of either topic that would be at the same time
brief, elementary, and correct — an inability of which I was never fully aware before I
put that appendix and this section into their final shapes — had to be stressed because
it illustrates so tellingly the conditions in both fields, in which faltering advance was
incessantly being undone by mutual misunderstandings between workers — attended with
unnecessary peevishness — and all but universal unwillingness to pull the same way.
Confusion went so far as to make it difficult, sometimes, to make sure what writers
really meant e.g. by the marginal productivity theory.

2 From this must be distinguished the firm’s (or anybody’s) time horizon, i.e. the
time span over which it plans. The concept of a time horizon has been introduced
by Tinbergen.

3 A continuous function has no jumps, a smooth function has no kinks.

1028 iv: FROM 1870 TO I914 AND LATER

to us by the requirements of the particular problems we wish to investigate.
Thus, when we are high up in thin air and hunting for the ‘purest’ features of
the logic of production, we shall assume, as we have just done, that produc-
tion functions are continuous and also that they are differentiable twice in all
directions. 4 Reality very frequently fails to correspond to these assumptions.
But this is no objection so long as we are concerned with the pure logic of
production. It becomes an objection only when we apply results, derived by
means of them, to patterns and problems for which discontinuity and non-
existence of partial derivatives of the first and second order are relevant: there
is no sense whatever in either asserting the presence of continuity and differ-
entiability or denying it for all patterns and all problems. Neglect of this trivial
truth has been an unbelievably fertile source of futile controversy to this day
and has impeded analytic advance in a manner that is most interesting from
the standpoint of the student of 'scientific progress’ and of the ‘ways of the
human mind.’ In order to bring out this aspect it will be convenient to touch
first upon a number of points as they present themselves today in order to
clear the ground (or part of it) for our story of the historical development and
in order to supply to the reader information that may help him to appreciate
it. Some modern expositions of the theory of production and cost (mainly of
static aspects) are listed for reference in the footnote below. 5

( 1 ) We have come to distrust the idea of any well-defined commodity or
service. Moreover, firms do not as a rule produce just one commodity in one
quality but many commodities in many qualities, and ability to shift their
production from one to the other is obviously an important consideration in
the choice of a productive set-up. 6 Finally, a change in the combination of
productive services will frequently affect of itself the quality or even kind of
the commodity a firm produces. To some extent, this may be taken into ac-
count by admitting many commodities (x l7 x 2 , — x m ) into the production
function and by writing the latter in the implicit form, q)(x 1? x 2 , • • * x m ; Vj,

4 That is, we shall assume that, v { and v- being representative productive services

(i, j = 1, 2 , * • • n), all expressions of the forms — and exist and are con-

8v/ 5v* 8vy

tinuous.

5 R. G. D. Allen, Mathematical Analysis for Economists (1938); on the production
function and constant-product curves, see especially pp. 284-9, which are readily un-
derstandable for non-mathematicians and reading of which would greatly facilitate the
perusal of this section. J. R. Hicks, Value and Capital (2nd ed., 1946), especially Part
n. P. A. Samuelson, Foundations of Economic Analysis (1947), particularly ch. 4,
perusal of which, strongly recommended, requires some mathematics, but very little.
E. Schneider, Theorie der Produktion (1934). Gerhard Tintner, ‘A Contribution to
the Nonstatic Theoiy of Production' (with an excellent summary of the static theory)
in Studies in Mathematical Economics and Econometrics (H. Schultz memorial vol.).

6 Louis M. Court, ‘Entrepreneurial and Consumer Demand Theories for Commod-
ity Spectra’ (E conometrica, April and July-October 1941) has considered the case of
infinitely many commodities, an idea of great importance.

EQUILIBRIUM ANALYSIS IO29

v 2 , "* v n ) = o. This has been done by Allen, Hicks, Leontief, Tintner, and
others.

(2) If we wish to base our theory of production on the Jevons-Bohm-Taussig
theory of the ‘roundabout' process, we may introduce time explicitly into the
production function, that is by writing: x = -^(Vi, v 2 , ••• v n ; t). This practice
is strongly suggested by Wicksell’s treatment of capital problems and has been
adopted by several modern authors. (See e.g. Allen, op. cit. p. 362.) 7 Evi-
dently, however, there are other characteristics of a firm’s technological pattern
besides rates of inputs and time: the rates of change of these rates, lags in
some of them, cumulation (integrals) of others, outputs that are expected not
for the immediate but the more distant future, may all be significant. With-
out going into these problems, we will advert to the practice of inserting shift
parameters (a, |3, * * * ) into the production function, which then looks like
this: x = f(vj, v 2 , * * * v„; a, (3, • • •). This amounts to not more than a purely
formal recognition of the fact that production functions do change in time.
The practice may justify itself any day, of course, but so far it seems to me
that this fact is equally well expressed by saying, as we said above, that an
innovation destroys a production function and sets up a new one. 8

(3) For the economist a process or method of production is defined by the
independent variables in the production function, even though this may
amount to throwing together what are very different processes or methods to
the engineer: this practice simply means that technological differences per se
are without interest for us. But it follows that we must include all the pro-
ductive services that may be required for any of the eligible methods of pro-
ducing a commodity, although some of these methods may require services that
are not required for others. This creates a difficulty that has induced some
theorists (see, e.g., Schneider, op. cit. p. 1 ) to include in the production func-
tion only those processes or methods that use the same services (though in
different proportions) and to define the technological horizon not by one pro-
duction function but by many.

More important, however, is another point. As defined, our production func-
tion refers only to a single firm — strictly, only to a single unit of production

7 The treatment of time as an independent variable fits well also into the Marshallian
system, although for other reasons. But though Marshall so treated it in his verbal
statements, he did not do so in his mathematical formulations, except of course for
value problems — which is a different matter.

8 If, in the manner of Marshall and Hicks, we form a separate category of those
innovations that are ‘induced’ by mere expansion of production — which must not be
confused with simple changes to methods of production that are within the firm’s
technological horizon from the first but do not pay until a certain output figure has
been reached — we do in fact recognize an intermediate class of cases which it is useful
to separate out for some purposes. But so long as it is not possible to foresee the effects
of induced innovations exactly, there is no point in introducing them into the produc-
tion function or into cost curves. If it is possible to foresee these effects exactly, then
induced innovations must be already within the horizon and need not be ‘introduced.’

1030 IV: FROM 1870 TO 1914 AND LATER

or 'plant’ 9 — and not to the economy as a whole. But throughout that period
and even today, it was and is common practice to reason as if there were such
a thing as a social production function, 10 and it is not difficult to see the reason
why: we obviously wish to speak of a ‘social’ marginal productivity when ex-
pounding the theory of distributive shares. And so most of the leaders of that
period, among them Bohm-Bawerk, J. B. Clark, Wicksteed, and Wicksell, took
the existence of an aggregative (social) production function for granted, at
least by implication, without realizing that the logical right to use this concept
must be acquired by proof. 11 Many modern authors, especially those of the
Keynesian type, are just as careless.

(4) Mathematically, the production function enters the theoretical set-up —
in order to yield demand functions for productive services, see for example
Allen, op. cit. pp. 369 et seq. — as a restriction upon firms’ behavior: these
strive to maximize net profits subject to the possibilities listed in the produc-
tion function. We might try to crowd into a single expression the whole of the
technological facts that, for any purpose in hand, seem relevant to us. But
even where this is possible, it is much more convenient to make a single rela-
tion basic — we shall of course choose one that has some primary economic
significance; of this presently — and then to introduce the other facts (hy-
potheses) that are to be taken into account as further restrictions or, as we
may say, as restrictions upon the restriction that we regard as fundamental.
The best way of making this clear is as follows. Suppose we have n services 12
which define a 'production surface’ in (n+i) dimensional hyperspace. In gen-
eral we shall find that firms cannot move about freely over the whole of this
surface and that technological conditions permit choice only within the bound-
aries of a certain region. Thus there may be 'limitational factors,’ which
must, by technological necessity, be always used in strict proportion to the
quantity of product or to the quantity of some other factor (R. Frisch); there

9 The problem of production functions for concerns that operate more than one
plant will be excluded from consideration in order to save space. Some work has, how-
ever, been done on it of late.

10 Marshall and Walras were really the only authors whose argument, carefully scru-
tinized, turns out to be free from any implications of this kind.

11 To overlook this was perhaps natural for those literary economists who did not
have any explicit concept of the production function at all. It was less natural for
Wicksteed and Wicksell. But we must not forget that, under conditions of pure com-
petition, the equilibrium relations between the marginal physical productivities real-
ized in different firms and industries are easy to establish and that this is all that was
required for their purposes: Marshall’s 'marginal shepherd’ was well qualified to repre-
sent the marginal productivity of his kind of labor in any employment, hence the
social productivity of this kind of labor in general.

12 Of course, if we consider scarce services only, account must be taken of cases in
which it depends on the extent of firms’ demand whether a given service is scarce or
not: water may cease to be ‘free’ in a given spot if firms need more than a certain
amount of it. We have touched upon this point already in another connection.

EQUILIBRIUM ANALYSIS

IO3I

may be also restrictions of other types (A. Smithies). 13 We shall return to this
in a moment, but must now advert to a particular short-run type of these ad-
ditional restrictions, the importance of which for the theory of marginal pro-
ductivity has been pointed out by Professor Smithies.

I have emphasized the fact that the full logical meaning of the concept of
production functions reveals itself only if we thinlc of them as 'planning 7 func-
tions in a world of blueprints, where every element that is technologically
variable at all can be changed at will, without any loss of time, and without
any expense.

But whenever we apply the concept, as we certainly wish to do, to firms
that own going concerns and are already committed to plant, equipment, and
perhaps part of an existing administrative apparatus, then, according to the
time we allow for adaptation, those elements of their existing set-up that are
resistant to change will act upon technological choice as further restrictions. 14
To assume them away will bring us back into the sphere of pure logic and
not alter the fact that reality will fail to correspond to the theoretical model
and to the theorems, especially the marginal productivity theorems, that are
derived from the model; and to allow time for full adaptation — Marshall's
method of dealing with this situation — will not help us either, because during
the lapse of the necessary time other disturbances will occur that will prevent
correspondence to the model from ever being brought about. It is as impor-
tant to realize the inevitable discrepancies between theory and fact that must
result from this as it is to realize that they do not constitute a valid objection
to the former; it is no valid objection to the law of gravitation that my watch
that lies on my table does not move toward the center of the earth, though
economists who are not professionally theorists sometimes argue as if it were.

(5) It is therefore under exceptionally favorable circumstances only that we
can observe 'logically pure 7 production functions. This is the case particularly
in agriculture, where we have not only observational but also experimental ma-
terial with which to construct them. But whenever we try to do so from ob-
servations of going concerns alone, we meet difficulties similar to those that
we meet in trying to construct statistical demand curves and cannot in general
expect — not at any rate without taking special precautions — that we get the
production functions of economic theory. Nevertheless and in spite of the
errors in interpretation to which they may give rise, 15 'realistic 7 production

13 R. Frisch, 'Einige Punkte einer Preistheorie . . .’ Zeitschrift fur N ationalokon-
omie, September 1931. A. Smithies, ‘The Boundaries of the Production Function and
the Utility Function, 7 Explorations in Economics, Notes and Essays Contributed in
Honor of F. W. Taussig (1936).

14 Marshall was well aware of this fact and of its importance for the interpretation
of actual business behavior. See his Pittsburgh gas case, Smithies op. cit. p. 328.

15 One of these errors stems from the observation, in itself quite correct, that a
going plant, designed for a particular output and for a particular process of produc-
tion, is often very rigid and leaves little room for adaptations to new situations of the
productive combination it embodies, especially to changes in relative prices of services.
Consideration of these relative prices, as foreseen at the time when the plant was
erected, is embodied (often subconsciously) in the set-up of the plant itself.

1032 IV: FROM 1870 TO 1914 AND LATER

functions are of great importance. They help to destroy the layman’s impres-
sion that production functions and marginal productivity schedules are just
theorists’ fictions. They confront us with new problems and shed light on the
stretch of road before us. For examples I refer the reader to the report of a
committee of the Econometric Society published in Econometrica (April 1936)
by its chairman, Mr. E. H. Phelps Brown.

[(b) The Evolution of the Concept .] As we have seen in the preceding chap-
ter and in Parts 11 and hi, schedules of marginal productivity, in terms of
physical and of value products, have been in use ever since the times of
Turgot and even before. The production function itself appeared in ‘classic’
times under the name of the State of the Arts — it being recognized that cer-
tain arguments hold only if technological knowledge is assumed to be con-
stant. The most important of these arguments was the law of decreasing re-
turns from land, but already Ricardo, by recognizing that ‘real values’ of com-
modities are ‘regulated’ by the ‘real difficulties’ encountered by the least-favored
firm, pointed toward a wider generalization. And then there was what Marshall
called Thiinen’s ‘great law of substitution.’ All this had still to find its proper
relation to the principle of marginal utility, but the rest looks to the backward
glance — apart from the more difficult problems that lurk behind even the
simplest case — like a fairly easy task of polishing, co-ordinating, and developing
existing ideas, all of which were to be found, in one form or another, in J. S.
Mill’s Principles or, at all events, in Mill plus Th iinen. The Austrians accom-
plished this in their way and Marshall in his. 16 In Marshall’s Principles we find
in fact, though he did not avail himself of the production function explicitly,
a very complete and properly qualified marginal productivity theory of the firm
and of distribution, and in addition many indications that he saw the prob-
lems beyond. 17 If we take in his treatment of the subject fully, even in the

16 Two other contributions should be mentioned here that seem to have remained
almost unnoticed for a reason that is highly characteristic for the conditions prevailing
in our field — their brevity: A. Berry in a paper on the ‘Pure Theory of Distribution,'
read before section F of the British Association for the Advancement of Science and
published in its Report, 1890, presented ‘equations of marginal productivity’ that
equated prices of productive services to marginal physical productivities multiplied by
the prices of products. And Edgeworth, in 1889 and then again in 1894 (see Papers n,
p. 298 and ni, 54) did the same. Both use production functions explicitly and present
the equalities referred to as elements of a comprehensive equilibrium system. Neither
received much credit for what must be listed as a considerable achievement. Professor
Stigler, however, noticed them both ( Production and Distribution Theories, pp. 132
and 322). Owing to their close relation to Marshall and, especially in Edgeworth’s
case, to all other builders in that field, it seems hopeless to try to appraise individual
‘rights.’ But their contributions help us to realize the breadth of the wave, at the crest
of which stands Marshall’s work.

17 Professor Stigler (op. cit. ch. 12) has shown very well how Marshall, pushing his
way slowly through traditional underbrush, ended up by accepting eventually the whole
of the marginal productivity apparatus. If, however, he would never admit the full
extent to which he actually did so, this is, I think, adequately explained by (1) his re-

EQUILIBRIUM ANALYSIS

10 33

form given to it in tbe first edition of his Principles, we cannot help feeling
some surprise at the statements at the beginning of Wicksteed’s Essay, to wit,
that ‘in investigating the laws of distribution it has been usual to take each
of the great factors of production ... to inquire into . . . the special nature
of the service that it renders and ... to deduce a special law regulating [its]
share of the product’ and to unify these laws on the basis of ‘the common
fact of service rendered .’ 18 But Wicksteed, dropping Marshall’s wise hesita-
tions and qualifications and writing down the production function explicitly,
did set forth boldly the naked logic of the matter and also attempted a proof
of the propositions — both of them guardedly affirmed but not proved by Mar-
shall — that every ‘factor’s’ distributive share will under ideal conditions tend
to equal its quantity multiplied by its marginal degree of productivity; and
that those shares will tend to sum up to (to ‘exhaust’) the net product of every
firm and, in the sphere of social aggregates, Marshall’s ‘national dividend.’
Now, both propositions are equilibrium propositions and need not hold out-
side of the point of equilibrium, assuming that one exists. Marshall was of
course aware of this but it was left for Wicksell to state it explicitly . 19 Wick-
steed, however, based his proof on the sufficient but not necessary postulate
that the production function is homogeneous of the first order, in which case
the 'exhaustion theorem’ would hold identically, that is, all along the line and
not only in equilibrium . 20 He did recant later on (see Common Sense of Po-

luctance to throw in his lot with the non-English economists who did the same thing;
(2) his justifiable aversion to assigning a ‘causal’ role to the partial coefficients of the
production function; and (3) his awareness of conceptual difficulties, some of which
were alluded to above.

18 P. H. Wicksteed, An Essay on the Co-ordination of the Laws of Distribution
(1894), p. 7. If the statements above are hardly fair to Marshall, they are strikingly
unfair to Walras and even to J. B. Say. The irritation that Walras displayed in his
‘Note sur la refutation de le theorie anglaise du fermage [rent of land] de M. Wicksteed’
(Recueil publie par la Faculte de Droit de I’Universite de Lausanne, 1896, republ. as
appendice m of the 3rd ed. of his Elements, but left out in the 4th, which, however,
contains the new no. 326 on marginal productivity) is therefore less unjustified than
Professor Stigler declares it is. Moreover it is a misunderstanding to think that Walras
claimed personal priority for the theory of marginal productivity as defined by himself.
As far as this goes, the note on p. 376 of the Elements is conclusive.

10 See his Lectures 1, p. 129. Professor Stigler’s exposition of Wicksell’s share in the
solution of the ‘modem’ marginal productivity theory — I call it ‘modem’ in order to
distinguish it from that of Longfield and Thiinen — is very interesting because it shows
how difficult it is, even for first-class minds, to grasp and appreciate relatively new
ideas that have already been displayed in broad daylight. Wicksell might have learned
all or nearly all that was to be learned from Marshall and the Austrians. But it took
him another decade, after having himself adumbrated the theory in 1893, to arrive at
his final view of the matter (see Stigler pp. 373 et seq.), in part, as an acknowledg-
ment shows, with the help of Professor D. Davidson.

20 A function of two or more independent variables is called homogeneous of the
first order or ‘linear and homogeneous’ in all or some of these variables if, when these
increase or decrease in a given common proportion — for instance when they are multi-
plied by a constant X — the dependent variable increases or decreases also in the same

1034 IV: FROM 1870 TO 1914 and later

litical Economy , p. 37 311.) but without carrying out the alterations that this
recantation would have called for. Before going on we had better see what
happened at about the same time in Lausanne.

Remember that Walras originally used what may be called a degenerate pro-
duction function, that is, a production function restricted to technologically
fixed and constant coefficients of production. In 1 894, Barone suggested to him
the idea of turning these technological constants into economic variables and of
introducing, for the determination of these, a new relation, the equation de
fabrication, which was to express the fact that, if some coefficients are de-
creased, output may be maintained by an appropriate compensatory increase
of others: the new ‘unknowns/ that is the new variable coefficients, were then
to be determined by means of the condition that costs be minimized for any
given output and any given factor prices. Barone himself started work on these
lines and published two installments of a corresponding theory of distribution
(‘Studi sulla distribuzione: la prima approssimazione sintetica’) in the Giornale
degli Economist i, February and March 1896, 21 without however going on with
it — we shall presently see why. Walras had already glanced at variability of
coefficients of production in connection with his theory of ‘economic progress/
which he defined (in contrast to ‘technological progress’) as progressive substi-
tution of the sendees of capital goods for services of ‘land.’ He then repro-
duced Barone’s suggestion in his ‘Note’ of 1896 (mentioned above) and in the
new no. 326 of the fourth edition (1900) of the Elements. There he formu-
lated ‘the theory of marginal productivity’ in three propositions of which the

proportion. Call x the product as before, although now this x, standing for the total
national dividend, would raise very delicate index-number problems, and (v v v 2 , * • •
v n ) the quantities of scarce factors used in producing x. Then the production function,
x = f(v lr v 2 , — v„) is said to be homogeneous of the first order if Xx = f(Xv v Xv 2 , • • •
Xv n ) for any point (v l7 v 2 , • • • v n ) and any X. In this particular case the relation,

x = v, 4 - v 9 - — -j L v_ - — , holds over the whole interval in which the x-func-

tion exists. This is Euler’s theorem, or rather a special case of Euler’s theorem, on homo-
geneous functions. Identifying the -^-’s with the various factors’ marginal degrees of

*v 4 '

physical productivity, we see that their shares exhaust the social product over the whole
of that interval and whatever the amount of the product, although all that we can
aver in cases not linear and homogeneous is that they do so in the equilibrium point.
Translating this into economic terms, first-order homogeneity means that there are
neither economies nor diseconomies of scale, or that large- and small-scale production is
equally efficient, or that there are ‘constant returns to scale.’ In itself this implies noth-
ing, of course, about what happens when only one of the ‘factors’ is increased, the
others remaining constant, i.e. about the shape of each ‘factor’s’ marginal productivity
curve. Note that, since X is arbitrary, we may put it equal to the reciprocal of any of

the v/s, e.g., to — . Then the production function reads: — = /( 1, — ,

i.e. the

v i v i " ' Vi v x

average productivities of all ‘factors’ are functions of the proportions but not of the ab-
solute amounts in which they are used.

21 See Stigler, op. cit. pp. 357 et seq.

EQUILIBRIUM ANALYSIS

IO35

last was omitted, without warning, or motivation, from the edition definitive
(1926): (1) free competition brings about minimum average costs; (2) in
equilibrium and if average cost equals price, the prices of productive services
are proportional to the partial derivatives of any production function [that
contains only substitutional (compensatory) services] or to the marginal pro-
ductivities; (3) the whole amount of product is distributed among the pro-
ductive services. 22 In 1897 (Cours 11, §§ 714-19) Pareto criticized the mar-
ginal productivity theory — mainly on the ground that it breaks down in the
case of what are now called limitational factors — and blocked out a theory that
covered all the more important possibilities and which was technically im-
proved in the Manuel. But he looked upon this not as an improvement — -espe-
cially not as an improvement on Walrasian lines — but as a renunciation of the
marginal productivity theory, which in the Resume of his Paris course (1901)
he declared ‘erroneous/ It was necessary to inflict these details upon the reader
because they serve to clarify the situation in the late 1890’s. 23

By 1900, then, the production function had established itself, as a result
of the efforts of many minds, 24 in its key position, alongside the utility func-

22 In proposition (2) I have italicized the word ‘and’; and I have inserted the proviso
that only substitutional factors are included because this was clearly Walras’ meaning,
as a preceding sentence on the same page (375) shows, where he explicitly recognized
the existence of other, non-substitutional ones. I think that both alterations only em-
phasize Walras’ true meaning. But I am unable to offer an explanation why, changing
his careless (and meaningless) original statement that each service’s rate of remunera-
tion is ‘equal’ to the partial derivative of the production function into the statement
that it is proportional to it, he did not say what the factor of proportionality is, namely,
in full equilibrium of pure competition, the price of the product. And I am also un-
able to say why, seeing that he imposed the condition that total receipts be equal to
total cost, he dropped the exhaustion theorem which follows from this condition. Ob-
serve that, since firms will always try to minimize total cost, whatever their output,
propositions (1) and (2) hold also for outputs other than the equilibrium output. of
pure competition. Then the factor of proportionality is no longer product price, but is
still marginal cost.

23 The reader finds many further details in Stigler’s work (especially pp. 323 et seq.)
and in H. Schultz, ‘Marginal Productivity and the General Pricing Process,’ Journal
of Political Economy, October 1929. This paper contains much useful information and
especially the simplest exposition in English of Pareto’s theory of production. Un-
fortunately it is also misleading not only in individual points but also in the total im-
pression it conveys. In this respect, perusal of J. R. Hicks’s ‘Marginal Productivity and
the Principle of Variation,’ Economica, February 1932, and of the subsequent con-
troversy between Hicks and Schultz (ibid. August 1932) would provide an antidote.

24 It is hardly possible to be more specific than that. The names of Berry, Edge-
worth, Marshall, Barone, Walras, and Wicksteed all enter in some way or another
when we discuss this difficult case of paternity. Remember, we are now discussing the
birth of the production function as such and not the older or newer marginal productiv-
ity ideas that had more or less definitely pointed toward it for a century or more. The
Walras-Barone equation de fabrication is of course nothing but a particular form of
the production function.

In this

1036 IV: FROM 1870 TO 1914 AND LATER

tion, as the second of the two descriptive functions that I have called the two
pillars of the classic theory of that time. 25 The old daws of returns/ properly
generalized and polished, lay at hand to supply the properties which the pro-
duction function was to enjoy, either generally or 'normally/ and which we
shall now restate again. If we wish to define marginal productivity of a service
as the partial derivative of the production function with respect to the quan-
tity of that service, we must, as has been pointed out already, assume first of
all that these partial derivatives exist. We may postulate in addition that they
are positive, that is, that a small increase in the quantity of any services will in-
crease the quantity of the product. 26 Following Turgot we may postulate fur-

> 0 j ^ ^en passes

through a single maximum and, after having reached this point, keeps on de-

( g 2f \

^ 2 < o; law of decreasing returns in the primary sense J . In this

case two corollaries follow: (1) there exists a point beyond which the average
productivity of every service (x/v*) decreases also (law of decreasing returns in
the secondary sense); (2) cross derivatives are positive, which means that if I
increase the quantity of a productive service v 4 by a small amount, this will not
only decrease (after the point indicated) its own marginal productivity but
also increase the marginal productivities of all the other productive services

\5Vi 5v, ^ )

A methodological remark may be usefully inserted here. Among the prop-
erties to be assigned to the production function, there are some that follow
from others and therefore may be 'proved deductively’ or 'stated as theorems.’
Thus decrease of average productivity (after a certain point) may be deduced
from, or proved by, the decrease of marginal productivity and there is then
no need for any separate observational or experimental proof. Thus Wicksell
(see his article in the Thiinen Archiv, 1909) was right in holding, and F.
Waterstradt (ibid.) was wrong in denying, that the 'law’ of decreasing average
productivity follows from other properties of the production function which
we usually assume. But, though we have in general some latitude in deciding
which properties we wish to postulate and which we wish to formulate as

25 See first sentence of this section. By using this simile, I do not mean to deny that
from some standpoints, especially the Austrian one, there is reason to object to looking
upon the utility and production functions as completely equal in analytic status, and
something to be said for regarding utility as the one and only pillar of the building.

26 Beyond an 'operative interval’ this need not be so of course: so many workmen
may be already employed in a plant that additional workers would reduce output —
everybody treading on the toes of somebody else. It does not make any real difference
whether this possibility is expressed by saying that after a certain point marginal pro-
ductivity becomes negative or by saying that, since no employer, if a free agent and
acting upon the rules of economic logic, will take on any service increments that will
decrease output, marginal productivity cannot fall below zero. For certain purposes the
first alternative is preferable.

EQUILIBRIUM ANALYSIS

i ° 37

theorems, this is not always so. Thus, there is no economic axiom that would
imply the proposition that physical marginal productivity (after a point) de-
creases monotonically. And in any case we always have to postulate some prop-
ositions for which, within a deductive sector of our (or any) science, it is not
possible to provide logical proof. This raises the question of their status or
nature. Formally they enter as hypotheses (or as definitions in B. Russell’s
sense), which on principle we can frame at will. But when, with a view to ap-
plication, we ask whether they are ‘true’ or ‘valid,’ that is whether results ar-
rived at by means of them may be expected to be verifiable (in general or
with respect to certain phenomena or aspects of phenomena), then there are
only two possibilities: they may be deductively provable in some wider sys-
tem that transcends economics or its deductive sector, or they must be estab-
lished by observation or experiment. This is the case of the proposition that
asserts decrease (after a point) of the marginal productivities of productive
services in function of the quantities of these services. This means that when
we assert this proposition we are asserting a fact and this imposes upon us the
duty of factual verification. Of course evidence for such a proposition may be so
overwhelming that we may refuse the challenge as vexatious. But since there
is no logically binding rule for deciding what is and what is not vexatious, we
must on principle be always prepared to meet the challenge: we have no
logical right to reply that the challenged proposition is ‘obvious’; and we are
committing a definite error, if we call it ‘evident.’ For us, these truths are im-
portant because they have been and are frequently sinned against in the mat-
ter of ‘laws of returns’: we shall presently see an interesting instance of this
is the discussion on first-order homogeneity. Let us note in passing that here
we are brushing against an interesting problem of general epistemology.

I take this opportunity to mention Edgeworth’s analysis of the laws of return’ (pub-
lished originally in the Economic Journal, 1911; republished in Papers Relating to
Political Economy, vol. 1, pp. 61 et seq. and 151 et seq.), which has been rightly
called one of his most important contributions to economic theory by Professor Stigler
(op. cit. pp. 1x2 et seq. to which the reader is referred). It is as interesting to note, that
Edgeworth had still to struggle for the recognition of quite elementary matters such
as that the ‘law’ of diminishing returns does not apply to land only, as it -is to note
that Edgeworth, whose chief merit it was to teach the distinction between decreasing
marginal and decreasing average returns, had repeatedly confused the two himself and
that his presentation in the paper in question is not correct in every detail. The matter
was taken up again by Karl Menger (the mathematician, son of the economist) in his
'Bemerkungen zu den Ertragsgesetzen’ (two articles in Z eitschrift fur Nationalokono-
mie, March and August, 1936; see also a comment by K. Schlesinger, ibid.). We must
be grateful to the eminent mathematician for the lesson on slovenly thinking which
he administered to us and which may serve as a shining example of the general tend-
ency toward increased rigor that is an important characteristic of the economics of our
own period. But in effect, the logical crimes revealed — except the confusion between
decreasing marginal and average returns — have hardly been productive of serious er-
rors in results. Even as regards that confusion it should be mentioned that, though no
less a thinker than Bohm-Bawerk committed it, it remained quite harmless in his

IO38 IV: FROM 187O TO 1914 AND LATER

case, for he reasoned correctly about decreasing marginal returns to his roundabout
process.

The reader will have no difficulty in understanding why it was that the
properties of the production function — that is, the use of a production func-
tion that constitutes the only relation between the productive services em-
ployed, all of which are assumed to be ‘substitutional 7 — recommended them-
selves to theorists, particularly for classroom and textbook purposes. Such a
production function is easy to handle and yields simple results. Moreover it
picks up, from the mass of relevant technological facts, just those that are
subject to economic choice and thus serves well to display the economic logic
of production. It cannot be repeated too often that this production function
is valid only on a high level of abstraction, for planned and not for existing
plants, and for a limited region of the production surface at that. But on that
level, and for that range, it is an advantage and not a blemish that it discards
all the cases in which the economic logic is thwarted by additional restrictions
of a purely technological nature. These additional restrictions exist however,
even in the stage of planning an enterprise; many more impose limits upon
long-run and still more upon short-run adaptations of existing concerns; and
as we approach the patterns of real business life we lose that pure logic more
and more from sight, especially because the restrictions prevent even immedi-
ately adaptable services — such as labor that can be hired by the week or day
or hour — and their prices from behaving according to the marginal productiv-
ity rales, even apart from the facts that perfect equilibrium and pure compe-
tition are never fully realized. And the reader will also understand that some
economists will express this situation by saying: ‘the marginal productivity
theory is of universal application on a high level of abstraction , 7 whereas other
economists will prefer to say: ‘the marginal productivity theory is erroneous . 7
Barring the regrettably frequent cases of failure to grasp the meaning of the
theory, this is all there is to the controversy on the production side of ‘mar-
ginalism 7 that has been carried on to this day . 27 In particular, all that Pareto

27 Telling illustrations of this statement may be gleaned, e.g., from the controversy
between Professor R. A. Lester, ‘Shortcomings of Marginal Analysis for Wage-Employ-
ment Problems 7 ( American Economic Review, March 1946) and Professors F. Machlup,
‘Marginal Analysis and Empirical Research 7 (ibid. September 1946) and G. J. Stigler,
‘Professor Lester and the Marginalists 7 (ibid. March 1947, where the reader also finds
Lester’s reply to Machlup and the latter’s rejoinder). In this connection a warning
to the reader suggests itself: in appraising an author's view on marginal productiv-
ity theory it is always necessary to make sure what an author means by this term:
Pareto and Stigler, e.g., seem in places to mean only theories that assume all ‘factors’
to be connected by one relation only, this relation expressing universal substitutability.
Statements may be true of this marginal productivity that are not true of marginal
productivity theories that admit also other relations between the factors. The latter is
the meaning adopted here. For instance, Walras 7 original theory, which worked with
constant coefficients of production and admitted no substitution except the substitu-
tion of production of a product for production of another product, and Wieser’s theory
which did the same are still marginal productivity theories for us. This is important
to remember: the circumstance that a theory includes boundary conditions, which will

EQUILIBRIUM ANALYSIS

L0 39

can have meant by renouncing the .marginal productivity theory is that we
cannot be content to deal with the case of substitutable services — the case of
the single substitutional relation— any more than we can be content to deal
with the case of constant coefficients, but that we must take both into account
and, in addition, cases in which coefficients of production vary with the quan-
tity produced 28 — which simply amounts to saying that the fundamental ana-
lytic schema that uses nothing but the substitutional relation needs to be sup-
plemented if we wish 'to approach reality more closely , 29 but remains valid
within its proper sphere.

[(c) The Hypothesis of First-Order Homogeneity.] If, following Wicksteed,
we further endow the production function with first-order homogeneity, that
is, if we assume that there are no economies or diseconomies of scale, we se-
cure further simplifications which explain why many authors cling to it , 30
even though it is generally recognized by now that we do not need it for prov-
ing that distribution according to marginal productivity rules will just exhaust
the product. Again I have to report a long, inconclusive, and unnecessarily

prevent some factors from earning at the rate of marginal physical productivity multi-
plied by either the prices of the product or the marginal revenue, does not prevent us
from calling this theory a marginal productivity theory.

28 This led him to define the coefficients of production in a new way, which is use-
ful only if we wish to retain these coefficients while getting rid of the assumption of
their constancy. He expressed the quantities of productive services employed as func-
tions of the quantities of products. His coefficients of production are then the partial
derivatives of these functions with respect to the various services ( Manuel , p. 607). A
similar idea was used by W. E. Johnson (‘The Pure Theory of Utility Curves/ Eco-
nomic Journal, December 1913) and in some respects generalized by A. W. Zotoff
(‘Notes on the Mathematical Theory of Production/ ibid. March 1923, a brilliant con-
tribution, the neglect of which might provide subject matter for another homily about
the manner in which economists work). Neither author acknowledged indebtedness to
Pareto.

29 In trying to do so we discover of course that the range within which ‘factors’
can be substituted for one another rapidly decreases as we make factors more and more
specific. With the time-honored triad of the services of land, labor, and capital, substi-
tutability holds almost unrestricted sway. When it comes to Douglas fir lumber,
dentists, and cutting tools, it almost vanishes in the short run. This merely means
that we must state, in each instance, what type of factors, of periods, and of prob-
lems we have in mind, and there should be no reason for quarreling either about mar-
ginal productivity or about ‘method’ in general. It sounds almost incredible and yet it
is the fact, nevertheless, that this has remained a source of controversy to this day —
of controversy that was, in part at least, kept alive and embittered because both parties
erroneously believed that there was a political interest at stake.

30 In order to satisfy himself of this the reader need only observe the frequency
with which first-order homogeneity turns up (sometimes unnecessarily) in Professor
Allen’s treatment of problems of production and distribution (see his Mathematical
Analysis for Economists, passim). A still more telling instance is Professor Hicks’s ‘Dis-
tribution and Economic Progress/ Review of Economic Studies, October 1936. One
of the most important of these simplifications refers to the coefficient of elasticity
of substitution.

1040 IV: FROM 1870 TO I9I4 AND LATER

acrimonious discussion 31 which hardly deserves more than the following com-
ments.

First of all, he who asserts first-order homogeneity of the production func-
tion asserts a fact, at least hypothetically. Since this fact is not implied in any
of the other properties that, in general, normally, or for particular purposes we
have previously agreed to attribute to the production function , 32 it can be es-
tablished or denied only by factual evidence if at all. Edgeworth’s early criti-
cism of Wicksteed’s use of first-order homogeneity is indeed disfigured by
misplaced irony. But it had at least the merit of realizing correctly that it is
facts and not speculations which are needed to refute the hypothesis: this is
why he hunted for contradicting instances. The vast majority of participants in
the discussion, however, have tried to this day to 'prove' or to 'refute’ it by
logical argument or by appeal to its obviousness or lack of obviousness , 33 which
inevitably leads into deadlock.

Second, we must not forget that asserting (denying) the practical possibility
of multiplying all 'factors' by a constant X is one thing; and asserting (deny-
ing) that output would also be multiplied by X, if it were practically possible
to multiply all 'factors’ by X, is quite another thing . 34 Nobody denies that the

31 It is not possible — and neither would it be profitable — to follow this discussion in
detail. Therefore I shall mention here, besides Wicksteed and his earliest and most
severe critic, Edgeworth, only a few modem contributions, namely: F. H. Knight, Risk,
Uncertainty and Profit (1921); N. Kaldor, ‘The Equilibrium of the Firm,’ Economic
Journal, March 1934; A. P. Lemer, Economics of Control (1944), pp. 143, 165-7;
G. J. Stigler, Theory of Price (1946), p. 202m — all of whom stand for first-order homo-
geneity. Strongly on the other side of the fence: P. A. Samuelson, Foundations, p. 84;
and E. H. Chamberlin, ‘Proportionality, Divisibility, and Economies of Scale,’ Quar-
terly Journal of Economics, February 1948. See ibid. February 1949 for two criticisms
and Chamberlin’s rebuttal.

32 Such a particular-purpose property is that all ‘factors’ be substitutional. Some
writers seem to have believed, though more often implicitly than explicitly, that first-
order homogeneity follows from this property. H. Schultz even tried to prove it (‘Mar-
ginal Productivity and the General Pricing Process,’ Journal of Political Economy,
October 1929, Appendix 1). This is an error.

33 Appeal to obviousness can of course be met by simple denial, but it should not
be met by saying, as has been said by Professor Samuelson ( Foundations of Economic
Analysis, p. 84) that the hypothesis is ‘meaningless’ since anyone who declares it to
be obviously valid will, if challenged, defend it by labeling any contradicting facts as
‘indivisibilities’ (see footnote 35, below), thus making the hypothesis true by definition.
This is not so, though I do not deny that uncritical reference to indivisibility of some
factor 'which must of course exist if the production function does not display first-
order homogeneity’ does give some color to the indictment: indivisibilities, too, are
facts that call for, and admit of, empirical verification. Nor is it relevant (see Samuel-
son, ibid. p. 84m) to point out that any function may be made homogeneous in a
variety or hyperspace of higher dimension: the relevant question is whether it is homo-
geneous in the n factors (or a subset of these) which it is always possible to enumerate
completely.

34 Pareto for instance denied validity of the first-order homogeneity assumptions on
both grounds ( Corns n, $ 714).

EQUILIBRIUM ANALYSIS I04I

practical possibility is more often absent than present. Controversy should
therefore be confined to theorems for which the assumption is both necessary
and sufficient. Since neither assumption is necessary for the ordinary marginal
productivity theorems, it is readily seen that the room for disagreement could
have been greatly reduced if this distinction had been kept in mind. It is a
striking illustration of the lack of rigor prevailing in economic discussion that
this was not done.

Third, one obstacle to first-order homogeneity that is universally recognized
by its sponsors is indivisibility or dumpiness’ in some factor or factors — -such
as management, railroad tracks, rolling mills. Such factors cannot be varied by
small quantities even in the blueprints of a plant that is still in the planning
stage — where size of plant is a variable — and much less so within the frame-
work of a going concern , 35 where it is only or mainly variation of output from

35 To deny the existence or importance of such indivisibilities and their relation to
often very large -intervals of increasing physical returns would be absurd. The claim
that they account satisfactorily for observed deviations from first-order homogeneity
can therefore certainly be made good to some extent, and the theorist, especially the
teacher of elementary theory, who assumes homogeneity of the production function
(with proper qualification as regards a direct relation between output and the quantity
of some "‘factor’ or ‘factors’), disturbed by indivisibilities, may feel sure that he is cover-
ing perhaps all the ground he cares to cover. Also, indivisibilities may be reduced by
taking account of the cases in which ‘lumpy’ factors, such as managers, may be varied
by hiring the part-time services of consultants or again the cases in which the ‘lumpy’
units in which a ‘factor’ is available (units of costly machinery for instance) may be
explained by the structure of the demand for it and not by technological necessity. I
am not denying anything of that. All I wish to show is, on the one hand, how all
this explains the duration and inconclusiveness of the debate and, on the other hand,
how easy it is to slip, from the tenable assertion of these facts, into a habitual and
thoughtless appeal to indivisibility in general. Indivisibility of course also interferes
with the assumptions of continuity and differentiability of production functions. On
this see P. A. Samuelson, op. cit. especially pp. 80-81.

Finally, reference should be made to cases where absence of first-order homogeneity
(presence of economies of scale) is made to spell indivisibility (and vice versa) by defi-
nition (Stigler, Kaldor). There is no point in quarreling about definitions. In this case
Professor Samuelson is right in holding that indivisibility is void of empirical content
(and in this sense ‘meaningless’) but this is no reason for refusing to work out theories
that rest on the homogeneity hypothesis, which does retain empirical content however
we label the cases to which it does not apply. On the other hand the choice of the
word indivisibility seems to suggest that Professors Stigler and Kaldor mean more than
a definition. They may mean to agree with Professor Knight, who declared absence of
economies of scale to be ‘evident’ if all services in a combination and the product are
‘continuously divisible.’ This is an assertion about supposedly unchallengeable facts
and not meaningless in Samuelson’s sense: we may challenge either the facts or, even
if we do not challenge the facts of any particular case, we may deny that the proposi-
tion in question is universally ‘evident.’ If a product requires n kinds of services and
if one of them is a lubricant — all of them being substitutional and as divisible as you
please — it is not evident to me that the quantity of lubricant applied must be pro-
portionately increased in order to increase the product in the same proportion, even if
all the other services must.

1042 iv : FROM 1870 TO 1914 AND LATER

a plant of given ‘size’ which is under discussion. We conclude by glancing at a
circumstance of a different type.

Fourth, then, we note that a given hypothesis may be verified not only by
observations that bear upon its validity directly but also by observations that
do so indirectly by verifying consequences that follow from it: many physical
hypotheses are verified in this way alone. Now, if there were any sense in
speaking of a national production function at all, first-order homogeneity of
this function would supply a very simple explanation of a remarkable fact,
namely, the relative constancy of the main relative shares of ‘factors’ in the
national dividend. For two factors, and v 2 , such a ‘social’ production func-
tion of the form, x = v x a v 2 1 “ a , (a < 1), was first suggested by Wicksell (Lec-
tures, 1, p. 1 28) and has been extensively used by Douglas and Cobb. 36

So far we have, throughout this section, defined marginal degree of pro-
ductivity by means of a partial derivative, that is, our marginal product has
been the increment of product which we get when adding an infinitesimally
small amount to the quantity of a service employed while keeping the quanti-
ties of all other services strictly constant. 37 We have indeed seen that the lat-
ter is not always technologically possible and that when it is not, marginal
productivity breaks down. But now we have to add that even where the addi-
tion of an infinitesimal amount to some service employed, all other condi-
tions remaining the same, yields a determined increment of product, this pro-
cedure need not be the most economical method for securing this increment:
it may be more economical to adjust the quantities of the other services em-
ployed as well. It is true that these adjustments may be of the second order of
smallness, especially if we are very strict about the smallness of the increment
we contemplate adding in the first place. But this need not be so. Further-
more it is true that fhere are purposes for which it is proper and useful to
keep all other services constant in order to isolate the effects upon product
of the one singled out for study; 38 but there are other purposes, among them

36 C. W. Cobb and P. H. Douglas, ‘A Theory of Production,’ American Economic
Review, Supplement, March 1928. This was the original paper that was to be fol-
lowed by an impressive series of econometric studies. Professor Douglas’ treatise on
The Theory of Wages (1934), and further studies summed up in his Presidential ad-
dress, ‘Are there Laws of Production?’ American Economic Review, March 1948. Also
see V. Edelberg, ‘An Econometric Model of Production and Distribution,’ Economet-
rica, July 1936. Professors Cobb and Douglas inserted a second constant into the for-
mula above so as to make it read: x = cVj* 1 v^' 0 , but this does not make much dif-
ference.

37 See Marshall’s Principles, p. 465.

38 We then get the marginal productivity curves turned out, e.g., by agricultural ex-
periment stations. Thus, a steer may be kept in strictly invariant conditions except for
the number of pounds of hay he is being fed: this will isolate the effects upon his
weight of successive increments of hay. Or, the wheat yield of a given plot of land may
be studied in this manner as a function of the quantity of nitrogen contained in a
fertilizer applied. It will be observed that this method will produce a theoretically in-
finite number of marginal productivity curves for each ‘factor/ one for each of the
theoretically infinite number of combinations of other circumstances.

EQUILIBRIUM ANALYSIS

1043

the analysis of business behavior and of the behavior of distributive shares, for
which it may be quite misleading to do so. This difficulty worried Marshall
greatly and induced him to emphasize the dangerous concept of Net Mar-
ginal Product , 39 that is to say of the marginal product that results from an in-
crement in the quantity of a factor, after corresponding rearrangement of the
others. Marginal productivity in this sense is no longer properly expressed by a
partial differential coefficient . 40

Output being evidently measurable, the production function is not exposed
to the criticism that induced economists, oi most of them, to drop the utility
function: you can see and count loaves of bread; you cannot see and measure
satisfaction, at least not in the same sense. Technically it is however just as
possible to do without the production function as it is to do without the
utility function: the fundamental theorem that the marginal productivity
(utility) of a dollar’s worth of each ‘factor’ (consumers’ good) must be (at
least) equal to the marginal productivity (utility) to the firm (household) of the
marginal productivity (utility) of a dollar’s worth of any other ‘factor’ (con-
sumers’ good) follows in both cases, though in a different garb, whether we use
production (utility) functions or simply marginal rates of substitution or trans-
formation. This can be visualized, if we agree to admit two factors only, V*
and V 2 , and mark off their quantities, v x and v 2 , on the two axes of a rectangu-
lar system of co-ordinates in space, reserving the third axis for output: the
latter then swells up from the factor plane in a loaflike fashion, forming the
production surface . 41 Sections parallel to the factor plane will cut out contour

39 See Principles, pp. 585-6. The net marginal product is a value concept and the
difficulty in question arises in the precincts of the cost problem rather than in the
immediate neighborhood of the production function. We may, however, bring it in
here by defining the marginal degree of productivity by means of an ordinary instead
of a partial differential coefficient. Suppose again that there are two ‘factors’ only,
v 1 and v 2 , so that the production function reads: x = f(v v v 2 ). Write the total dif-
ferential

dx = w/'’' + T^ ir *

Then, dividing through, e.g. by dv 1 , we can define marginal degree of productivity as

dx bf bf dv 2

dv x 8v 1 §v 2 dy> 1

For use to be made presently, note that if dx = o, we have

dv2 = 1 / bf_

dV l 8V 1 / 6V 2

40 Marshall also observed that, if we take rearrangements into account, marginal pro-
ductivity will vary according to the time that is allowed for adaptation. See on this
E. Schneider (op. cit. p. 28) and his concepts of total and partial adaptation.

41 Readers not familiar with this construction which is by now classic had better
look up Allen, op. cit. no. 11.8, pp. 284-9, and, for the derivation of (stable) demand
functions for ‘factors,’ pp. 370-71 and 502-3.

1044 IV: FR0M 1870 TO 1914 AND LATER

lines that are loci of constant output. Projected on the factor plane they will
cover the positive quadrant of the latter with equal-product curves or iso-
quants, 42 each of which depicts all the combinations of the two factors that
result in a given quantity of output, 43 and isolates nicely the relation of substi-
tutability from the other relation that enters when we proceed from any
equal-product curve to a higher one, that is, increase output. 44 All this has
been worked out and made fruitful — and brought into general use — only in
our own time, mainly by the efforts of Professors Allen and Hicks and their
followers. I mention it here to emphasize the historically important fact that it
stems from Edgeworth and Pareto and that, by 1914, all the elements of the
modern theory were present at least embryonically. Similarly, it should be in-
tuitively clear that the theory of production functions and of the families of
equal-product curves must have done much to improve the theory of cost.
The great contribution of the period to 1914 was indeed the theory of op-
portunity cost — and its application to the problems of income formation —
which has already been dealt with in Chapter 6 and owes little to the rigor-
ous elaborations in the field of cost phenomena with which we are concerned
here. 45 But in itself this contribution touched but peripherically upon the
problems of what we now understand by the theory of cost. So far as exact
aspects are concerned Pareto’s was the chief performance. 46 However, instead

42 The term 'isoquant’ was introduced by R. Frisch but originally for a different
concept, for which it should have been reserved.

43 That is, along each equal product curve, dx = o. The marginal rate of substitu-
tion ( dv 2 /dv 1 ) is subject to the usual restrictions (to which homogeneity of the pro-
duction function may or may not be added). The ‘law of decreasing returns’ to any
(substitutional) service is expressed by the condition that equal-product curves be convex
to the origin in the operative interval.

44 I hesitate to call this other relation complementarity because this term has by
now acquired a different meaning (see Allen op. cit. p. 509). But the two-factor dia-
gram (Allen, p. 371) is perhaps the best means of showing, on an elementary level,
how services that co-operate in production may within limits compete with one an-
other and vice versa and how the two relations stand to one another in the case of
two substitutional factors.

45 It is perhaps not superfluous to mention that a rigorous formulation of the theory
of cost from the standpoint of the maximum problem of the individual firm — with the
production function introduced as a restriction — is one of the best means of settling
the question of the pricing of factors that have no, or no eligible, alternative oppor-
tunities of employment. From this standpoint, the opportunity-cost principle reveals
itself as a special case of a more comprehensive principle. But this procedure is not the
only possible one. The Austrian theory of imputation also took care of this case (the
vineyards that, unless used as vineyards, could not be used at all or used only for graz-
ing goats), and Bohm-Bawerk, in particular, said all about this that there is to be said.

46 For a good presentation of Pareto’s theory of cost, see H. Schultz, op. cit. sec. v.
Along with Pareto we should again mention W. E. Johnson. For modern presentations
see Allen, passim ; J. R. Hicks, Value and Capital (1939), Part 11; P. A. Samuelson,
Foundations, ch. 4. Also see von Stackelberg, Grundlagen einer reinen Kostentheorie
(1932) and L. M. Court, ‘Invariable Classical Stability of Entrepreneurial Demand and
Supply Functions,’ Quarterly Journal of Economics, November 1941.

EQUILIBRIUM ANALYSIS 10 45

of entering into these developments, I shall conclude by noticing another de-
velopment that stems directly from Marshall. In doing so we re-enter the field
of partial analysis but in a region that borders upon general analysis.

(d) Increasing Returns and Equilibrium. Marshall himself undoubtedly did
more than any other leader to pack a maximum load of business facts upon his
theoretical schema. The width of his grasp shows nowhere more impressively
than in his theory of production. But we may duly admire this performance
and yet feel that his marvelous comprehension both of purely analytic and of
'realistic’ aspects resulted in an exposition that seemed to leave many loose
ends about and certainly left plenty of problems for his successors. Thus, his
emphasis upon the element of time in relation to the phenomena of decreasing
marginal and average cost 47 constitutes a major contribution . 48 His familiar
concepts of prime and supplementary costs, of quasi-rent, of the representa-
tive firm , 49 of normal profit, and, above all, of internal and external economies,
together with his attention to particular patterns of the data that individual-
ize almost every firm’s environment , 50 go far toward presenting all the clues that
are needed for a satisfactory treatment of decreasing costs in all its various
meanings and aspects. Nevertheless we get clues only and Keynes was right in
asserting that in this field Marshallian analysis was least complete and left

47 Throughout the discussion that we are about to survey, decreasing cost and in-
creasing returns, increasing cost and decreasing returns, were as a rule treated as syno-
nyms, which of course they are not. As late as 1944, Professor Lerner found it neces-
sary to advert to this ( Economics of Control, p. 164). But I am not aware of any
error that could be attributed to this bad habit. However, it may have confused many
a beginner.

48 Modern factual investigators who keep on discovering the existence and impor-
tance of the intervals of falling average and marginal cost in the cost curves of indi-
vidual firms — intervals, as we have already seen, that may cover the whole of the ob-
servable range of these cost curves — and believe that these findings shake the founda-
tions of 'neo-classic’ cost analysis, are really rediscovering Marshall: a striking illustra-
tion of the fact that the majority of economists do not read.

49 The analytic intention that gave birth to the methodological fiction called Repre-
sentative Firm stands out on p. 514 of the Principles ; and so does its relation to de-
creasing cost. In the subsequent discussion, Professor Pigou introduced the concept of
the Equilibrium Firm, which differs from Marshall’s representative firm only in that
the latter does, and the former does not, represent the modal conditions of the indus-
try (see Economics of Welfare, 3rd ed. p. 788). This conception of a modal firm is
’mportant for more than one possible purpose of realistic theory but has never been
exploited fully. (See however the study by S. J. Chapman and T. S. Ashton 011 ‘The
Sizes of Businesses, Mainly in the Textile Industries,’ Journal of the Royal Statistical
Society , April 1914.)

50 See, e.g., Principles, p. 506. But chs. 10 and 11 of Book v are full of suggestive
remarks — and warnings— of this kind. It should be emphasized again that Marshall
made it more difficult for himself to express his meaning, and for his readers to under-
stand him, by the false or at least misleading parallelism that he had before (pp.
397-8) set up between the 'laws’ of decreasing and increasing returns which he him-
self disavowed repeatedly, e.g. by the statement that increasing return shows seldom
in the short run (pp. 5x1-13).

1046 IV : FROM 1870 TO 1914 AND LATER

most to do (Essays in Biography , pp. 225-6). This was, I think, because of
Marshall's aversion to going through with pure analytic schemata and to his
bent toward misplaced realism. He insisted on including internal and external
economies in his (industrial) ‘supply’ schedules (though he noticed the objec-
tion to this. Principles, p. 5140.) — I suppose, in order to make these more
realistic — in spite of the fact that he thereby destroyed their reversibility and
rendered them useless for the purposes of static theory: they really represent
pieces of economic history in the form of diagrams. 51 He thus blurred the
clarifying distinctions between falling cost curves and downward shifts of cost
curves and between costs that fall while production functions stay put and
costs that fall in consequence of changes in production functions. 52 At any
rate it is understandable that both the leads given by Marshall and the loose
ends left by him must have started discussion in any environment that took
any interest at all in the foundations of economic theory. The only thing to
wonder at is that this discussion took so long to burst into print and to pre-
sent results to the scientific public at large. For instance, Professor Viner’s fa-
mous paper on ‘Cost Curves and Supply Curves' that, starting from Marshall's
analysis, successfully cleared up a large part of the ground, appeared only in
September 1931 (Z eitschrift fiir Nationalokonomie ); Professor A. A. Young’s
paper on ‘Increasing Returns and Economic Progress' only in December 1928
( Economic Journal). We shall group our brief comments around the topic In-
creasing Returns and Equilibrium, and even so shall have to confine ourselves
to but few of the many valuable contributions that ought in fairness to be
considered. 53

51 It is only from the standpoint of static theory that Professor Stigler’s strictures on
Marshall’s concepts of external economies are fully justified (op. cit. pp. 68 et seq.).
Both internal and external economies are concepts that denote undeniable facts which
deserve to be divided up in these two categories (see, however, F. H. Knight, Fallacies
in the Interpretation of Social Cost, first publ. in 1924, that is, at a very early stage of
the controversy on decreasing cost; republ. in Ethics of Competition, 1935). We shall
understand by external economies nothing but the downward shifts in the marginal
and average cost curves of individual firms that may result from the historical growth
of their environments (not necessarily from the growth of their ‘industries’), bearing in
mind that Marshall expressed this fact by declining ‘cost curves’ — which are. similar in
nature to demand curves that may rise owing to similar causes and, like these, are
simply curves fitted to the points of a histogram — and that some of his followers.
Professor Robertson particularly, kept to this method.

52 What seems to me to be overemphasis on industrial ‘supply! schedules as against
cost schedules may perhaps be explained similarly. We cannot go into this but shall,
for the purposes of our exposition, use nothing but individual cost curves.

53 By a stroke of editorial genius, Keynes arranged a symposium (D. H. Robertson,
G. F. Shove, and P. Sraffa) on the matter (‘Increasing Returns and the Representative
Firm’ published in the Economic Journal, March 1930) that is still eminently worth
reading. He prefaced it by a fragmentary bibliography to which I refer the reader. I
wish to add several important notes by Mr. R. F. Harrod, especially his ‘Notes on
Supply,’ Economic Journal, June 1930, and his ‘Law of Decreasing Costs’ ibid. De-
cember 1931; also Mrs. Robinson’s article, ibid. December 1932, and Professor Rob-
bins’, ibid. March 1934.

EQUILIBRIUM ANALYSIS

i ° 47

After rumblings which we must neglect, there appeared in the Economic
Journal (December 1926) the famous paper by Professor Sraffa that was des-
tined to produce the English branch of the theory of imperfect competition. 54
But for our present topic, his criticism was not anything like as 'destructive'
as Keynes, to judge from his introductory remarks to the Symposium, seems
to have considered it to be. Sraffa had simply pointed out that, under condi-
tions of pure competition, a firm cannot be in perfect equilibrium so long as
increase in its output would be attended by internal economies. 55 Partly in-
fluenced by Sraffa and partly by way of developing Marshallian teaching, Pro-
fessor Pigou, in his 'Analysis of Supply' (Economic Journal, June 1928, in-
serted in the third ed. of Economics of Welfare, Appendix in), pointed out
that, if we base declining industrial supply curves on external economies only,
we may still retain rising supply curves for individual firms and thus avoid —
formally at least — any conflict between 'increasing returns’ and competitive
equilibrium conditions, granted that we really believe in the existence of such
a conflict at all. He added that if the growth of an industry or its environment
induces increased specialization and this again increased size of the firms com-

54 Piero Sraffa, "The Laws of Returns under Competitive Conditions.’ But the main
ideas, critical and constructive, had appeared a year before: "Suite relazioni fra costo e
quantita prodotta,’ Annali di Economia, 1925, which shows Sraffa's starting points
and the nature of his brilliantly original performance much better than does the Eng-
lish article. See also his contribution to the ‘Symposium.’

55 This means only that, given a market price at which any single firm is able to
sell as much as it pleases, it will, so far as pure logic is concerned, always be advan-
tageous for the firm to increase its output if this can be done at falling marginal costs
in the short run and at falling average costs in the long run, and that therefore equi-
librium output cannot be attained before these conditions have ceased to operate.
Hence the proposition in our text above may well seem self-evident. Nor had it ever
been denied by Marshall, whose equilibrium points on falling supply curves — industrial
supply curves — must, as we shall see presently, be based upon the facts of external
economies. Only, Marshall was so anxious to point out the many circumstances that
in practice (where pure competition practically never prevails) prevent the firms we have
any opportunity of observing from acting upon our proposition that it nowhere stands
out clearly. His followers, especially Professor Robertson, whose common sense was
impressed by the ubiquity and importance of internal economies even in industries
that are considered as competitive, thought that denying the presence of internal
economies amounted in these cases to denying the obvious. It is interesting to notice
why: they thought so for the same reason that is at the bottom of the reluctance of
so many economists to admit the proposition that there are no net profits in perfect
equilibrium of pure competition (see below, footnote 56 and subsec. e). Both theorems
apply to states of perfect equilibrium only and, since perfect equilibrium exists in real
life still less often than does pure competition, internal economies, just as net profits,
may in fact be ubiquitous without thereby impairing either the validity or the value
of either theorem. But if the proviso ‘in the point of perfect equilibrium’ be left out
and still more if our proposition be thrown into the faulty form that makes it read
‘pure competition and internal economies are incompatible,’ then we speedily cease
to wonder how it was possible for a proposition to be considered as obviously wrong
by some that appeared as self-evident to others.

1048 IV: FROM 1870 TO 1914 AND LATER

posing that industry and increased opportunities for harvesting internal econo-
mies, we get a type of external-internal economies (as Professor Robertson
called them) that may be of some analytic use. More important was his sug-
gestion to make the costs of firms functions both of their own outputs and of
the output of the industry or group — provided we can make definite sense of
these concepts — to which they belong. Much has been done to put the topic
into a more promising shape by Harrod, Shove, Viner, and Young, but I have
said all I can say in the available space to convey to the reader this striking
instance of the slowness and roundaboutness of analytic advance, 56 and to set
him pondering over the question why results were established in and after
1930 that might easily have been established by 1890.

Instead of grouping our comments around decreasing costs we might as well
have grouped them around Marshall’s complex doctrine of Normal Profit,
which survived well to the present time when it is still quite common to find
teachers dividing the profit item into Marshallian normal profits and windfall
profits. 57 Since we have dealt with this range of problems already (see above,
ch. 6) we have only to add two points that are more easily dealt with on the
higher theoretical level on which we are moving now: the one refers to the
relation between production functions and cost functions in general and the
other to the ‘tendency toward zero profits’ in particular.

[(e) Tendency toward Zero Profits.] But since the subject of profits is still
more than are others infested by confusions, it will be well to restate first a few
propositions that will serve to disentangle the points that interest us now
from others with which they are habitually associated. Marshall as a rule con-
sidered the profit item of the balance sheets of business practice — and espe-
cially the balance sheets of owner-managed firms — rather than anything that

56 The reader must not think, as he might from the brevity of my account, that
this bit of housecleaning was all that resulted from the work that went into that con-
troversy. Thus, the useful distinction between the marginal value product to the indi-
vidual firm (the marginal private net product) and the marginal social net product
was worked out by Pigou and Shove. In a sense this work culminated in R. F. Kahn’s,
'Some Notes on Ideal Output,’ Economic Journal, March 1935.

57 The concept of a normal rate of profits has been refined by several modern econo-
mists, particularly by Mrs. Robinson, Mr. Shove, and Mr. Harrod. See especially Har-
rod’s ‘A Further Note on Decreasing Costs,’ Economic Journal, June 1933. The con-
cept of windfall profits is now mainly in use for aggregate profits that arise (if for
this purpose we may use the terminology of Keynes’s Treatise on Money ) from a sur-
plus of investment over saving, so that individual profits that are due to chance tend
to drop out of the picture. It might be argued that this arrangement misses the es-
sence of the profit phenomenon and falls below the level attained by Marshall. It
might also be argued that Mr. Harrod’s definition — the normal rate of profit is the
rate of expected profits that leaves a firm without motive either to increase or to de-
crease its capital commitment — re-establishes the connection between profits and re-
turn to physical capital, which it was the main achievement of the period before 1914
to sever. But all this does not matter here where we are concerned only with the
question of the surplus of receipts over payments (actual or imputed) to ‘factors’ that
is relevant to the construction of cost curves.

equilibrium analysis

10 49

has any claim to be called ‘pure profit,' and he considered this profit item as
it is rather than as it would be in (static) equilibrium of a stationary process.
Though careful analysis, in this as in other cases, can no doubt unearth the
contours of a comprehensive schema in which everything finds its appropriate
place — but of a schema that is Ulysses' bow to less powerful minds — the ordi-
nary reader simply finds a fricassee of such things as: earnings of management
of all possible kinds, including also the earnings of better-than-common man-
agement; gains from successful risk-taking and uncertainty-bearing, ’that is the
sort of thing that gives a favorable bias to the relation between expected and
actual results; gains from advantages incident to the control of particular fac-
tors, some of which would, in other firms, not contribute as much to results
as they do where they are; chance gains that go to the owner as residual claim-
ant, due regard being paid to the wisdom of Goethe's dictum that only the
able enjoy consistent luck; and, among other things, gains that accrue to a
firm as it grows, or else, because it has grown, relatively to its competitors or
absolutely or both; an element of monopoly entering, implicitly or explicitly,
wherever required. Evidently, these items do not constitute a logically homo-
geneous whole, in the same sense as do for instance wages, in spite of all the
qualifications that have to be added also in their case. Nevertheless Marshall
created a sort of normal rate of profit out of this compound — warily treading
his way through the dangers of circular reasoning — which he associated felici-
tously with the representative rather than with the marginal firm . 58 This nor-
mal rate of profit may be loosely defined as the rate that makes it worth while
to enter, and to stay in, business (these expressions mean the same thing in
the end), and thus acquires a distinction from the managerial salary that is
easier to justify in a common-sense manner than in strict logic. Somehow all
this has grown into the simplified normal profit of Marshall's followers and
then into the marginal efficiency. of Keynes’s General Theory.

Now, nobody has ever asserted that this rate of profit either is or tends to-
ward zero. Walras meant something entirely different when he set up his con-
cept of an entrepreneur ne faisant ni benefice ni perte . 59 What he did mean

58 Observe the wisdom of this move. Operating with the marginal firm, the theorist
leaves out of account the broad fringe of ‘submarginal’ firms, the existence of which
often dominates an industry’s situation and casts doubts on the very definition of the
marginal firm. This is another argument for the concept of the representative firm, to
which justice has not been rendered even now.

59 The almost violent aversion displayed toward Walras’ concept, first by Edgeworth
and then by a long line of economists to this day, is therefore wholly unjustified and
rests on nothing but a complete failure to understand Walras. Barring this, however, I
wish to repeat that two objections to it are invalid on logical grounds. First, it has
been asserted, already by Edgeworth, that to speak of a zero profit, in an analysis of
a capitalist economy the motive force of which is profit, is in itself absurd: but there
is nothing absurd or self-contradictory in holding that the drive for profit is the mo-
tive force of the private-enterprise economy and in holding at the same time that profit
would be eliminated in perfect equilibrium of pure competition. Second, it has been
asserted that the zero-profit proposition is ipso facto disproved by economic reality.
But for the analogous reason, even if the existence of net surpluses were much more of

1050 IV: FROM 1870 TO 1914 AND LATER

can be most easily realized if we analyze the list of causes that produce the
Marshallian rate of profit. We then also realize that the Marshallian theory,
according to which profits have no tendency to vanish, and the Walrasian
theory, according to which they do, not only do not contradict one another
but, referred to the same level of abstraction, turn out to be identical. The
reader can satisfy himself of this by observing, first, that Marshall’s theory, as
he himself presented it, is geared to phenomena of change or growth that static
equilibrium excludes; 60 second, that the monopoloid elements that enter Mar-
shall’s analysis, though implicitly more than explicitly, and which are not nec-
essarily excluded by the assumptions of static equilibrium, do violate the as-
sumptions of pure competition; and that, if we are resolved to display the log-
ical properties of perfect equilibrium in pure competition, Marshall’s profits
will in fact vanish as completely as will Walras’.

Observe that this does not necessarily exclude institutional gains such as
may accrue to an innkeeper from good relations with the police . 61 Nor does it
exclude the existence of net surpluses in the system. Only they should in good
logic not be associated with profits but rather with the control of the thing
that gives rise to them. Even with the most perfect competition, 'factors’ will
frequently receive more than is necessary to induce them (a) to offer their
services for productive use and (b) to offer their services at any particular spot
in the system . 62 As mentioned before, Pareto also noted, from a somewhat dif-
ferent angle, the surpluses that may arise from technological or institutional
obstacles to optimum allocation of resources ( transformations incompletes )
that are the cornerstone of his theory of rent. Careless handling of these sur-
pluses may easily lead into circular reasoning or to ‘meaningless’ appeal to
some logical necessity, according to which they 'must’ be associated with some

an established fact than it is, there would be no force in such an appeal from an
equilibrium proposition of the kind involved to facts culled from an evolutionary real-
ity, which is never in equilibrium and never is, or can be, purely competitive. Observe
this interesting feature of the situation: we have here a proposition that can hardly
apply to reality under any conceivable circumstances; and which is nevertheless of the
utmost importance in order to understand this reality.

60 In particular it excludes the function of managing uncertainties, whose impor-
tance links up with change.

61 Such institutional positions of vantage, if their importance is asserted, must of
course be identified and established or reference to them is indeed meaningless. But
since, subject to this condition, theorists can stress them as they please, I have never
been able to understand why denial of the zero-profit proposition should have become
the cherished badge of theorists with radical leanings. Moreover, for their comfort,
there is always the monopoly element to fall back upon.

62 These two cases are not always kept distinct. Thus, Mrs. Robinson (Economics
of Imperfect Competition , 1933) defines such surpluses in the first sense on p. 102,
and in the second sense on p. 103. But it should be noted that her distinction between
cost curves that do and cost curves that do not include such surpluses (ch. 10) spelled
an important advance. She called all these surpluses Rents. We have already noticed
that this concept of rent (foreshadowed, as we know, by Senior, J. S. Mill, and also
Marshall) comes in usefully for some purposes.

EQUILIBRIUM ANALYSIS 1051

factor or other. But their existence and also this association are indubitable
facts that are not difficult to establish. Because of this I feel unable to give
instances from the literature that would, clearly illustrate either of these mis-
tabes. 63 Finally, it is convenient to use this opportunity to point out the rela-
tion between decreasing costs and profits, even though we have already seen
that, so far as perfect equilibrium in pure competition is concerned, there is
no need to worry about them.

For this purpose we cannot do better than borrow the argument of Marx.
As we know, he made investment of industrial exploitation gains — which are
not profits, though he called them so, but capital gains — the main motor of
economic evolution. If we press this process into a schema of cost curves that
fall owing to internal and external economies 64 and incidentally to increasing
sizes of individual firms, we immediately realize two things. First this process,
while it does not benefit the individual firms or the bourgeois class as a whole
ultimately, is attended at every step by temporary gains that are profits in our
sense and accrue to firms that grow in this manner more quickly or more suc-
cessfully than do others. Disequilibrium prevails throughout, but Marx saw
that this disequilibrium is the very life of capitalism, 65 and it is with this dis-
equilibrium, on the one hand, and with decreasing costs in this sense, on the
other, that pure profits are chiefly associated. Second, Marx’s process, as he did
not fail to notice, must in strict logic lead to monopolies or oligopolies of those
firms that have once gained an initial advantage. Marshall’s treatment of the
same set of problems in general, and of decreasing costs in particular, really
comes to the same results on both points, due allowance being made for his
superior technique and his anxiety to do justice to all the facts, frictional and
other, that prevent those individual trees from growing into the high heavens.
We shall have to return once more to this historically important, though only
'objective,’ doctrinal affinity. Having thus cleared the ground we can settle
our two questions very quickly.

The emergence of the production function into explicit recognition, a de-
velopment that we may for our present purpose associate with Wicksteed’s
Essay on the Co-ordination of the Laws of Distribution (1894), raised a prob-
lem of co-ordination of the theories of production and of cost that did not
exist before. The old theory of production, such as we find it in J. S. Mill and
even in Marshall, was simply a discussion of the 'factors of production’ and
fitted in easily with the 'laws of cost.’ But however effectively the intrusion

63 The difficulty of agreeing on such instances is greatly increased by the fact that
authors who levy this charge, from Marshall to Samuelson, have invariably abstained
from giving references. Of course there may be plenty in bad textbooks.

64 This is not quite correct, of course. But it will do for our present purpose.

65 An inkling of this truth must have been present in the mind of A. Smith when
he wrote that it is the firm with the lowest average costs in the industry that sets the
price of the product. This does not, as Marshall thought ( Principles , p. 484), contradict
Ricardo’s opposite statements: Smith thought of an evolutionary and Ricardo thought
of a stationary process, and there is in fact a tendency for the lowest costs to prevail
in the first case and a tendency for the highest costs to prevail in the second case.

IO52 IV: FROM 1870 TO 1914 AND LATER

of the production function clarified other problems, it obscured for a consider-
able time the problem of the relation between the technology and the eco-
nomics of production, or, as we may also say, between technology on the one
hand and cost and distribution on the other. This may be best illustrated by
Wicksteed’s own attempt to derive a proposition on the distribution of the na-
tional dividend, namely the proposition that distributive shares determined ac-
cording to the marginal productivity principle will just exhaust the national
dividend, apparently 66 from nothing else than a property of the production
function, namely first-order homogeneity. It is easy to see now that the pro-
duction function alone does not determine either cost of production or distri-
bution and in particular that, by itself, it cannot tell us much about the exist-
ence or absence of net gains to firms. Not less easy is it — now — to see how the
production function fits into the cost and distribution phenomena. All that we
need for this purpose is to keep in mind that, in the sphere of pure economic
logic, the production problem is the problem of maximizing the difference be-
tween a firm's receipts and costs and that this maximum is subject to the tech-
nological restrictions embodied in the production function. 67 But around 1900
this was not so easy for the average economist to see, especially if he was not
in the habit of throwing his ideas into the simple mathematical form which in
this instance clears up everything. A center of such confusion as there may
have been 68 was of course the zero-profit proposition, the meaning of which
we have taken pains to make clear.

From what has been said above it should be clear that there is a perfectly
good way of satisfying ourselves that, on the way toward perfect equilibrium
in pure competition, with the qualifications that have been indicated — and do
not render the proposition either circular or tautological — pure profits tend to
vanish. All we have to do is to list all the sources of such surpluses over paid
out or imputed costs we can think of 69 and then to show cause why they all
shrink and, in the limiting case, disappear on that way. Equality between
(properly discounted) planned receipts and planned costs may be legitimately
inferred from this — though only with the reservation that somebody may any
day present specific instances to the contrary — and is further strengthened by
the consideration that firms that make less than total costs in the sense above

66 I say ‘apparently’ in order to emphasize that this interpretation is unfair and not
only because of his later recantation. Other conditions are partly stated and partly
implied.

67 There may be of course many other restrictions. Among them is one that is very
important from the standpoint of any individual firm and that has not received the
attention it merits, viz. the funds at the disposal of the firm.

68 Again I do not wish to mention instances. For, with economists’ loose ways of
expressing themselves, I find it very difficult to array individuals whose statements
might be amenable to more favorable interpretations.

69 It is particularly important to keep in mind that, with correct handling of imputa-
tion, imputed subjective costs of managerial activity are no loophole for circularity or
tautology to enter. On the contrary, it is the objector who commits these sins if he
vaguely refers to unspecified possibilities of unspecified gains.

EQUILIBRIUM ANALYSIS

i°53

will, in the long run, go out of business and men who expect to make more
than total costs in the sense above will, under the conditions assumed, be
drawn into business in the long run. 70 But a more rigorous though still ele-
mentary proof has been offered and has gained some currency in classroom
work.

For brevity’s sake we assume away all but substitutional factors— so that the
only restriction upon a firm’s maximizing behavior is the ordinary or 'normal’
production function as defined above — and also the problems that arise in the
case of discontinuities of cost curves. 71 In perfect equilibrium and perfect com-
petition, marginal costs to a firm will be equal to the price of the product
which, like all factor prices, the firm accepts as data. In a large class of cases
this condition determines output uniquely. Since, in strict logic, the firm will
minimize total and average costs for any output, average costs must be at a
minimum also for this output. But in the point of its minimum, the average
cost curve is intersected, from below, by the marginal cost curve. Therefore
marginal and average costs are equal in this point and both are equal to price.
It is true that in the Cambridge theory of the early 1930’s (R. F. Kahn, J. Rob-
inson) average cost includes normal profit. But this schema applies only to sit-
uations of imperfect competition: only in imperfect competition can this normal
profit contain anything besides returns to owned factors evaluated at the mar-
ket prices of these factors. Hence pure profits are zero in perfect competition. 72
This may be unduly 'abstract.’ But there is nothing wrong with it in logic.

Appendix to Chapter 7

Note on the Theory of Utility

In this Note we shall survey, in the briefest possible compass, the whole career
of the utility theory of value, both its earlier developments which we know
already and its later developments down to its metamorphoses in our own
epoch. Let us keep in mind throughout that, although we shall now deal with
utility theory (and its successors) as a theory of consumers’ behavior, its im-
portance extends far beyond this field into those of production and income
formation as has been pointed out in the preceding chapter.

70 Explanation of numbers and sizes of firms offers no difficulty at all, even in the
case of first-order homogeneity. I mention this here once more in order to draw atten-
tion to the surprising fact that, so far as general theory is concerned and always except-
ing Marshall, these problems of evident interest have been almost completely neg-
lected or declared to be insoluble.

71 Space forbids our entering into these problems which have attracted some atten-
tion in our own period. A single reference will have to suffice: G. J. Stigler, ‘Note on
Discontinuous Cost Curves,’ American Economic Review, December 1940.

72 There is hardly any justification for Professor Samuelson’s formulation of this
theory on p. 83 of his Foundations ; and none at all for his statement on p. 87 that
‘net revenue’ — if this means ‘pure profits’ — does not tend to be zero even in (perfect
equilibrium of) pure competition.

IV: FROM 1870 TO 1914 AND LATER

1°54

[1. The Earlier Developments]

We know that, from Aristotelian roots, this theory was developed by the
scholastic doctors whose analysis of value arid price in terms of 'utility and
scarcity’ lacked nothing but the marginal apparatus. We also know that, along-
side of scholastic teaching and presumably not entirely without its influence,
the utility theory of value began to be taught by laymen — Davanzati being our
star instance — and that it went on developing quite normally right into the
times of A. Smith — Galiani’s work being the peak achievement of the epoch,
though Genovesi should not go unmentioned. 1 Even the 'paradox of value’ —
that comparatively 'useless’ diamonds are more highly valued than is 'useful’
water — had been explicitly posited and resolved by many writers, for example
by John Law. And there was, though standing by itself on a side line, Daniel
Bernoulli’s expression for the marginal utility of income (Part 11, ch. 6, sec. 3b).
But then this development came to a standstill: though many economists,
particularly on the Continent and still more particularly in France and Italy,
referred to the element of utility as a matter of course — and though Bentham
formulated explicitly what was to be known as Gossen’s law of satiable wants —
they failed entirely to exploit it any further. Some who tried to do so did it
in so very infelicitous a way as to discredit rather than to spread its use. Con-
dillac, for instance, who may be considered its most important sponsor in the
last quarter of the eighteenth century, explained the utility of air and water
by the effort involved in breathing the one and drinking the other. A. Smith
and, following him, practically all the English 'classics’ with the exception of
Senior 2 evidently did not realize the possibilities of the utility approach to the
phenomenon of economic value and were content to turn away from 'value-in-
use’ with a reference to the paradox of value that should not have been a
paradox any more. Let me repeat that it is quite wrong to explain this attitude,
especially in the case of Ricardo, by saying that, while seeing all there is to see
about utility, they did not care to elaborate so obvious an aspect of things: it is
quite clear — and can, for Ricardo, be proved from his correspondence — that
they did not follow up the utility clue because they did not see their way to
using it effectively. But Senior’s treatment does constitute a definite step in
advance. In France and Italy the old tradition that favored the utility approach
did not die out entirely. But neither did it bear fruit. J. B. Say, who made an
attempt on this line, spoiled his chance by his handling of the matter that
was still more clumsy than it was superficial and led nowhere.

A number of 'forerunners’ began to emerge, however, though none of them
received any recognition at the time. The two who achieved the largest meas-
ure of posthumous fame have been mentioned already, H. H. Gossen and
J. Dupuit. There were several others, but it will suffice to mention three:

1 [These men and their work are discussed in Part 11.]

2 Malthus should not, I think, be listed as another exception, though his criticism
of Ricardo’s theory of value does point in the direction of a utility theory.

EQUILIBRIUM ANALYSIS

1°55

Walras, the father of Leon; Lloyd, who published three years later; .and Jen-
nings . 3 The three performances are closely similar in nature and results. In
particular, the marginal utility concept (Walras’ rarete and Lloyd’s special
utility) 4 is clearly present with all three authors and so are those general argu-
ments about how wants and utility are related to value that became so familiar
half a century later.

[2. Beginnings of the Modern Development]

Leon Walras tells us that he started from his father’s teaching. But Jevons
and Menger undoubtedly rediscovered the theory for themselves. In so doing,
all three of them improved and amplified it, but their historical achievement
consists in the theoretical structure they erected upon it and not in these
improvements. As we have already seen, they all restated Gossen’s or Bentham’s
or Bernoulli’s Law of Satiable Wants; in so doing they all treated utility (or
the satisfaction of wants) as a psychological fact that is known to us from
introspection, and as the 'cause’ of value; they felt little or no compunc-
tion about its measurability ; 1 and they all made the utility of every commod-

3 A. A. Walras, De la Nature de la richesse et de Vorigine de la valeur (1831). His

T heorie de la richesse sociale (1849) adds nothing to the theory of value, so far as I
can see, but contains several other points that are of interest, e.g. the definition of
capital as every good that serves more than once. W. F. Lloyd — 'student’ of Christ
Church (this admirable title which might be considered the only one fit for a scholar

is at present Mr. Harrod’s) and Professor of Political Economy in the University of

Oxford, ‘A Lecture on the Notion of Value . . .’ delivered before the University of
Oxford in 1833 (1834). It is strange that an Oxford professor of economics should
have needed rediscovering. Nevertheless, such was the case. The merit of having res-
cued Lloyd’s name from oblivion belongs to the late Professor Seligman ('On Some

Neglected British Economists,’ in Essays in Economics, pp. 87 et seq., the work to
which reference has repeatedly been made already). Our text shows, however, that
Professor Seligman was in error when he allocated to Lloyd the 'proud position of
having been the first thinker in any country to advance what is known today as the
marginal theory of value, and to explain the dependence of value on marginal utility’
(op. cit. p. 95).

[J. A. S. did not complete this note. On Richard Jennings ( Natural Elements of
Political Economy, 1855), see the article in Palgrave’s Dictionary and Jevons’ Theory
of Political Economy (2nd ed., ch. 3).]

4 As everybody knows, Leon Walras retained the term rarete; Gossen had spoken
of ‘utility of the last atom’; Jevons introduced final utility and final degree of utility;
the phrase marginal utility ( Grenznutzen ) is von Wieser’s; Wicksteed suggested frac-
tional utility, J. B. Clark specific utility, Pareto ophelimite elementaire.

1 Walras indeed eventually convinced himself or was convinced by J. Henri Poincare,
the great mathematician, that utility, though a quantity, was unmeasurable. But this
did not induce him to delete, from the text of his Elements, statements and implica-
tions to the contrary. See, e.g., p. 103 of the edition definitive (1926), where he defines
his rarete (marginal utility) as the derivative of total utility with respect to quantity
possessed, borrowing his father’s analogy to velocity — the derivative of displacement
with respect to time.

1056 IV: FROM 1870 TO 1914 AND LATER

ity to its possessor depend upon the quantity of that commodity alone. 2

Further work, partly induced by hostile criticism, transformed this 'psycho-
logical’ or 'subjective’ or ‘modern’ theory of value before long. In order to
convey the essentials of a story that cannot be told satisfactorily in the space at
our command, we shall confine ourselves to a minimum of names and reduce
to a sequence of logical steps what actually was a sequence of controversies,
which were sometimes as acrimonious as they were pointless.

[3. The Connection with Utilitarianism]

The first task that confronted the sponsors of the ‘new’ theory of value was
to defend it against all the misunderstandings — some of them quite puerile —
to which it had given rise. 1 Ever fuller restatements resulted — nourished by
applications to particular cases, which were not valueless though they were
sneered at as futile casuistry — that did something to clear the ground for fur-
ther advance. For instance the Austrians, who faced German opponents of
strongly anti-utilitarian tastes, pretty quickly realized the necessity of clearing
their skirts of hedonism. The historical alliance of utility theory with utili-
tarian philosophy was obvious. We cannot blame men who were no theorists
for suspecting that there was also a logical one. Moreover, some of the most
prominent exponents of marginal utility were in fact convinced utilitarians:
Gossen was, and Jevons, and Edgeworth. They, and others too, had used lan-
guage that was apt to create the impression that marginal utility theory de-
pended upon utilitarian or hedonist premisses — Bentham certainly thought so
— and could be attacked successfully by attacking these. Jevons was the chief
culprit: he even went so far as to call economic theory a ‘calculus of pleasure
and pain’ — Verri had done so before — and elicited from Marshall the rebuke
that he was mixing up economics with ‘hedonics.’

It was one of the many merits of Marshall’s treatment of utility that he
deplored and renounced the alliance with utilitarianism (see especially his foot-
note, pp. 77-8 of his Principles, Book 1, eh. 5). But in one respect he followed

2 But, unlike Gossen, they did not postulate linearity of the marginal utility function.
That this is not a harmless and insignificant detail can be shown by asking ourselves
such questions as how a moderate inflation affects the marginal utility of money income
for those whose money income remains constant in the process. The answers differ
according to the form of the function. And since the straight-line form is certainly un-
realistic (except for infinitesimal intervals), the answer derived from it is practically
sure to be wrong. See R. Frisch, New Methods of Measuring Marginal Utility (1932).

1 The protagonist of the Austrian group who did most of this work was Bohm-
Bawerk. I shall mention only his controversy with Dietzel in the Jahrbilcher fur Na-
tionalokonomie (1890-92), and both the text of and the appendices to the third edi-
tion of his great treatise on capital and interest ( Kapital und Kapitalzins) . A brilliant
and compact survey of arguments and counterarguments has been presented by P. N.
Rosenstein-Rodan in the article ‘Grenznutzen’ in the German encyclopedia ( Hand -
worterbuch der Staatswissenschaften, 4th ed., vol. iv, 1927).

EQUILIBRIUM ANALYSIS . 10 57

Jevons in teaching a doctrine that comes more naturally from a utilitarian
although, again, the relation is one of association rather than logic. From the
standpoint of a calculus of pleasure and pain, ‘disutilities' — the term is Jevons’
— should be in fact introduced on the same level as utilities. This is what
Jevons did. Walras did not do so and the Austrians, Bohm-Bawerk in par-
ticular, were strongly opposed to doing so. But Marshall and Pigou kept to the
Jevonian standpoint: Marshall developed it into his doctrine of real cost (ef-
forts and sacrifices), which, in a way, was the olive branch presented to his
‘classical’ predecessors. J. B. Clark and, in Vienna, Auspitz and Lieben also
accepted it. Notice that this standpoint, however independently arrived at,
stands in line with old tradition (compare, e.g., what has been said above on
Galiani’s theory of value); and that, outside of the utility theory tradition, it
had the support of A. Smith (and of many philosophers of natural law). In
England, Cairnes sponsored it, but it was renounced by Wicksteed and, more
effectively, by Keynes. The analytic importance of the question lies in its bear-
ing upon the concept of supply of labor and, if we adopt an abstinence theory
of interest, of capital. In all other respects it makes little difference whether
we take the available amount of labor as given or insert into our system an-
other equation (marginal utility of real wages = marginal disutility of labor)
in order to determine it.

Actually it is not difficult to show that the utility theory of value is entirely
independent of any hedonist postulates or philosophies. For it does not state
or imply anything about the nature of the wants or desires from which it
starts . 2

[4. Psychology and the Utility Theory]

Once we recognize the purely formal character of the theorist’s utility con-
cept, we are naturally led to question the relations between the utility theory
of value and psychology. Some of the early Austrians seem to have believed
that their theory was rooted in psychology and even that they were develop-
ing what in essence was a branch of ‘applied psychology.’

This belief was encouraged by some Austrian psychologists such as von Meinong
and von Ehrenfels, who held that Menger had made a valuable contribution to psy-

2 We have also seen above that the theory does not imply any hypothesis concern-
ing the role of egotism in human behavior and that it is not particularly ‘individualistic.’
It is, however, interesting to notice, first, how difficult it is for people to realize all
this whose whole thinking runs in ‘philosophic’ terms and who are primarily interested
in possible philosophic implications; and that this difficulty is greatly increased by the
presence of cases where sponsorship of the theory is actually combined with hedonist
or individualist philosophies or politics or where, even in the absence of such philo-
sophical or political preferences, the language of an author invites interpretation in a
hedonist or individualist sense. In the latter case it may be next to impossible to get
rid of undesired associations evoked by the words used. This explains the many at-
tempts that have been made to replace the word utility, which seems to convey more
than the fact that a thing is actually being desired, by other terms such as desiredness
(Fisher) or ophelimity (Pareto).

IO58 IV: FROM 1870 TO I914 AND LATER

chology which was capable of more general application. Certain applications, for in-
stance to the psychology of religion, were in fact made which it is impossible to report
without a smile though they were far from being nonsense. Thus, von Ehrenfels actually
spoke of marginal piety and of the marginally pious individual. But many non- Aus-
trian economists, who sympathized with the Austrian theory, also thought (and even
think) a great deal of the importance of its psychological aspects. On this compare:
Maurice Roche-Agussol, La Psychologie economique chez les Anglo- Americains (1918)
and Etude bibliographique des sources de la psychologie economique (1919); also the
same author’s Tsychologische Okonomie in Frankreich,’ Zeitschrift fur Nationaldkon-
omie, May 1929 and January 1930.

Let us note in passing a side issue that has never received the attention it deserves.
If psychology is to render effective assistance to economics at all, economists must not,
of course, neglect experimental psychology and especially the work that turns upon the
measurement of sensations. It is, to say the least, a curious fact that one of the early
exploits in this field, the one that was undertaken by E. H. Weber, has led to a re-
sult amplified by G. T. Fechner (see above ch. 3, sec. 3) into the 'fundamental law
of psycho-physics,’ which is formally identical with the Bernoulli-Laplace hypothesis
about the marginal utility of income: it postulates that, if y be the intensity of sensa-
tion, x the physically measurable external stimulus, and k an individual constant, then
dy = k dxj x.

This was in fact noticed by some economists. But it was brushed aside by the lead-
ing Austrians, Wieser, for example, declaring ( Theorie der gesellschaftlichen 'Wirt-
schaft, $ 1) that this law had nothing whatever to do with Gossen’s law of satiable
wants. But however that may be, the efforts of psychologists to measure psychical
quantities is not a matter of indifference to any economist who is not entirely lacking
in scientific imagination. For examples of recent progress in the measurement of sensa-
tion, see especially Professor S. S. Stevens’ 'A Scale for the Measurement of a Psycho-
logical Magnitude: Loudness,’ Psychological Review, September 1936, and his and J.
Volkmann’s, 'The Relation of Pitch to Frequency,’ American Journal of Psychology,
July 1940.

But both the Austrians and others soon came to realize that their 'psychol-
ogy’ was a mistake: the utility theory of value has much better claim to being
called a logic than a psychology of values. Opponents, however, at first did
not see this, any more than did adherents. In consequence, the sponsors of the
'psychological theory of value’ had to face two additional indictments: first,
that they were exploring psychological aspects of value-in-use that -were irrele-
vant to the objective facts of the economic process; second, that their psychol-
ogy was bad. The first indictment has no other basis than a failure to under-
stand the import of the theory . 1 The second would be quite true, if any psy-

1 It was formulated by many Marxists, e.g. by Karl Kautsky in his Preface to Marx’s
Theorien iiber den Mehrwert: the psychological theory describes how individuals feel
about the process of valuation which, determined by hyperindividual social forces, runs
its course irrespective of these feelings exactly as a railroad accident happens irrespective
of what the passengers feel about it. The reader should carefully distinguish between
the error in this — which consists in overlooking the measure of success with which the
theory explains precisely those very objective facts that this argument holds are beyond
its reach — and the perfectly sound principle that the facts of a social process must
never be confused with the images of them in the individual psyches. But many non-

EQUILIBRIUM ANALYSIS

10 59

chology were involved in the utility theory of value considered as a theory of
economic equilibrium. If we ask how consumers come to behave as they do
in all those wider problems of human behavior for which particular psy-
chological propositions become relevant, we must in fact appeal to all that
modern professional psychology — of all varieties, from Freudianism to behavior-
ism — might have to give us.

As a rule, however, the necessity of such an appeal does not arise in tech-
nical economics — it is different, of course, in economic sociology. Most of us
would indeed find it difficult or at least highly inconvenient to avoid entirely
all reference to motives, expectations, comparative estimates of present and
future satisfactions, and the like, however fervently we might hope for an
economic theory that would use nothing but statistically observable facts. But
such use of psychical observations must not be confused with the use of meth-
ods or results borrowed from professional psychology. Like all other research
workers, whatever their field, we take our facts where we find them, irrespective
of whether or not they are also dealt with by other sciences. We do not be-
come dilettantes in physics when we use the physical facts that are im-
plied in the classical law of decreasing returns in agriculture. No more do
we become dilettantes in psychology — or borrow from professional psychology
■ — when we speak of motives or, for that matter, .of wants or satisfactions. But
though this practice does not present any problems concerning the rela-
tion between economics and psychology, it does present another. Early utility
theorists talked about psychical facts with the utmost confidence. They in-
cluded them in the stockpot of common experience — that source of knowl-
edge of the course of everyday life, no element of which a reasonable man
could possibly call into question. But so far as these psychical facts are
known to us only from observation of what goes on in our own indi-
vidual psyches — from introspection — their standing evidently leaves something
to desire, even though most of them, such as the satisfaction incident to
quenching one's thirst, are so simple and so little problematical that he who
quibbles about them might easily compromise himself in the eyes of men of
less delicate methodological conscience. In any case, nobody will deny that
it is preferable to derive a given set of propositions from externally or ‘ob-
jectively' observable facts, if it can be done, than to derive the same set of
propositions from premisses established by introspection. And, as we shall
presently see, this can actually be done in the case of the utility theory of
value, at least so long as we do not ask it to do more for us than to furnish
the assumptions or ‘restrictions' that we need within the equilibrium theory of
values and prices. This is the Leitmotiv of subsequent developments . 2

Marxists also held that, by its probings into the ‘psychology’ of value-in-use, the utility
theory contributed nothing to our understanding of economic processes. For an ex-
ample see the article ‘Grenznutzen' by W. Lexis, in, the second edition of the Hand-
worterbuch der Staatswissenschaften.

2 Before proceeding I wish to advert to a type of pseudo-psychology which is noth-
ing but an abuse. Keynes’s well-known psychological law about the propensity to con-
sume is an outstanding example. It avers that both individuals and societies will, if

io6o

iv: FROM 1870 TO 1914 AND LATER

5. Cardinal Utility

Let me repeat once more: in the beginning, utility, both total and marginal,
was considered a psychic reality, a feeling that was evident from introspection,
independent of any external observation — hence, to repeat this also, not to
be inferred from those externally observable facts of behavior in the market
which were to be explained by it — and a directly measurable 1 quantity. I be-
lieve that this was the opinion of Menger and Bohm-Bawerk. Marshall, though
he spoke boldly of utility as a measurable quantity, refined upon this, in the
remarkably careful argument of Sections 2-9, Chapter 5, Book 1 of his Prin-
ciples, by adopting the weaker assumption that, though we cannot measure
utility or ‘motive’ or pleasantness and unpleasantness of sensations directly, we
can measure them indirectly by their observable effects, a pleasure for instance
by the sum of money a man is prepared to give up in order to obtain it rather
than go without it. 2 This was no doubt a step in advance. But we shall hence-
forth merge both these theories of utility measurement into one conception
which we shall call (the theory of) Cardinal Utility. Both present difficulties
and are open to objection. But neither is simply nonsense.

However, even on this level and apart from mere defense and elaboration,
there was plenty to do. In order to illustrate, I shall mention three contribu-
tions of major importance. First, none of the founding fathers, not even Wal-
ras, had bestowed adequate care upon fundamentals. 3 The theory badly needed
rigorous restatement. This was accomplished, in a manner that anticipated

they experience an increase in income, normally increase their expenditure or con-
sumption but by less than the increase in income. Whether this is so or not, it is a
statement of statistically observable fact which Keynes raised to the rank of an as-
sumption. Nothing is gained, except a spurious dignity, by calling it a psychological
law. Our experience with such ‘laws of human nature,’ from the seventeenth century
on, is certainly not encouraging. But even Jevons would not do without them ( Theory
of Political Economy, p. 59).

1 The meaning of direct measurability is best instanced by the measurement of
length. It may be defined as the association, with every utility sensation, of .a real num-
ber, unique except for the choice of a unit which is to be interpreted as a unit sensa-
tion. Nobody held that this could be done as easily as it can in the case of length.
But some authors did hold that there was no difficulty of principle involved. The pres-
ence of a practical difficulty — that would reduce utility measurements to rough ‘esti-
mates’ — was recognized by Bohm-Bawerk ( Kapital und Kapitalzins, 3rd ed.. Appendix).

2 He guarded this carefully against circularity. The exact definition of measurability
in this sense would run as follows: it is possible to associate, with every utility sensa-
tion, a real number, unique except for the choice of a unit, which is to be interpreted
as a unit quantity of an externally observable incentive producing an externally observ-
able reaction. An illustrative analogy, which is however not quite satisfactory, is pro-
vided by the method of measuring heat by means of a thermometer.

3 This may surprise readers who remember the prolix commentaries of the Aus-
trians. But then Wieser and Bohm-Bawerk were fatally handicapped by their lack of
the necessary mathematics.

EQUILIBRIUM ANALYSIS lo6l

many a later performance, by Antonelli . 4 Second, Edgeworth did away with the
assumption that the utility of every commodity is a function of the quantity
of this commodity alone, and made the utility enjoyed by an individual a
function of all the commodities that enter his budget. Marshall welcomed
this step coldly (to say the least), perhaps because he thought of the mathe-
matical complications involved in making the equations of utility theory par-
tial instead of ordinary differential equations. As a third example we choose
Marshall’s attempt to make the measurement of utility operational by means
of the concept of Consumer’s Rent.

The term Consumers’ Surplus or Rent is Marshall’s, but the essential idea — not every
detail — is Dupuit’s. The reader should, if necessary, refresh his memory from Principles,
Book iii, Chapter 6, so that this space may be reserved for comments. There, Mar-
shall does not mention Dupuit’s name, and only inadequate amends are made for this
by means of a statement occurring in another and far distant place (Book v, ch. 12,
concluding footnote), namely, that 'the graphic method has been applied in a manner
somewhat similar to that adopted in the present chapter by Dupuit in 1844 and, inde-
pendently, by Fleeming Jenkin in 1871.’ The idea of ‘measuring’ the total utility ac-
cruing to an individual from the consumption of a given quantity of a given commodity
by the sum of money represented by the definite integral, taken from zero to the
given quantity, of his individual demand function (the consumers’ surplus is then the
difference between this integral and the price actually paid times the quantity bought)
is at first sight open to a number of objections, which were in fact raised but most of
which rest upon misunderstandings of Marshall’s meaning. Appreciation of the value
of the tool will be best conveyed by a frank recognition of the limitations to which,
at least in the original Marshallian formulation, it must be understood to be subject.
First, it was meant to be essentially a tool of partial analysis; the price of one com-
modity only is made to vary, all other prices being kept constant. Second, even within
this range, the concept of consumers’ rent embodies a method of approximation (though
it may be exact in certain cases). For it assumes that the marginal utility of income
does not change if the individual, having acquired a first unit of the commodity in
question for, say, $100, a second for, say, $99, a third one for, say, $90, goes on spend-
ing more and more money on additional units as they are offered to him at decreas-
ing prices. Strictly, this is inadmissible. But if this expenditure is but a small part of his
total expenditure — so that his other expenditures are not perceptibly affected by this one
— we may neglect, as of second order of magnitude, the variations in the marginal utility
of income that actually occur. Of course, this limits the method severely: it cannot be
applied to such things as food in general or house room or it can be applied only to
small ranges of variations in the prices of these, and Marshall knew why he used tea
as an example by which to display it. But within these limits the method is neither
incorrect nor valueless.. Even the Sum of all consumers’ rents enjoyed by an individual —
a concept that looked absurd to some critics — and the sum of all consumers’ rents en-
joyed by all individuals buying an individual commodity may be made to carry mean-
ing by means of further assumptions that are not worse than others we habitually
make. However, consumers’ rent had a bad reception from the first, and Professor
Pigou, who developed Marshall’s teachings so faithfully in other respects, did not
throw the weight of his authority into its scale. But of late. Professor Hicks, impressed
by its usefulness in welfare economics (see below, sec. 8), recalled it — or something

4 G. B. Antonelli, Sulla teoria matematica della economia politica (1886).

1062

IV: FROM 1870 TO 1914 AND LATER

like it — from the limbo of dead issues to what looks like another lease on life. See
his note to Chapter 2 of Value and Capital and his articles 'The Rehabilitation of
Consumers’ Surplus’ ( Review of Economic Studies , February 1941); 'Consumers’ Sur-
plus and Index Numbers’ (ibid. Summer 1942); and 'The Four Consumer’s Surpluses’
(ibid. Winter 1943). [Cf. also R. L. Bishop, 'Consumer’s Surplus and Cardinal Utility,’
Quarterly Journal of Economies, May 1943.]

6. Ordinal Utility

Of course, if measurability were the only stumbling block in the way to ac-
ceptance of the marginal utility theory, critics could be satisfied by a reformu-
lation that retains the concept of utility or satisfaction but makes it a non-
measurable quantity. 1 For there is in fact no compelling necessity of insisting
upon measurability so long as we are interested only in a maximum problem:
there are means of telling whether or not we are on the top of a hill without
measuring the elevation of the place where we stand. And since the objection to
measurability was the most serious of the objections that were raised from the
first by nonmathematical opponents of the nonmathematical exponents of the
marginal utility theory, some of these, Wieser especially, soon discovered that
they could afford to yield the point, 2 at least with respect to total, as distin-
guished from incremental, utility. Pareto, who, after having at first accepted the
marginal utility theory in the Walrasian form, turned against it around 1900, 3
also raised primarily this objection which then was anything but new, to wit:
'show me a utility or satisfaction that is, say, three times as great as another!’
But nobody questioned people’s ability to compare satisfactions expected from
the possession of different sets of goods without measuring them, that is to
say, people’s ability to array such sets in a unique 'scale of preference/ This
is what we mean by Ordinal Utility.

Only the briefest reference can be made to a point on which economists have not
been able to reach agreement to this day. We can, as has just been stated, array hypo-

1 A quantity or magnitude (the Greek peyeftog) is defined as anything that is capable
of being greater or smaller than some other thing. This property implies only transi-
tivity, asymmetry, and aliorelativity (the last term meaning that no thing can be
greater or smaller than itself). It also covers the relation of equality, which is how-
ever symmetrical and reflexive (the latter term meaning the opposite of aliorelative) .
Now, quantity in this very general sense does not imply measurability, which requires
fulfillment of two more conditions: (1) that it be possible to define a unit; (2) that it
be possible to define addition . operationally, i.e. so that it can be actually carried out.

2 This is, I suppose, what Wieser meant when he said that utility had no ‘extension’
but only 'intensity.’ If my interpretation be correct, this turn of phrase was no doubt
highly infelicitous.

3 Pareto’s publications during the nineties, the Cours in particular, are substantially
pristine utility theory (or ophelimity theory, as he called it). I think that his change
of heart was first revealed in the lectures he gave in 1900 at the Ecole des Hautes
Etudes in Paris. The first publication on the new line that I know is his ‘Sunto di
alcuni capitoli di un nuovo trattato di economia pura,’ in the March and June numbers
of the Giornale degli Economisti, 1900.

EQUILIBRIUM ANALYSIS

1063

thetical sets of goods ordinally. Suppose that an individual tells us that he prefers a
set of goods (B) to a set of goods (A) and a set of goods (C) to the set of goods (B);
therefore he prefers (C) to (A) (transitivity). But can we go further and assume that
the increase in satisfaction which, on the showing of the experiment, he must experi-
ence when, having been promised (A), he is then promised (B), is capable of being
greater or less than, or equal to, the increase of satisfaction he would experience if,
having been promised (B), he is then promised (C)? This question is by no means
otiose because it has been asserted by some and denied by others that admissibility of
this assumption opens a way back to measurability ( even though, by itself, it is not
sufficient to insure it). We cannot go into this question and must content ourselves
with a reference to the three most important papers about it. They are: O. Lange, ‘The
Determinateness of the Utility Function’ ( Review of Economic Studies, June 1934);
P. A. Samuelson, ‘The Numerical Representation of Ordered Classifications and the
Concept of Utility’ (ibid. October 1938); and especially F. Alt, ‘Uber die Messbarkeit
des Nutzens’ (Z eitschrift filr Nationqlokonomie, June 1936). For readers who can
muster sufficient interest in questions of this kind, I shall however add this: the merit
of having seen the importance of this assumption is Lange’s. But he failed to see that
it was only necessary, but not sufficient, in order to prove the possibility of measure-
ment. Samuelson’s argument points this out correctly. Alt’s argument, however (which
was not known to Samuelson), is logically adequate and reduces the problem satisfac-
torily to one of empirical verification of the seven assumptions involved (which it is
true has not been attempted so far).

Pareto proceeded to develop the idea of ordinal utility and eventually worked
out what must in fairness be considered the fundament of the modern theory
of value. 4 He was not quite consistent about it and slid back again and again
into the habits of thought he had acquired in his formative years. Further ad-
vance was made, however, by Johnson and Slutsky although it was not until
1934 that the job was completely done by Allen and Hicks. 5 Additional prob-

4 See the Appendix to his Manuel in its entirety. But the later article in the French
edition of the encyclopaedia of mathematical sciences ( Encyclopedic des sciences
mathematiques pures et appliquees, 1911), contains several improvements (the earlier
article in the German ed. is of no importance).

5 W. E. Johnson, ‘The Pure Theory of Utility Curves,’ Economic Journal, Decem-
ber 1913. This important paper contains several results that should secure for its au-
thor a place in any history of our science. But, having apparently been written in igno-
rance of Pareto’s work, it aroused not unnatural resentment on the part of Italian
economists because of its failure to acknowledge Pareto’s priority in most essentials.
The Russian economist and statistician Eugen Slutsky, Professor in the University of
Kharkov, published in the Giornale degli Economisti, July 1915, an article entitled
‘Sulla teoria del bilancio del consumatore,’ the complete neglect of which outside of
Italy may perhaps be excused on account of the conditions prevailing in that year. It
keeps to the idea that utility is a quantity, though an unmeasurable one; posits certain
assumptions about its properties; and then develops the theory of consumers’ behavior
with which little fault can be found so long as that view of utility is accepted. Ample
amends for that neglect were made by Henry Schultz (‘Interrelations of Demand, Price,
and Income,’ Journal of Political Economy, August 1935); by R. G. D. Allen (‘Pro-
fessor Slutsky’s Theory of Consumers’ Choice,’ Review of Economic Studies, February
1936); and by J. R. Hicks, who in Value and Capital gave Slutsky’s name to the

1064 IV: FROM 1870 TO I914 AND LATER

lems cropped up in the process, some of them in several different forms, but
the familiar outcome may be briefly stated as follows . 6 Cardinal utility had
been conceived as a uniquely determined 7 real function of the quantities of
commodities (per stated period of time) at the disposal of the individual or
household. Ordinal utility cannot be so conceived. But it is still possible to
describe its behavior by means of any real function of the same quantities that
increases whenever we proceed from any given set of commodities to another
which the individual prefers, decreases whenever we proceed from any given
set of commodities to another which is less acceptable to the individual, and
assumes constant values (does not change) whenever we proceed from any
given set of commodities to one which is equally acceptable to the individual —
just as the two bundles of hay were to Buridan's ass. Such a function will rep-
resent the individual’s 'scale of preference’ mentioned above but, unlike the
function that represents cardinal utility, it will not do so in a uniquely deter-
mined way, because all it is devised to tell us is whether there is increase, de-
crease, or equality of utility. Everything else about it, any further algebraic or
numerical features it may display, is entirely arbitrary and has in fact no eco-
nomic meaning. Hence, if <p be any such function , 8 any monotonically increas-
ing function of cp, call it /(q>), will do just as well. Pareto called such a func-
tion an Index Function (funzione-indice) . They were to play the same role in
the value theory that works with ordinal utility as had been played by the
utility function in the value theory that worked with cardinal utility — in fact,
we might call them utility functions that obviate the objection against meas-
urability.

As a matter of fact, however, it was not the index function as such, but an-
other construct that became characteristic of this stage of value theory, namely,
the indifference surfaces or, in the case of two commodities, the indifference
curves (curves of equal choice, curve di scelti uguali). It is very interesting to
notice that historically these were independently 'discovered/ for purposes that

fundamental equation of the modem theory of value. Perusal of Professor Allen’s ar-
ticle, a shining example for what in this book is considered correct behavior in the
case of unexpected discovery of predecessors, will tell readers unfamiliar with Italian all
there is to know about Slutsky’s performance. No comment is, I trust, necessary on
the famous ‘Reconsideration of the Theory of Value’ by Allen and Hicks (Economics,
February and May 1934), which marks substantial advance beyond Slutsky.

6 I cannot do more than indicate the most important milestones on the main road.
Many other things must go by the board. For instance, part of the development I am
trying to describe in the text was paralleled by the thought of the later Austrians,
though, owing to the inefficiency of their nonmathematical method, they did not get
very far. On these Viennese developments, see A. R. Sweezy, ‘The Interpretation of
Subjective Value Theory in the Writings of the Austrian Economists/ Review of Eco-
nomic Studies , June 1934.

7 This must of course be qualified in two directions: we are always free to choose a
unit and we are always free to choose our zero point. In these two respects cardinal
utility is also arbitrary — but not more so than is any other method of measurement.

8 For technical reasons, we do, however, require certain other properties, such as
continuity and differentiability.

EQUILIBRIUM ANALYSIS

1065

had nothing to do with ordinal utility, by Edgeworth, 9 who fully accepted the
doctrine of cardinally measurable utility. Let us for a moment return to this
doctrine. Confining ourselves to the two commodity case, we can then lay off
the quantities of these commodities on two of the co-ordinates of a three-
dimensional diagram and represent by the third co-ordinate the varying
amounts of total utility enjoyed that correspond to all the possible combina-
tions of the two commodities. The result is a utility surface that rises from the
origin as the quantities of the two commodities increase, and possibly flattens
out later on, presenting a shape not unlike that of a loaf of bread (Pareto
called it la colline du plaisir). A succession of horizontal planes — that is, of
planes parallel to the plane of the two commodity co-ordinates — will cut out
from this loaf curves along which total utility is constant, the quantities of the
commodities varying in such a way that the increase of one just compensates
the individual for the corresponding decrease of the other. These curves, the
whole meaning of which seems to rest upon the assumption that utility is
measurable, are what Edgeworth called indifference curves. If we project them
on the commodity plane, we get the familiar ‘indifference map/ Edgeworth
used it very elegantly in his theory of barter, particularly in order to delimit
the range of possible barter terms or exchange ratios. 10

But so soon as we project the indifference lines on the commodity plane, the
utility dimension vanishes from the picture so that their meaning is no longer
dependent on any hypothesis of measurability. They then tell us no more than
(1) that the individual considers certain combinations of the two commodities
as equally eligible and (2) that he prefers combinations represented by any
‘higher' indifference curve to combinations represented by any ‘lower’ one. The
first man to see the implications of this was Irving Fisher. 11 He had no objec-
tion to measurability. On the contrary, he tried to make it operational (see
below editor’s note between sections 7 and 8). But in doing so, he encountered
certain difficulties when, in the second Part of his work, he discarded the un-
tenable assumption that the utility of each good depends on its own quantity
only (‘independent goods’). 12 At this point doubts were bound to arise not
only about the measurability but also about its very existence. Accordingly,
Fisher presented an analysis completely free from utility assumptions that
worked only with indifference maps in the modern sense. With him — as later

9 They put in appearance in his Mathematical Psychics (1881) and therefore ante-
date ordinal-utility analysis of the Pareto type by about twenty years.

10 Marshall was sufficiently impressed with this brilliant piece of work to reproduce
the gist of it in a note in the appendix to his Principles. But this is all he had to do
with indifference curves. It is incorrect to say that he anticipated the idea by the ap-
paratus of curves which he used in his Pure Theory of Foreign Trade (1879).

11 Mathematical Investigations (see above, ch. 5, sec. 7b). It is not sufficiently recog-
nized that, partly explicitly, partly by implication, this book anticipated the better part
of modern value theory.

12 The nature of these difficulties will be indicated in the next footnote. It is my
guess — not, I think, a very hazardous one — that it was these difficulties which mo-
tivated Marshall’s adherence to the conception of independent goods.

io 66

IV: FROM 1870 TO 1914 AND LATER

on with Allen and Hicks — indifference curves were the starting points of the
analysis; they were not, as with Edgeworth, derived from a utility surface.

However, the indifference curves are part of index functions and can also be
derived from these. This is what Pareto did. But they are just as independent
of the particular index function chosen as they are of the particular form of the
cardinal utility function, being uniquely determined by the scale of preferences.
This suggests the idea of doing also without index functions, especially because
they give rise to difficulties similar to those that Professor Fisher met in the
case of utility functions. 7 * * * * * 13 But it took until 1934 to give full effect to it and to
develop a theory that is nothing but a logic of choice: the theory of Allen and
Hicks that was published in that year was, so far as I know, the first to be
completely independent of the existence of an index function and completely
free from any lingering shadows of even marginal utility, which is replaced in
their system by the marginal rate of substitution. 14 In consequence, elasticities
of substitution and complementarity are defined exclusively from the scales of
preference and likewise divorced from utility. Beyond this we cannot go. It
must suffice to mention the most important of the problems that are as yet
unsolved within the range of this theory of choice: so far, indifference curves
are satisfactorily defined for individual households only; the question remains
what meaning is to be attached to collective indifference curves — for example,
indifference curves of a country — -which have been used in some of the most
brilliant theoretical work of our time. 15

[The first six sections of the Note on the Theory of Utility had been substantially
completed and had been typed. The next few paragraphs were found in manuscript,
incomplete, with shorthand notes to indicate the argument contemplated. See editor’s
note at end of this section.]

7. The Consistency Postulate

As the reader knows, indifference-curve analysis has at long last become
part of current teaching. The profession has got used to it, and even the
controversy concerning its suitability for a sophomore course has died out. But
it should have been clear from the first that things would not stop at indiffer-
ence varieties and that they are after all but a midway house. They are more
elegant and methodologically safer than was the old utility analysis but they

ferential equation of the indifference curves be integrable. In the case of only two
variables (two commodities), there is always an integrating factor; in the case of three

or more there need not be one. This question of integrability was very serious for

Pareto’s approach. Later developments have deprived it of its importance.

14 It may be well to point out explicitly that this involves discarding Gossen’s law

of satiable wants.

15 See, e.g.. Professor Leontief’s paper on ‘The Use of Indifference Curves in the
Analysis of Foreign Trade,’ Quarterly Journal of Economics, May 1933.

EQUILIBRIUM ANALYSIS

1067

have not helped us to results that the latter could not have reached; and no
result of the latter has been proved definitely wrong by them. Moreover, if
they ‘assume less' than does the utility analysis, they still assume more than,
for purposes of equilibrium theory, it is necessary and comfortable to assume.
And if they use nothing that is not observable in principle, they do use ‘poten-
tial’ observations which so far nobody has been able to make in fact: from a
practical standpoint we are not much better off when drawing purely imaginary
indifference curves than we are when speaking of purely imaginary utility func-
tions. 1 Accordingly, it has been pointed out, as early as 1902, by Boninsegni,
and a few years later by Barone, 2 that for the purposes of writing the equa-
tions of equilibrium theory we do not need either. 3 What then do we need
for this purpose if we leave every other out of account? A little reflection shows
that even the early utility theory of value never actually used any other postu-
late than this: faced with a given set of prices and a given ‘income/ every-
body chooses to buy (or sell) in a uniquely determined way. Everything else
is idle decoration and justified, if at all, by such interest as may attach to it
from the standpoint of other purposes. Barone had seen this but he had failed
both to formulate this postulate exactly and to prove its sufficiency. This has
been done by Samuelson, 4 who formulated the consistency postulate: if

% = h\P l7 ••• P n , I) (i = 2, • • • n),

2 - 1 =

i = l

1 On the possibilities of 'The Empirical Derivation of Indifference Functions/ see
the paper with this title, by W. Allen Wallis and Milton Friedman, in Lange et al.
editors, Studies in Mathematical Economics and Econometrics, 1942 (Henry Schultz
memorial volume) — though here again we must never say never; see, e.g.. Professor
Wald’s important paper, ‘The Approximate Determination of Indifference Surfaces by
Means of Engel Curves/ Econometrica, April 1940. Of course, this must not be al-
lowed to obliterate the logical difference: it does make a difference whether or not a
certain construct has, to use the phrase of Immanuel Kant, a ‘relation to possible ex-
perience’ ( Relation auf mogliche Erfahrung). Also, it can of course be shown just as
in the case of the utility analysis that indifference-variety analysis is not open to any
indictment on the score of circularity or emptiness.

2 P. Boninsegni, ‘I Fondamenti dell’ economia pura/ Giornale degli Economist i,
February 1902; and E. Barone, ‘II Ministro della produzione/ ibid. September and
October 1908 (see above, sec. 5).

3 They realized, of course, the necessity of restrictive assumptions about consumers’
behavior from which the properties of demand functions would follow. This distin-
guishes their views from G. Cassel’s, who simply advocated the scrapping of every-
thing behind demand functions to make these the ultimate data. See his ‘Grundriss
einer elementaren Preislehre/ Zeitschrift fur die gesamte Staatswissenschaft (1899),
which deserves to be mentioned because it was the first uncompromisingly radical attack
upon the whole structure of the utility theory of value made by an economist trained
in mathematics. In his Theory of Social Economy, Cassel substantially repeated the
argument.

4 In his ‘A Note on the Pure Theory of Consumer’s Behavior/ Economica, Feb-
ruary 1938; see also ‘The Empirical Implications of Utility Analysis/ Econometrica,

1C>68 IV: FROM 1870 TO 1914 AND LATER

and proved brilliantly that this gives all the restrictions we need for our

n n

^Pjdx pj = o and y 'dPjdtyj < o (not all = o ). 5

i=i i=i

[Editor’s note: The plan for the remainder of this Appendix to Chapter 7 (Note
on the Theory of Utility) is not quite clear. There is no doubt that J. A. S. intended
to make his treatment of welfare economics a part of this Appendix, which is described
as a digression or note on utility (see the first paragraph of section 5 of this chapter,
The Theory of Planning and of the Socialist Economy) and there is some evidence that
it was to be sub 8 (section 8). The section on Welfare Economics which follows was
a preliminary treatment probably written in 1946 or 1947. The first six sections of
the Note on the Theory of Utility were apparently written at the end of 1948. This
material had been typed and read by J. A. S. Sometime later he sketched out sec-
tion 7 (The Consistency Postulate) and put down notes for a section 8 (The Corpse
Shows Signs of Life). It is conceivable that welfare economics would have been dis-
cussed here. 'The Corpse’ is so fragmentary, however, that I have simply presented it
in the next two paragraphs as part of this note and have made Welfare Economics
section 8 of the Appendix to Chapter 7.

'8. The Corpse Shows Signs of Life. We have surveyed what in spite of backslidings
and detours looks like a very definite line of development to a goal that seems to have
been definitely reached by Samuelson. However, the picture would be incomplete if
we failed to notice a number of symptoms which seem to be at variance with that
line and to point in another direction. If these symptoms could all be interpreted as
survivals of old views, they would not be worth while mentioning. It is but natural that
a concept like utility, so deeply rooted both in century-old tradition and in the habits
of everyday thought and parlance, should not give way easily. But there is more to it
than this. It is true that it has by now been cogently proved that the concept of
utility is superfluous in the theory of equilibrium values — which is in fact not only
the strongest but the only needful argument against it. But it has not been proved —
and cannot be proved in the nature of things — that the concept can never be useful for
any other purpose. However we may feel about it, we cannot deny the heuristic service
it has rendered in the past — historically it was the discovery of the very theory which
now can do without it — and there is no saying whether its fertility is exhausted for
all time. In this connection it becomes relevant to note that some arguments against
it have no weight and others have gone too far. It is even possible that the argument
against measurability is among the latter. Of course, as far as this goes, if we ever
come to devise methods of measurement, it would not be the old psychic reality:
there is the possibility that we might wish for a potential; there is even a possibility
that we might measure without subjective reality [shorthand notes],

'And in this connection [shorthand notes] whatever objections against them [short-
hand notes]’

[J. A. S. then jotted down the following references, which he obviously intended to
discuss.]

T. Irving Fisher, Mathematical Investigations in the Theory of Value and Prices
(1925), his doctor’s thesis first published in the Transactions of the Connecticut Acad-
emy of Arts and Sciences, 1892.

October 1938. Cf. N. Georgescu-Roegen, 'The Pure Theory of Consumer’s Behavior,’
Quarterly Journal of Economics, August 1936.

5 [J. A. S. did not finish this section or fill out the mathematical symbols for the
Samuelson postulate; the mathematical formulation above was supplied by R. M. G.]

EQUILIBRIUM ANALYSIS 1069

2. Aupetit [not certain, writing illegible],

3. Irving Fisher, ‘A Statistical Method for Measuring "Marginal Utility” and Test-
ing the Justice of a Progressive Income Tax,' in Economic Essays Contributed in Honor
of John Bates Clark (1927).

4. Ragnar Frisch, ‘Sur un Probleme d’economie pure,’ Norsk Matematisk Forenings
Skriften, 1926.

5. Ragnar Frisch, New Methods of Measuring Marginal Utility (1932).

6. Paul A. Samuelson, "A Note on Measurement of Utility,’ Review of Economic
Studies, February 1937.

... is not true [shorthand notes] welfare economics [shorthand notes] consistency
[shorthand notes] parameter, features [shorthand notes]

Potential, [shorthand notes] Engel Curves.’

8. Welfare Economics *

The reader is presumably familiar with the distinction made in current teach-
ing between "positive' and "welfare’ economics. Little beyond convenience of
exposition can be adduced for this distinction so far as it means not more
than that positive economics is to explain and welfare economics is to pre-
scribe. For all propositions of welfare economics can be formulated in the in-
dicative mood just as well as any propositions of positive economics can, by
the insertion of the appropriate axiological postulates, be turned into an im-
perative. Since, however, modern welfare economics has, as a matter of fact,
acquired a distinct status of its own, it is convenient to notice its develop-
ment separately. We have also an additional motive for doing so since the
subject bears an obvious relation to the subject of interpersonal comparison
of satisfactions that has not yet been touched upon.

We know the hallowed antiquity of welfare economics: a large part of the
work of Carafa and his successors as well as of the work of the scholastic doc-
tors and their successors was welfare economics. We also know that the wel-
fare point of view was much in evidence in the eighteenth century and that,
in Italy, the phrase felicitd pubblica appeared very frequently on title pages.
For Bentham and the English utilitarians generally this point of view was,
of course, an essential element of their creed. Hence, the positive spirit of
Ricardian economics notwithstanding, we find it also in the English "classics/
particularly in J. S. Mill. So far as this goes, modern welfare economists merely
revive the Benthamite tradition.

The temporary victory of the utility theory naturally gave a new impulse.
We can see this already with the forerunners, such as Dupuit and Gossen. But
current work in welfare economics harks back to Marshall’s teaching, as devel-
oped by Pigou, and to Edgeworth and Pareto. Marshall made two contribu-
tions, besides offering many of those general considerations that were so con-

* [There were two treatments of welfare economics (one typed and one in manu-
script), which had many points in common. The manuscript version is presented here.
Both treatments were preliminary and were written earlier than the preceding seven
sections of this Appendix on the Theory of Utility.]

1070 IV: FROM 1870 TO 1914 AND LATER

genial to his propensity to preach. First, as has been mentioned above, he re-
discovered Dupuit’s consumers' surplus or rent, and thus presented welfare
economics with an analytic tool that is, or was thought to be, particularly
adapted to application in this field. Second, he formulated several propositions
of the kind that is typical of modern welfare economics. The most famous
one is noticed in the footnote below. 1 Its importance consists not so much
in the proposition per se, but in the fact that it spelled a new departure: the
virtues of the perfectly competitive equilibrium state — what Marshall called the
doctrine of maximum satisfaction — had indeed been questioned many times
before from a variety of standpoints; but this was the first time that this was
done within the range of the pure theory of that state, the first time that,
on the theoretical plane, the possibility was considered of turning individual
actions into channels more conducive to general welfare than those of laissez-
faire. Edgeworth’s many contributions are perhaps best exemplified by that
part of his theory of taxation which is concerned with justice. The treatment
is in the spirit of his New and Old Methods of Ethics (1877), that is, in the
spirit of hedonism or utilitarianism. The main points are the distinction be-
tween, and the rigorous definition and quantification of, the concepts of equal,
proportionate, and minimum sacrifice, the equalitarian implication of the last-
mentioned idea coming duly into view. 2 Mainly, Edgeworth's efforts were di-
rected against popular errors of reasoning such as are implied, for instance, in
the widespread belief that decreasing marginal utility of income is all that
need be assumed in order to make progressiveness of taxation follow from the
postulate of equal sacrifice. 3

All this is simply revived Benthamism — or rather, Benthamism in the armor
of a better technique — and implies not only a quantitative conception of utility
or satisfaction or welfare but also the further idea that satisfactions of differ-

1 Marshall ( Principles , pp. 533 et seq.) averred that the sum total of satisfaction in
a society might be increased beyond the maximum attainable under laissez-faire in a
state of perfect equilibrium in perfect competition by taxing the production of com-
modities subject to decreasing returns and using the proceeds in order to subsidize the
production of commodities subject to increasing returns. This proposition, which we
cannot discuss here, has been much amplified by Professor Pigou and especially by
Mr. R. F. Kahn, the chief authority on the subject. See the latter’s paper ‘Some Notes
on Ideal Output,’ Economic Journal, March 1935.

2 The decisive proposition was that, in order to minimize the total sacrifice involved
in raising a given sum, taxation should, to the requisite amount, wholly absorb, first, the
excess of the highest income over the second highest one, then the excess of these two
over the third highest one, and so on.

3 This error can be found, as a witness to our loose habits of thinking, in the
writings of quite reputable economists, though it should be obvious that, given the
intention to take away from taxpayers equal ‘amounts’ of satisfaction, nothing follows
from the ‘law’ of decreasing marginal utility of income except that higher incomes
should pay higher absolute sums than smaller incomes: whether a tax devised to give
effect to that intention is to be progressive, proportional, or regressive depends on the
particular form we choose to adopt for that law of decrease.

EQUILIBRIUM ANALYSIS

1071

ent people can be compared and, in particular, summed up into the General
Welfare of society as a whole — the idea of 'interpersonal comparability of
utility.’ This idea, which few economists will care to defend nowadays 4 al-
though many use arguments that presuppose it, has had a chequered career.
It has been challenged almost from the first, for example, by Jevons, and then
again and again both by writers who raised no difficulty about measurability
and by writers who did. But it kept on intruding, the chief reason being, of
course, that it seemed so useful in welfare economics. Marshall himself evi-
dently did not object to it , 5 and Wicksell actually went to the length of
saying that parliamentary discussions on questions of taxation would be mean-
ingless if it were impossible to compare the utilities of different persons . 6 This
is going rather far, but on the other hand it is also going rather far to state
unconditionally that interpersonal comparison of utility 7 is meaningless in
every sense and for all purposes.

However, from the standpoint of those economists who are steadfast op
ponents both of interpersonal comparison and of measurement of individual
utilities, any attempt at either is of course no better than walking on clouds.
Nevertheless, they were in no mind to give up welfare economics. It is here
that Pareto enters again to save the situation, at least in part. He and, fol-
lowing him, Barone pointed out that objection to interpersonal comparisons
(or measurability) does not invalidate those propositions of welfare economics
which refer to events that benefit or injure some members of society without
injuring or benefiting others . 8 This principle will also enable us, in a more
restricted sense, to speak of an event’s being 'socially beneficial’ when some
people are injured (lose something), but when those who are can be fully in-
demnified (so that they no longer prefer their old situation to the new one)

4 See L. Robbins, 'Interpersonal Comparison of Utility,’ Economic Journal, De-
cember 1938.

5 It is true that he wrote ( Principles , Book 1, ch. 5, p. 76): ‘We cannot directly
compare the pleasures which two persons derive from smoking; nor even those which
the same person derives from it at different times.’ But the emphasis is upon the word
'directly’; and the sentence means not more than that, exactly as measurement of the
desires of a given person is always an indirect one in the sense explained above, so
interpersonal comparison must resort to indirect methods. Marshall’s reasoning in fact
repeatedly implies the possibility of interpersonal comparison.

6 See, e.g., his article on Cassel’s system, republished as Appendix 1 to the English
edition of the Lectures, vol. 1, p. 221.

7 Perhaps I should explain, as I have explained before with respect to measurability
and integrability, that this need not amount to more than saying that it may be
possible to frame hypotheses concerning the relation between the significance of a
dollar to the poor man. A, and the significance of a dollar to the rich man, B, that
yield none but reasonable results.

8 This means, of course, that such events, rearrangements, or measures can be called
'beneficial' or 'injurious’ irrespective of any interpersonal comparison and irrespective
of the question by how much the beneficiaries or victims are benefited or injured. The
case where all individuals are benefited or injured is evidently covered by our formulation.

1072 iv: FROM 1870 TO 1914 AND LATER

at the expense of those who have been benefited and when, after this has been
done, the latter are still better off than they were before. 9

The standard work from which the new Anglo-American welfare economics
stems. Professor Pigou’s Economics of Welfare (1920; 3rd rev. ed. 1929), 10
though it does take some account of the point of view just referred to, goes
much beyond the limits drawn by the Paretian suggestion, especially as re-
gards transfers of wealth from the relatively rich to the relatively poor. But the
new Anglo-American welfare economics itself tries to respect those limits,
though trespass on forbidden ground is still frequent. That is to say, it tries
to confine itself, on principle, to propositions that can be established without
the aid of either interpersonal comparison or measurement of utility. Such self-
restraint might seem surprising in view of the fact that its main result is to
deprive of their scientific or pseudoscientific foundations many equalitarian ar-
ticles of. faith to which most modern economists are emotionally attached.
But not much self-restraint is actually needed, for a device has been discovered
that enables welfare economists to elude those restrictions. It is called Social
Valuation and consists in replacing the conception of social welfare defined
as the sum of individual satisfactions by the dictate of some agent who de-
cides what relative weights are to be attached to the (unmeasurable) desires of
the members of society. 11 That this agent is nothing but the volonte generate
of the eighteenth century should be clear; so should the danger that this agent
become but a name for the interests and ideals of the analyzing individual.

Under these circumstances, the question arises once more in what way
modern welfare economics differs from that of the English 'classics.’ 12 It dif-

9 The reader will realize on reflection that this is more than what it seems to be at
first sight, viz. a very artificial definition of what is meant by making 'society’ better off.

10 Originally Wealth and Welfare (1912).

11 This may be illustrated by the parliamentary discussions on questions of taxation
envisaged by Wicksell. According to the modern view, neither parliaments nor anyone
else can compare the utilities of the persons who are to pay the taxes and the utilities
of the persons who are to receive the proceeds or to benefit in other ways by the corre-
sponding public expenditure. But this does not really matter: the parliamentary ma-
jority itself simply puts a comparative (ordinal) value upon the sacrifices and benefits
involved. And similarly, the reader will no doubt put the value he pleases both on the
comparative and on the absolute merits of the two procedures.

12 Since it is impossible for us to enter into the methods and results of modern wel-
fare economics, readers may welcome a few references: A. Burk (Bergson), ‘A Re-
formulation of Certain Aspects of Welfare Economics,’ Quarterly Journal of Eco-
nomics, February 1938; H. Hotelling, 'The General Welfare in Relation to Problems
of Taxation and of Railway and Utility Rates,’ Econometrica, July 1938; N. Kaldor,
'Welfare Propositions in Economics and Interpersonal Comparisons of Utility,’ Eco-
nomic Journal, September 1939; J. R. Hicks, 'The Foundations of Welfare Economics,’
Economic Journal, December 1939: T. de Scitovszky, ‘A Note on Welfare Proposi-
tions in Economics,’ Review of Economic Studies, November 1941; O. Lange, 'The
Foundations of Welfare Economics,’ Econometrica, July-October 1942; G. Tintner,
'A Note on Welfare Economics,’ Econometrica, January 1946. Professor Hotelling’s
paper is of particular interest because it contains . what is perhaps the most famous

EQUILIBRIUM ANALYSIS

i ° 73

fers, first, by a better technique. Second, partly because this better technique
yields better results but much more because the preconceptions and affilia-
tions of the modern radical differ from the preconceptions and affiliations of
the old radical, it also differs by its attitude toward business and laissez-faire.
But third it also differs by a circumstance that is not to its credit. Classic wel-
fare propositions — including those of Jeremy Bentham — display a remarkable
awareness of the qualifications to which considerations of instantaneous wel-
fare maxima become subject as soon as we take account of the future. Not less
remarkably, such considerations are almost completely absent from the writings
of modern welfare economists. Practically their only topic is the administra-
tion of the means afforded by an existing industrial structure. This is no ob-
jection so long as welfare propositions remain exercises in pure theory and are
frankly described as such. It is a fatal objection as soon as the welfare econo-
mist, repeating a long-exploded methodological error, proceeds to 'prescribe/
The chief objection to the most popular of all welfare precepts — equality of
incomes — is not that it has no rigorously defensible foundations; the chief ob-
jection is that, even so far as tenable, it is completely uninteresting by com-
parison with the question of its effects upon cultural and economic evolution.

'practical’ proposition of modern welfare economics, namely, that maximizing general
welfare (in a particular sense) requires that all goods and services should he produced
and consumed in quantities such as to equalize marginal costs and prices even where,
owing to the presence of decreasing average costs, this involves losses to the producing
industry — a proposition that is of great theoretical interest. Another excellent example
for 'modern welfare economics at work’ is Professor Samuelson’s 'Welfare Economics
and International Trade,’ American Economic Review, June 1938, supplemented by
'Gains from International Trade,' Canadian Journal of Economics and Political Science,
May 1939, and Foundations (1947), ch. 8.

[When originally written, the latest reference in this section was to Tintner’s article
in Econometrica, January 1946. The reference to Samuelson’s Foundations (1947) was
added later in pencil.]

CHAPTER 8

Money, Credit, and Cycles

1. Practical Problems 1074

(a) The Gold Standard 1075

(b) Bimetallism 1076

(d) Stabilization and Monetary Management 1077

2. Analytic Work 1080

(a) 'Walras 1082

(b) Marshall 1083

(d) The Austrians 1085.

3. Fundamentals 1086

(a) Nature and Functions of Money 1086

[(b) Knapp's State Theory of Money] 1090

4. The Value of Money: Index Number Approach 1091

[(a) Early Work] 1092

[(b) The Role of the Economic Theorists ] 1092

[(c) Haberler , Divisia, and Keynes ] 1094

5. The Value of Money: the Equation of Exchange and the "Quantity

Approach’ 1095

[(a) The Definition of the Concepts] 1096

[(b) Distinction between the Equation of Exchange and the Quantity

Theory] 1099

[(c) Purchasing Power Parity and the Mechanism of International Pay-
ments] ' 1106

6. The Value of Money: the Cash Balance and Income Approaches 1108

(a) The Cash Balance Approach 1108

(b) The Income Approach 1109

7. Bank Credit and the ‘Creation’ of Deposits 1110

8. Crises and Cycles: the Monetary Theories 1117

9. Non-Monetary Cycle Analysis 1122

(a) Juglar s Performance 1123

(b) Common Ground and Warring * Theories’ 1125

1. Practical Problems

Once more the bulk of the vast literature on money and related subjects,
which the period under survey produced, grew out of the discussions of cur-
rent problems. It contained, as the literature on money always did and does,
a large quantity of completely worthless publications and a still larger quantity
of publications which, though more or less meritorious within their range, are
uninteresting from the standpoint of a history of analysis. It is nevertheless
necessary, recalling what has been said in Chapter 2, section 3, to restate a

1074

MONEY, CREDIT, AND CYCLES IO75

few of those practical problems that induced discussions of some importance.

(a) The Gold Standard. The literary reflex of the tendency that dominated
the monetary policy of the period, the maintenance or adoption of the gold
standard, merits more careful analysis than it is possible for us to offer. There
were in all countries, among those who discussed actualities of national mone-
tary policy in a practical spirit, very many unconditional ‘pro's/ They in-
cluded, as does every party to every practical controversy, narrow-minded
fanatics without a trace of intelligence, but on its higher levels this was a
respectable group. I shall mention, by way of example, Bamberger, Giffen, de
Parieu, though a dozen other such trios would do just as well . 1

In view of the superficial sentence that some of us are in the habit of pass-
ing on the monetary thought of that time, it should be noticed, first, that the
opinions and recommendations of the unconditional ‘pro's' were incessantly
under fire — so that nothing could be farther from the truth than the idea that
the economists of that period as a body worshipped the golden calf — and, sec-
ond, that these opinions received but qualified support from those leaders of
scientific economics who actually worked in the field. As we shall see, neither
Jevons, nor Walras, nor Marshall, nor Wicksell, nor Wieser, nor Fisher can,
without qualification, be called either theoretical or practical gold , mono-
metallists. Later on, moreover, the depressions of the eighties and nineties
raised the question of gold's responsibility either for falling or for cyclically
fluctuating prices. And the emergence of the gold-exchange standard raised the

1 Ludwig Bamberger (1823-99) was a typical doctrinaire liberal of the German type
— a revolutionary in 1848, a staunch enemy of socialism, protection, and even social
insurance ever after. As a member of the Reichstag he established himself as its author-
ity on money, and his great aim was to get Germany on the gold standard and to keep
her there. He was a violent anti-bimetallist (see subsec. b), disposing of the bimetal-
list argument by pointing to the silver interests behind it. But the particular task he
manfully strove to accomplish and the particular historical conditions in which this task
posited itself to him must be taken into account before we condemn his views on the
score of theoretical inadequacy. The more important of his speeches and articles (A us-
gewahlte Reden und Aufsatze iiber Geld- und Bankwesen ) have been edited by K.
Helfferich (1900).

Sir Robert Giffen (1837-1910), an economic journalist and civil servant, belongs to
that category of meritorious or even eminent economists to whom this book cannot do
justice. His Progress of the Working Classes in the Last Half Century (1884) and his
Growth of Capital (1889) are landmarks in the history of economic statistics. Here we
have to notice his valiant defense of the gold standard ( Case against Bimetallism, 1892;
Evidence before the Royal Commission on Gold and Silver, 1886-8) and his almost
ferocious hatred of Fancy (i.e. non-gold) Monetary Standards.

F. E. de Parieu (1815-93) was by far the most important of the three. A public man
— half politician, half civil servant — he specialized in the fields of taxation (income tax
and related matters) and monetary policy. From 1857 on, perceiving the ineluctable
drift of things, he advocated the gold standard — but with due respect to the French
silver problems — and international monetary co-operation (see subsec. c below). His
work on money is in his various reports. His works on public finance have been no-
ticed already. [J. A. S. intended to but did not do this in the unfinished sec. 6 of ch. 6.]

1076 iv: FROM 1870 TO 1914 AND LATER

question of the merits of actual gold circulation to which, as we know, Ricardo
had already returned a negative answer. 2

(b) Bimetallism. This was, throughout that period, the most fertile source
of "practical’ controversy. The popular and political literature of the silver men
— justice to silver; dollar of our fathers; You shall not crucify mankind upon a
cross of gold — contains many arguments that kept on a much lower level than
anything that can be found in the writings of the sponsors of gold. In particu-
lar, it is infested by products of a semi-pathological nature, for at that time
bimetallism was the chief hunting grounds of monetary monomaniacs. Never-
theless, it is the fact — a fact that these semi-pathological products and also the
victory of the gold party tend to obliterate — that, on its highest level, the bi-
metallist argument really had the better of the controversy, even apart from
the support that a number of men of scientific standing extended to the cause
of bimetallism. 3

(c) International Monetary Co-operation. The various international mone-
tary unions and conventions, such as the Latin Union, the Scandinavian Union,
the German Union (before the foundation of the empire), naturally sug-
gested more comprehensive schemes. On the initiative of France, an interna-
tional currency conference was held in Paris, 1867, that under the leadership
of de Parieu succeeded to a surprising extent in keeping clear of the bimetal-
list hornets’ nest, considered the question of a uniform world coinage of gold,
and adopted what were so far the boldest proposals ever made for a world-wide
monetary Union. But at the subsequent international conferences of 1878, 1881,
and 1892, pressure by the United States diverted discussion and proposals to
bimetallism and thereby killed the original idea. 4 However, at the conference
of 1892, the German economist, Julius Wolf, proffered a new idea, namely,

2 The gold-exchange standard was essentially a practitioner’s idea. Scientific analysis
had little if anything to do with the ‘discovery.’ There are, however, a number of
critical interpretations of the exchange standard by scientific economists of which it
must suffice to mention: L. von Mises, ‘The Foreign-Exchange Policy of the Austro-
Hungarian Bank,’ Economic Journal, June 1909; J. M. Keynes, Indian Currency and
Finance (1913); Fritz Machlup, Die Goldkemwahrung (1925); C. A. Conant, ‘The
Gold-Exchange Standard,’ Economic Journal, June 1909; and a series of important
papers and reports by E. W. Kemmerer, see, e.g., his analysis of the case of the
Straits Settlements in Political Science Quarterly , xxx and xxi (December 1904 and
December 1906).

3 It is, however, quite impossible to sample that torrent of publications. Instead, I
shall mention two works of undoubted scientific standing that may serve as an intro-
duction to the popular literature also: J. S. Nicholson, Treatise on Money and Essays
on Monetary Problems (1888), and F. A. Walker, International Bimetallism (1896).
There was a Bimetallic League whose many publications are recommended to readers
desirous of going further into the subject. Additional material is to be found in the
reports and other writings of S. Dana Horton, next to Walker the leading American
advocate of international bimetallism. The outstanding purely analytic performance on
bimetallism is that of Walras ( Elements , legons 31 and 32).

4 On these conferences, whose reports contain many contributions of analytical merit,
see H. B. Russell, International Monetary Conferences (1898). •

MONEY, CREDIT, AND CYCLES

10 77

that an international gold reserve be deposited in a neutral country and that
international banknotes be issued on the basis of this reserve — the idea that,
though in an entirely different form, was to be partly realized by the Interna-
tional Fund of Bretton Woods fame.

(d) Stabilization and Monetary Management. The chief appeal of the bi-
metallist argument, at least for people not directly interested in silver produc-
tion, was of course in the prospect it held out of rising prices. Officially, how-
ever, bimetallists preferred to speak of stabilizing the price level. But other
schemes of stabilization, unconnected with silver, were also produced, for ex-
ample, schemes that proposed to divorce circulation entirely from gold and to
use paper money. And though, during three decades of falling prices, it was
primarily the price level people thought of stabilizing (as always, there was
intentional or unintentional confusion of this aim with the aim of keeping up
individual prices, especially those of agricultural products), broader aims were
by no means absent. Even mere stabilization of prices implies — as its main
purely economic motive — concern with stabilization of a country's economic
situation. But stabilization of employment was often mentioned explicitly.
Further, especially in connection with discussions of the gold-exchange stand-
ard, there was much talk about stabilizing money rates . 5

All this already meant monetary management of one kind or another. For
instance, bimetallism spells management whenever, in order to make it work,
it is necessary to regulate the price of silver — that is to say, to peg it by pur-
chases in order to keep silver from driving gold out of circulation — for in this
case the monetary system no longer works automatically. All schemes that

5 The 'comedy of errors’ present in almost any discussion of economic policy may be
instructively illustrated by one particular instance pertaining to that range of prob-
lems. When Austria, in the nineties, adopted the gold-exchange standard, it was urged
by politicians and in the press that one of the advantages of this arrangement would be
to secure lower interest rates than would prevail in the case of a fullfledged gold cur-
rency. Truth and error in this should be easy to disentangle. A central bank that is to
keep exchanges within gold points must, in the long ran, do pretty much all that a
central bank does under the fullfledged gold standard, and refrain from doing what
such a bank must not do. Therefore, interest rates in a money market that works under
the gold-exchange standard cannot be normally lower than they would be in a money
market that works under a fullfledged gold standard. But, first, the total amount of
gold necessary in order to start a gold-exchange-standard system is smaller than the
total amount of gold that is necessary to start a system with actual gold circulation.
Hence money rates in the initial period need not be kept on so high a level for so
‘long in the former case as would be necessary in the latter case. Second, with the
central bank in control of the whole of a nation’s monetary gold stock, it is easier in
the former case to avoid the necessity of varying bank rate in passing spells of diffi-
culty than it is in the latter. However, politicians and the daily press claimed that
interest rates would normally be lower with a gold-exchange standard than they would
be with a fullfledged gold standard. And in their zeal to refute this erroneous proposi-
tion, professional economists usually failed to admit the two true ones — so that, as so
often happens in our field, both parties to the controversy were, in effect, right and
wrong at the same time.

1078 IV: FROM 1870 TO 1914 AND LATER

went further than this involved, of course, still more management. As an ex-
ample, I shall mention a proposal that commanded some support: the pro-
posal of an inconvertible paper currency to be regulated by a government de-
partment that was to buy government bonds for this currency — to increase
liquidity — whenever the price level fell, and to sell government bonds — to de-
crease liquidity — for this currency whenever the price level rose. This proposal
may be considered as one of the many precursors of the open-market opera-
tions of the Federal Reserve System. But the idea of open-market operations
was familiar in other forms also. For monetary management was not confined
to management of the currency. It extended to management of the foreign
exchanges and, more important, of bank credit, 6 Nor did it remain in the realm
of 'pl ans -’ It was increasingly practiced by all the great central banks. 7 And it
is not true that monetary management of this and other types knew no other
purpose than to safeguard a nation's gold stock. It was practiced for thera-
peutic purposes. These purposes differed from ours and the full-employment
purpose was not the dominating one. But it is as misleading to overstress the
importance that was then attached to playing the gold standard game for its
own sake as it is to speak of the monetary systems prior to 1914 as 'auto-
matic.' 8 Unless this be clearly understood, it is impossible to appreciate the
doctrinal developments of that age either in themselves or in their relation to
the thought of our own time.

For the rest we must be content to notice a few of the performances, in the
field of ‘monetary reform,’ of the scientific leaders. Jevons sketched out what
seemed to him 'An Ideally Perfect System of Currency’ 9 in which gold, while
retained as means of exchange and common denominator of values, was to
cease to be the standard for deferred payments, 'the amounts of debts, al-
though expressed in gold, being varied inversely, as gold varies in terms of other
commodities.’ This revived the 'tabular-standard plan' of Lowe (see above.

Part hi, ch. 7, sec. 3) and is also the keynote of Marshall’s suggestions. 10 The

6 Thus, the issue of control of credit vs. control of money, which carries over into
more recent times, was already discussed.

7 For England, in particular, see W. T. C. King, History of the London Discount
Market (1936).

8 They looked more automatic than they were because they functioned so smoothly.

Moreover, if the Bank of England seems (statistically) to have reacted, in its discount
policy, mainly to the inflow or outflow of gold, it must not be forgotten that, in the
conditions that prevailed roughly until 1900, reacting to the inflow -and outflow of
gold involved essentially the same behavior as would have reacting to the domestic
business situation, in nine cases out of ten. When this ceased to be so, central banks
increasingly resorted to 'gold devices,' i.e. increasingly abandoned the orthodox gold
standard game.

9 Written about 1875 but first published in his important Investigations in Currency 3

and Finance, posthumously edited by Mrs. Jevons and Professor Foxwell in 1884. At- |

tention is called to Foxwell’s Introduction. j

10 In order to save space, I neglect the other features of Jevons’ scheme, which are |

in the direction of an international note issue and clearing system based upon gold. I

Marshall’s exploits in the role (as he styled it) of ‘amateur currency-mediciner’ saw the f

MONEY, CREDIT, AND CYCLES I.O79

latter include, however, a novel idea. Adopting Ricardo’s ingot plan, he pro-
posed that these ingots should consist of both gold and silver and that silver
bars of a certain weight should be legally 'wedded’ to gold bars of a certain
weight so that the monetary unit would constitute a claim to quantities of both
gold and silver in fixed proportion (Symmetallism). Irving Fisher’s proposal , 11
the Compensated Dollar, combined adoption of the gold-exchange standard
with the device of varying the gold content of the monetary unit according to
the variations of an official price index so that a dollar should represent, in-
stead of a constant quantity of gold, a constant quantity of purchasing power.
Finally, Walras advocated a plan that linked up with actual practice in France
in a manner that was as ingenious as it was simple. Gold was to remain the
standard monetary metal and to be coined for private account without limit.
Silver was to be the material of token coins ( billon ) which, however, were
not only to provide small change ( billon divisionnaire) but also a type of
legal-tender money that was to be used for the purpose of controlling the price
level ( billon regulateur) : government was to expand its circulation when prices
were falling and to contract its issue when prices were rising. The modern
ring of this proposal needs no emphasis. Walras added another, which makes
him one of the precursors, of our own Too per cent plans.’ He recognized,

though only in the case of banknotes, the fact that banks create means of

payment or, as he put it, that banks can lend to entrepreneurs without borrow-
ing the same amount from capitalists (savers). But he disapproved of it. And
he proposed that the silver surplus be used in order to coin additional silver
tokens in the amount of banknotes outstanding — minus the amount of legal-
tender cash held by the issuing banks — and to suppress the latter . 12

The merits or demerits of these plans are not in question here. They have

been mentioned for two reasons: first, because they show how utterly un-

founded is the belief that scientific leaders did not attend to problems of
monetary reform until our own day; second, because all those plans rested
upon a basis of analytic work, the fundamental importance of which must be
recognized quite independently of whether or not we like the plans themselves.

light in a paper he read at the Industrial Remuneration Conference in 1885, signifi-
cantly entitled 'How far do remediable causes influence prejudicially (a) the continuity
of employment, (b) the rates of wages?’ (see Keynes’s biography of Marshall, Essays in
Biography, p. 204); in his evidences before the Royal Commission on the Depression
of Trade and Industry (1886), before the Gold and Silver Commission (1887-8), and
before the Indian Currency Committee (1899), published in Official Papers (1926);
and in his article ‘Remedies for Fluctuations of General Prices’ ( Contemporary Review,
March 1887). See also F. Y. Edgeworth, ‘Thoughts on Monetary Reform,’ Economic
Journal, September 1895.

11 See Irving Fisher, assisted by Harry G. Brown, The Purchasing Power of Money
(1st ed., 1911).

12 Etudes d’ economic politique appliquee, 1 and v.

IV : FROM 1870 TO 1914 and LATER

2. Analytic Work

The story of the period's purely analytic work — to which henceforth we
shall confine our attention almost exclusively — is a story of successful advance . 1
Though, as we have just seen, most of the leaders participated with zest in
the discussions on the practical problems of their day, their work was less de-
pendent upon this stimulus than had been the work of their predecessors:
more than before analysis forged ahead, as it were, under its own steam, and
the purely scientific filiation of ideas — ^doctrinal change that is not simply re-
action to changing facts and changing political humors — is more in evidence
than it was in the preceding period. And more than in other parts of eco-
nomics new and valuable methods and results grew out of the pre-existing
stock of knowledge: in 'general theory' it is possible, if we so choose, to speak
of revolution; in monetary theory there was only vigorous evolution. No break
occurred with the work that J. S. Mill had thrown into an imperfectly system-
atic form. Yet most of the ground on which the structure of monetary analysis
stands today was actually conquered.

The general picture I am about to present suffers from the impossibility of giving
an account, except on rare occasions, of the factual work of that period which is at
least as important for our own as are the 'theories.' But all that can be done in a
sketch like this is to mention types and give one or two examples of each. There are,
first, some really excellent official reports: besides the English ones, which as usual hold
first place, I will again refer to those of the international monetary conferences and
of the U.S. National Monetary Commission (1911-12). Second, there are the his-
tories of currencies and of banking — such as W. A. Shaw's History of Currency , 1252-
1894 (1895) or W. G. Sumner’s classic, A History of American Currency (1874). Third,
the period produced repertoires of materials that are still of value — Adolf Soetbeer’s
(1814-92) Materialien zur Erlauterung und Beurteilung der wirtschaftlichen Edelmetall-
verhaltnisse (1885; English trans. from 2nd ed., 1887, the seventh part of which con-
tains his famous Table of Prices) is the outstanding performance of this genus. A fourth
type is exemplified by Sir R. H. Inglis Palgrave’s statistical work on central banks,
especially the Bank of England (most of it summed up in his Bank Rate and the
Money Market , 1903, which is a masterpiece of the art of making figures speak) : it is
very difficult to formulate particular results but he who peruses this book page by page’
suddenly discovers that he understands its subject. Fifth, we should note the infiltra-
tion of modern statistical methods into the field — the earliest example known to me
being J. P. Norton’s Statistical Studies in the New York Money Market (1902).

1 Four references will suffice: Professor Marget’s work ( Theory of Prices, 1938-42),
though not primarily written from the historical point of view, is yet by far the best
guide to the history of monetary analysis during that period; Professor Rist’s History
of Monetary and Credit Theory (English trans., 1940) must also be mentioned again;
Professor Howard Ellis’ German Monetary Theory, 1905-1933 (1934; together with
authorities there quoted or mentioned in the Bibliography) presents an exhaustive treat-
ment of the work within its field; V. F. Wagner’s Geschichte der Kredittheorien (1937)
usefully supplements Professor Rist’s work.

MONEY, CREDIT, AND CYCLES lo8l

Why is it, then, that the work of that period is sometimes referred to so
slightingly and that many of us construct an entirely unrealistic cleavage be-
tween it and our own? One answer is precisely that the evolutionary quality
of those new methods and results make them look like mere reformulations
of old stuff. But there is another answer, one that is highly interesting for the
student of the mechanisms of scientific 'progress.' That period failed to de-
velop and systematize its conquests in a form readily accessible to all econo-
mists, with all implications and applications nicely worked out and displayed
on a silver platter. These conquests therefore did not penetrate into the com-
mon run of literature, especially into the textbooks, so that derogatory criti-
cism, while it arouses just indignation in scholars like Professor Marget, is at
the same time in a position to justify itself by quotations from the common
run — even from such well-known, successful, and (in their way) meritorious
books as Karl Helfferich's Das Geld (1903), or J. L. Laughlin’s Principles of
Money (1903), or Horace White's popular Money and Banking (1st ed., 1895;
3th ed., 1914), or David Kinley's Money (1904), or Alfred de Foville's La Mon-
naie (1907). Even Adolf Wagner’s Sozialokonomische Theorie des Geldes
(1909), which takes a higher flight and contains several original points, is not in
much better case, and Karl Knies’s Geld und Credit (1873-9), important
though it is in other respects, added but little to the topics covered by its title.

In conscience, we must, however, mention at least a few more of those textbooks
that stand out from the rest for one reason or another: Jevons’ Money and the Mech-
anism of Exchange (1875), which ran into many editions — a charming book in which
rather trite elements are sometimes glorified by original sparks; J. Shield Nicholson’s
Treatise on Money and Essays on Monetary Problems (1888) — a work that has never
got its due; F. A. Walker’s famous textbook, Money (1878), perhaps the best means
to familiarize oneself with the current doctrine of those times at its best; Tullio Mar-
tello’s La Moneta (1883), the value of which is but slightly impaired by some liberal-
ist vagaries on free coinage; A. Messedaglia’s La Moneta . . . (1882-3), one of the best
performances of the scientific literature on money that preceded the Walras-Marshall-
Wicksell-Fisher achievements. In addition, the parts, books, or chapters on money of
the general treatises — such as Pierson’s, or Divisia’s, or Colson’s — ought to be men-
tioned. 2 But we must confine ourselves to the Third Book of G. Cassel’s Theoretische
Sozialokonomie (1918, 4th ed. rev. 1927; English trans., 1923, new ed., 1932). This
work deserves to be singled out because it presents, with a clearness that does not admit
of doubt, an instance of the view that the fundamental logic of the economic process
is entirely independent of the monetary phenomenon, the theory of which fundamen-
tally consists merely in the theory of the price level — by which relative, prices (exchange
ratios) are turned into absolute money prices on quantity-theory lines — and therefore
really and not only apparently stands outside the body of general economic theory. In
this respect, Cassel entirely missed the import of Walras' message, which in other re-
spects he followed so closely. But if we take his treatment as an outstanding instance
of what is indeed a completely antiquated view of the matter, we must add that he
represents this view extremely effectively and that his treatment therefore retains impor-
tance. Nor is this importance merely historical. We may well use Cassel whenever we
wish to find out what our own advance really amounts to.

2 On Pierson, Divisia, and Colson, see above, ch. 5.

io82

IV : FROM 1870 TO 1914 and LATER

A brief description of the nature and fate of the chief analytic performances
of the period will explain this paradoxical state of things.

(a) 'Walras. First, by far the greatest of those performances was that of
Walras. 3 In the same sense in which it is true to say that he created economic
statics, the modern theory of economic equilibrium, it is also true to say that
he created the modern theory of money. In fact, his theory of money and
credit is simply part of this general theory of economic equilibrium. He there-
fore substantially fulfilled the great desideratum which has been so much
stressed during the last twenty years, namely, the desideratum that the analysis
of money should be built into the system of general theory instead of being
developed independently and then plastered upon it. And, so far as monetary
statics is concerned , all propositions developed about money and monetary
processes are either contained in his system or may be derived from it by intro-
ducing additional assumptions. Thus, as has been shown by Lange, 4 the
Keynesian analysis of the General Theory (not of the Treatise of 1930) is but
a special case of the genuinely general theory of Walras. But, as we have seen,
Walras did not come into his own until the twenties. Such influence as he
exerted during the period under discussion was mainly through Wicksell and
Pantaleoni. And even these two did not fully appreciate the importance of his
work on money. His immediate successor, Pareto, was altogether blind to it
and slid back rather than advanced in this particular field. Two excellent fol-
lowers Walras did find. But they remained almost completely unknown,
Aupetit and Schlesinger. 5

So far as the period under survey is concerned, the Walrasian theory of
money simply did not exist for the overwhelming majority of economists. I
take, however, the opportunity to advert to the original work of Del Vecchio,
which, in part from Walrasian bases, started in the last years of that period. 6

Another body of original work on money, related to that of Walras, may
be conveniently mentioned here, namely, Irving Fisher's. Most of it came too
late to exert influence within the period. And when it did appear, professional
attention was too much concentrated on one book. The Purchasing Power of

3 It is only in the 4th ed. of the Elements d’economie politique pure (1900) that
we find Walras’ pure theory of money fully developed. His slow progress toward this
most important piece of monetary analysis covered the years 1876-99, the starting point
and the individual steps being reflected in the first three editions and in a number of
memoirs on applied problems which eventually went into the Etudes d’economie poli-
tique appliquee (see above, ch. 7, sec. 7e).

4 See O. Lange, ‘The Rate of Interest and the Optimum Propensity to Consume/
Economica, February 1938.

5 A. Aupetit, Essai sur la theorie generate de la monnaie (1901); Karl Schlesinger,
Theorie der Geld- und Kreditwirtschaft (1914). These two books, especially the latter,
are striking instances of the fact that in our field first-class performance is neither a
necessary nor a sufficient condition for success.

6 Gustavo Del Vecchio, Professor at the University of Bologna, began publishing his
important series of papers in 1909. They were summed up in his Grundlinien der Geld-
theorie (1930) and more completely in his Ricerche sopra la teoria generate della
moneta (1932).

MONEY, CREDIT, AND CYCLES 1083

Money (1911), the success of which obscured the fact that it presented only
one aspect — and not the most important one — of its author’s monetary theory
as this phrase is understood, now. Ever since the publication of this book
Fisher has been classed as a sponsor of a particularly rigid form of quantity
theory (see below, sec. 5) and all his other contributions to monetary analysis
of the economic process as a whole — monetary analysis in the sense in which
Keynes's General Theory is monetary analysis — have been neglected. This was
and is because he did not call them monetary or income analysis but chose
other titles, such as Theory of Interest or Booms and Depressions. In conse-
quence, his readers never got a full view of his work on money and in particu-
lar never noticed the Walrasian streak in it. 7

(b) Marshall. The second great performance of the last three decades of the
nineteenth century was Marshall’s. 8 Like Walras, though less explicitly, he saw
the monetary problem as part of the general analysis of the economic process
and as one of the doors to the theory of employment. More clearly than Wal-
ras, though less emphatically than Wicksell, he taught the importance of the
distinction between the ‘real’ and the ‘monetary’ rate of interest and of attend-
ing to the details of the mechanism by which changes in the amount of money
act on the economic system. And there were many hints that suggest future
developments though only a few of them will be mentioned in this chapter.
He held all the elements required for a decisive step forward though he did
not himself take this step. Unlike Walras he was indeed in a position of ef-
fective leadership. From 1885 on, the whole world’s population of economists
would have listened had he addressed it. But only glimpses of his views on

7 Practically all of Professor Fisher’s numerous books and papers are relevant for
the scholar who may some day attempt the task of co-ordination. I mention here only
the most important of those books that have not been mentioned above, ch. 5, sec. 7b..
Appreciation and Interest ( Publications of the American Economic Association, August
1896); The Purchasing Power of Money (with H. G. Brown, 1911; rev., 1913); The
Money Illusion (1928); Booms and Depressions (1932). But the Rate of Interest (1907),
fully developed into The Theory of Interest (1930), which has been mentioned al-
ready, is really still more important for monetary theory in the present-day sense. Fisher’s
work on index numbers will be mentioned later.

8 Marshall’s final presentation of his contributions, to be mentioned presently in the
text, was preceded by a number of communications, mainly to official committees of
inquiry, that were republished in his Official Papers and may be supplemented by a
number of passages in the Memorials. But the Principles also contain important ele-
ments of an imposing total. The reader finds a survey of most of the essential points
in Keynes’s biographical memoir (Essays in Biography, pp. 195-206), but must be
warned again that this memoir was written by a (then) fervent disciple. In some points
the large claims made by this disciple on behalf of the originality and priority of the
master must certainly be discounted. For the rest, Keynes’s statement that Marshall
developed the whole of his monetary theory during the seventies should be accepted
unreservedly — though without prejudice to the claims of Walras and Wicksell. Another
point is interesting to note: Marshall’s monetary analysis, like his economic analysis in
general, clearly started from J. S. Mill’s and must be understood as a development of
the latter’s teaching.

1084

monetary problems were vouchsafed to it until the publication, in his extreme
old age, of his Money, Credit , and Commerce (1923), when nothing in it
seemed novel any more. His Cambridge pupils and other followers of his did
listen. As a matter of historical justice, it should be emphasized that, in devel-
oping the English monetary theories of our own time, Hawtrey, Lavington,
Keynes, Pigou, and Robertson developed Marshallian teaching — though on
lines of their own.

It is unnecessary to comment upon works that are in every student’s hands. All that
is necessary to point out here are the links with Marshall. Professor R. G. Hawtrey
should perhaps not be called a pupil in the same sense in which this term applies to
the others. But most of the propositions that individuate his teaching — which, as the
reader knows, is mainly geared to the problems of business cycles — may be traced to
Marshall (and some to Wicksell). The best way of putting it is perhaps to say that
Hawtrey’s analysis is an original development, in a certain direction, of Marshall’s
analysis. Of his numerous works, it will suffice to mention here Good and Bad Trade
(1913), Currency and Credit (1st ed., 1919), The Art of Central Banking (1932), Cap-
ital and Employment (1937). Frederick Lavington’s works are not so well known as
they deserve to be: The English Capital Market (1921) and The Trade Cycle . . .
(1922). They are unconditionally Marshallian. So is Professor Pigou’s article, 'The Value
of Money,’ in the Quarterly Journal of Economics, November 1917, his chief contribu-
tion to monetary theory per se. Other contributions are to be found in his Industrial
Fluctuations (1927). Of all the rest, I will mention only his monetary analysis of the
economic process, Employment and Equilibrium (1941). The theoretical skeleton of
Lord Keynes’s first book, Indian Currency and Finance (1913), was also Marshallian,
and in his Tract on Monetary Reform (1923) he wrote that his 'exposition [of mone-
tary theory] follows the general lines of Prof. Pigou and Dr. Marshall’ (p. 85m),
though notes of his own are sounded at critical points. His most ambitious book,
A Treatise on Money (1930), may be described as a development of (though also away
from) Marshallian and Wicksellian lines — the Wicksellian elements were rediscovered,
however, not taken from Wicksell. It was only in The General Theory of Employ-
ment, Interest, and Money (1936) that allegiance to Marshall was formally renounced.
This makes it all the more important to note that it was not so much theoretical dif-
ferences which produced this posthumous break with Marshall as the difference in
social vision — in the diagnoses Marshall and Keynes formed about the economic situa-
tion of their times. As far as points of theory and not factual assumptions or practical
recommendations are concerned, there was one important difference only — rabout the
mechanism of saving and investment — but even this one could have been reduced to a
matter of shift of emphasis, had it not been essential for Keynes to divorce himself from
what he styled the 'classic theory.’ Professor D. H. Robertson’s strikingly original Bank-
ing Policy and the Price Level (1926) went really further beyond Marshall than any
of the works mentioned in this paragraph. If it stood alone, it would not be appro-
priate to pigeonhole Robertson with the Marshallians. Nor can he be so pigeonholed on
the strength of his theory of business cycles. But the rest of his publications on money
(including his well-known elementary textbook), the most important of which have
been republished in his Essays in Monetary Theory (1940) may be said to have grown
from Marshallian roots.

But this success of Marshall's teaching on money was to come later, so late
that he lost part of the credit for it. Up to 1914, monetary theory outside of
Cambridge was practically untouched by Marshallian influence.

IV : FROM 1870 TO 1914 AND LATER

MONEY, CREDIT, AND CYCLES

1085

(c) Wicksell. The third great performance to be mentioned is that of Wick-
sell . 9 Posthumously he acquired even greater international reputation as a
monetary theorist than either Marshall or Walras. This better fortune is due
to the facts that his Swedish disciples never ceased to call themselves Wicksel-
lians, even when they criticized and surpassed him, and that his message be-
came accessible in German at a relatively early date and in a form that was
not so forbidding as was that of Walras. But it took him decades to reach the
Anglo-American sphere.

Again it is hardly necessary to mention such well-known names as Myrdal, Ohlin,
Lindahl, Lundberg. Gunnar Myrdal’s Monetary Equilibrium (Swedish, 1931; German,
1933; English, 1939), Bertil Ohlin’s Swedish essay on the theory of expansion, ‘Penning-
politik, offentliga arbeten, subventioner och tullar som medel mot arbetsloshet’ pub-
lished in a report on Monetary Policy to the Swedish Unemployment Commission,
1934), and Erik Lindahl’s English summary of his contributions ( Studies in the Theory
of Money and Capital, 1939). Erik Lundberg’s Studies in the Theory of Economic
Expansion (1937) will represent the post-Wicksellian development. It is an interesting
fact to note in a history of economic analysis that, until about ten years ago, this de-
velopment paralleled and in some important points anticipated, the English (Keynesian)
one without becoming known to English economists. Some mild protests naturally re-
sulted from this state of things and also some discussions about the differences between,
and the relative merits of, the two bodies of thought. See Ohlin’s 'Some Notes on the
Stockholm Theory of Savings and Investment,’ Economic Journal, March and June
1937, and the subsequent discussions in the same Journal (see below, Part v, ch. 5).
Professor D. Davidson, the contemporary and helpful critic of Wicksell, should not
go unmentioned. The reader finds all he ought to know about .Davidson’s monetary
doctrines in the excellent article, 'The Monetary Doctrines of Professor Davidson,’ by
Mr. Brinley Thomas ( Economic Journal, March 1935). In the latter’s Monetary Policy
and Crises (1936) there is a brief but useful sketch of Swedish monetary theory since
Wicksell.

(d) The Austrians. In the fourth place, there were the contributions of the
Austrian group. They all started from Menger , 10 who did not, however', strike
out on a line for himself: his theory, though a masterly performance so far as

9 Wicksell’s chief contributions are in his Geldzins und Giiterpreise (1898). R. F.
Kahn’s trans., Interest and Prices, with an introduction on the evolution of Wicksell’s
thought by Professor Ohlin, appeared in 1936, but some of the essential ideas, espe-
cially the famous Wicksellian ‘cumulative process’ were presented to the English pub-
lic in the article on 'The Influence of the Rate of Interest on Prices,’ Economic
Journal, June 1907, and in vol. n of his Lectures on Political Economy (Swedish orig-
inal, 1906; English trans., 1934). Very important, because emphasizing certain points
that do not stand out so strongly in those two books is also his (Swedish) article on the
obscure point in the theory of money, 'Den dunkla punkten i penningteorien,’
E konomisk Tidskrift, December 1903. As in the case of Marshall, it should be ob-
served that Wicksell started from Mill and that his monetary theory developed from a
criticism of the latter and the English authors behind him, Tooke in particular.

10 See Collected Works (4 vols., London School Reprints, 1933-6). Menger’s chief
pieces on money were the chapter on the theory of money in his Grundsdtze and the
article ‘Geld’ in the 3rd ed. of the Handworterbuch (1909).

io86

►

iv: FROM 1870 TO 1914 and LATER

it went, was simply a descendant from Davanzati’s. It was Wieser who at-
tempted a new departure. 11 In trying to do justice to it we meet with the same
difficulty that confronted us when we were trying to define his place in the
history of general theory. Wieser’s spacious vision of the monetary phenome-
non is not adequately rendered by calling him a sponsor of the 'income-
approach’ 12 or a sponsor of the consumption standard. It comprised much
more than that, in particular the conception of a monetary theory of the eco-
nomic process as a whole. But he was so deficient in technique and so little
able to coin his metal that nothing of this came out as it should have. And so
his influence touched only a few individuals. The author of the group’s stand-
ard work on money, von Mises, 13 who was also its foremost teacher in the field
— in fact the founder of a school of his own — was no doubt one of them. But
he was only partly in sympathy with Wieser’s views.

3. Fundamentals

(a) Nature and Functions of Money. Discussions on the nature and func-
tions of money and hence on the question of definition were carried on
throughout the period. But, with the exception to be noticed under (b), they
did not excite much interest and, without any exception, they did not pro-
duce very interesting results. I believe that a majority of writers accepted, or
would have been willing to accept, Roscher’s definition. 1 Menger and his fol-
lowers did so with particular emphasis — without any intention to commit them-
selves thereby to all its implications. Others, Americans especially, accepted
Walker’s neat phrase — 'Money is that Money does’ — in an equally non-com-

11 Wieser’s ideas on money, like those of Walras, developed when his original work
on general theory had been done. His first publication in the field was his inaugural
lecture delivered on his appointment to Menger ’s chair in Vienna ('Der Geldwert und
seine geschichtlichen Veranderungen/ Z eitschrift fur V olkswirtschaft, Sozialpolitik
und Verwaltung, 1904). An improved version was presented in an address to the Verein
fur Sozialpolitik at its Vienna meeting in 1909 and published in the Verein's Schriften,
vol. 132, and another in the article 'Geld’ (Allgemeine Theorie des Geldes) in the 4th
ed. of the Handworterbuch, 1927.

12 On Wieser as a sponsor of the income approach, see below sec. 6b.

13 Ludwig von Mises, Theorie des Geldes und der Umlaufsmittel (1st ed., 1912,
2nd ed., 1924, English trans. under the title, Theory of Money and Credit, 1934).

1 ‘The false definitions of money divide up into two main groups: those that con-
sider it to be something more, and those that consider it to be something less, than
the most salable commodity’ (Roscher, Grundlagen, Book n, ch. 3, § u6 [trans. by
J. A. S.]). As an example of the contrary opinion, I quote Richard (son of the more
important Bruno) Hildebrand, Theorie des Geldes (1883), where we learn that money,
far from being a commodity is 'the very opposite of a commodity.’ In Interest and
Prices Wicksell quoted both these authors. And his comments upon the issue illus-
trate well how little such general pronouncements really mean to the serious worker.
But the contradictions between them help to discredit economics in the eyes of all
those laymen and historians who take them too literally and believe that everything
else follows from them.

MONEY, CREDIT, AND CYCLES 1087

mittal spirit. Most writers distinguished between money or primary money
(meaning coin and government fiat, often but not always, also banknotes or
at least notes of central banks) and 'credit’ or fiduciary money (meaning means
of payment arising out of credit transactions), a distinction to which some at-
tached great importance 2 and which, in certain cases to be noticed, was in
fact indicative of something more significant than terminological preference.
We have seen above that the leading authorities on money were not addicted
to any uncritical gold standard fetichism. Where they did stand for the gold
standard, as in Italy, there were good and sufficient practical reasons for their
doing so. But practically all must be classed as theoretical metallists in our
sense of the term. 3 It seems worth our while to advert to the following points.

First, the practice continued to prevail of developing the theory of money
from its old four functions: medium of exchange, measure of value, store of
value, standard of deferred payments — many authors insisting both on the sep-
arability of these functions and on the practical reasons why we actually find
them combined. Walras, anticipated of course by all those authors who — like
A. Smith and Mailthus — had used labor as a standard of value, introduced the
useful fashion of keeping distinct the numeraire — a commodity whose unit is
used in order to express prices and values but whose own value remains un-
affected by this role — and monnaie — the commodity that actually serves as
means of exchange and whose value is consequently affected because its mone-
tary role absorbs part of its supply.

Second, many writers went out of their way to emphasize the store-of-value
function of money. This is important because it raises the question how far the
economists of that period were aware of the phenomenon that is called Liquid-
ity Preference in the Keynesian economics of our own day. Marshall spoke of
a law of hoarding according to which people’s demand for gold hoards in-
creases as its value rises (see Official Papers, p. 6). Occasionally he seems to
have given thought to the fact that people sometimes fail to spend though
they have the power to do so. 4 Von Mises noticed in passing that money is
sometimes held as an asset ( Vermogensanlage ). Going further, Kemmerer
averred (Money and Credit Instruments, p. 20) that 'large sums of money are
continually being hoarded’ and that 'the proportion of the circulating, medium
which is hoarded from time to time . . . varies with all the influences which
affect . . . business confidence.’ Moreover, Marshall and others, especially
Fisher, were aware of the role that hoarding, in the sense of unwillingness to

2 See, e.g., Laughlin, op. cit. or Mises, op. cit. In our own time no less an author-
ity than Professor Rist (op. cit.) may be. cited in support of the opinion that neglect
of that distinction has been the source of many errors, theoretical and practical. But
the errors can be avoided even if we include 'credit' with money, and committed if we
do not.

3 Pareto, evidently disgusted by Italian currency troubles, went even so far as to
call paper money 'false money’ (moneta falsa). Other Italians also, such as Pantaleoni,
considered it as a pathological case. Equally strong metallism, though differently mo-
tivated, we can find only in Marx.

4 So already in Economics of Industry, see J. M. Keynes, General Theory, p. 19m

spend, plays in the mechanism of depressions. But only outsiders, such as Hob-
son, attached 'critical importance’ to it as a cause of disturbance in general
and of unemployment in particular. 5 Since it is this feature that constitutes
the theory of Liquidity Preference, we must, I think, credit — or debit — the
introduction of the theory to Lord Keynes (see, however, below, sec. 6).

Third, the theory of money of that period was not monetary analysis either
in the sense of Becher and Quesnay 6 or in the modern sense; that is to say,
it was not the general theory of a monetary economy. We have indeed seen
that Walras’ theory of money is fully- integrated with his general theory of
value and distribution. We have noticed and shall notice again other advances
in that direction, in particular the one associated with Wicksell’s name. On
the whole, however, monetary theory remained in one separate compartment
and the 'theory of value and distribution’ in another. Prices (including rates
of income) remained primarily exchange ratios, which money reduces to abso-
lute figures without affecting them in anything except for clothing them with
a monetary garb. Or, in other words, the model of the economic process was
in all essentials a barter model, the working of which inflations and deflations
might disturb but which is logically complete and autonomous. Practically all
the most valuable work of the period — so far as it was not concerned with
specifically monetary problems — was Real Analysis, even where it expressed its
concepts in terms of money. 7

This situation found expression in the creation of an interesting concept
that emerged and vanished with it. If, on the one hand, the facts of value
and distribution are logically so independent of money that they can be set
forth with only a passing reference to it, but if, on the other hand, it is recog-
nized that money may act as a disturber, then the problem arises of defining
how money would have to behave in order to leave the real processes of the
barter model uninfluenced. Wicksell was the first to see the problem clearly
and to coin the appropriate concept. Neutral Money. In itself, this concept
expresses nothing but the established belief in the possibility of pure 'real’
analysis. But it also suggests recognition of the fact that money need not be
neutral. So its creation induced a hunt for the conditions in which money is
neutral. And this point eventually led to the discovery that no such conditions
can be formulated, that is, that there is no such thing as neutral money or
money that is a mere veil spread over the phenomena that really matter — an

5 J. A. Hobson, Physiology of Industry, p. 102, approvingly quoted by Keynes; see
preceding footnote.

6 On Becher and Quesnay in this connection, see above, Part n, ch. 6.

7 This statement may cause some difficulties for the beginner which an example
will remove. Bohm-Bawerk’s Fund of Subsistence is a real concept denoting all sorts
of consumable goods. Nevertheless, he speaks of it in terms of money. But this does
not mean either that he adopts a monetary concept of capital or that he attributes
to money any influence on the process he describes. His money — like Ricardo’s so far
as the general theory of the Principles is concerned — is nothing but a homogeneous
expression for a medley of quantities of physical goods.

MONEY, CREDIT, AND CYCLES 1089

interesting case of a concept's rendering valuable service by proving un-
workable. 8

Fourth, so long and so far as the theory of money actually did dwell in a
separate compartment, its central — and practically only — problem was the ex-
change value or purchasing power of money. In the analytic work of the period
this stands out much' more clearly than it did before. Hence the popularity of
the book title, Money and Prices, which persisted into postwar times. 9 No
doubt influenced by the progress of the index-number method, most authors,
especially in the United States, did not hesitate to define the value of pur-
chasing power of money as the reciprocal of the price level. The Austrians dis-
trusted index numbers, 10 and felt more theoretical qualms concerning the na-
ture of the value of money.

A brief comment on these qualms seems justified. From the first, the Aus-
trians entertained a wish, not unnatural from their standpoint, to apply their
marginal utility theory to the case of money — which both the enemies of this
theory and some of its foremost sponsors, Wicksell for instance, declared to
be impossible. Now it was easy to apply the marginal utility theory to the
significance that individuals attach to their monetary income. Daniel Bernoulli
(see above, Part n, ch. 6, sec. 3b) had already done this. But this significance
for the individual of a unit of his money income — its subjective exchange value
as Menger called it- — does not help us at all when we wish to explain the pur-
chasing power or exchange value of money — Menger’ s objective exchange value
of money. For the latter must be known to the individual — the individual must
know what his money will buy — before he can put any subjective value upon
his money. On the face of it, it is therefore impossible to do in the case of

8 See J. G. Koopmans, 'Zum Problem des "neutralen” Geldes’ in Beitrdge zur Geld-
theorie (1933). The problem in question must, of course, not be confused with such
problems as stability of price level or stability of employment and the like. As soon
as we hold that a monetary system or policy insures such stability, we admit precisely
that it exerts an influence and hence that it is not neutral. The outstanding example,
next to Wicksell’s, of an economist's development from belief in the barter model
and the possibility of a neutral money toward the belief that nothing can be averred
about economic processes without specific reference to some given behavior of money,
is afforded by the series of Professor Pigou's works. The turning point is to be found,
I think, in his Theory of Unemployment (1933).

9 A few examples in addition to others mentioned elsewhere: Antonio De Viti de
Marco, Moneta e prezzi (1885); L. L. Price, Money and its Relations to Prices (1896);
Richmond Mayo-Smith, 'Money and Prices,’ Political Science Quarterly (June 1900);
E. W. Kemmerer, Money and Credit Instruments in Their Relation to General Prices
(1907) — a brilliant performance that had the misfortune of being overshadowed by
the greater one of Fisher; J. L. Laughlin, Money and Prices (1919) and A New Exposi-
tion of Money, Credit, and Prices (1931); Albert Aftalion, Monnaie, prix et change
(1927).

10 They were, of course, not the only ones to do so. An American instance is Laugh-
lin. Generally speaking, index numbers imposed themselves upon the profession as a
whole by a slow process of infiltration which wore out opposition rather than con-
vinced it (see below, sec. 4).

1090 iv: FROM 1870 TO 1914 AND LATER

money what can be done in every other case, namely, to deduce its exchange
value from curves or schedules of marginal utility: to attempt to do so seems
to spell circular reasoning. We cannot stay to discuss the efforts of Wieser and
especially of Mises to overcome this difficulty or the objections raised against
their solution by Anderson. 11 But it should be pointed out that, quite inde-
pendently of this question, the Austrian way of emphasizing the behavior or
decision of individuals and of defining exchange value of money with respect
to individual commodities rather than with respect to a price level of one
hind or another has its merits, particularly in the analysis of an inflationary
process: it tends to replace a simple but inadequate picture by one which is
less clear-cut but more realistic and richer in results.

Most economists agreed — or would have agreed if asked — that marginal util-
ity analysis does not apply to the case of the exchange value of money. But
the question whether the supply and demand apparatus applies to it was an-
swered affirmatively by most. This was the natural position to take for those
who were prepared to treat money like any other commodity, as were the Aus-
trians and E. Cannan. But it is curious that many of those who, by adopting a
special formula for money such as the equation of exchange or the cash-balance
formula (see below, secs. 5 and 6), testified to their belief that money cannot
be so treated, should also have taken that position. In fact, both friends and
foes of the ‘quantity theory’ agreed in describing it as an application of the
demand and supply apparatus to the case of money. 12

[(b) Knapp’s State Theory of Money.] In Germany what may be described
as a tempest in a teapot was raised by Knapp’s State Theory of Money. 1 * This
book presented a theory of money that turns upon the adage: Money is the
Creature of Law. Had Knapp merely asserted that the state may declare an
object or warrant or ticket or token (bearing a sign) to be lawful money and
that a proclamation to this effect or even a proclamation to the effect that a
certain pay-token or ticket will be accepted in discharge of taxes must go a
long way toward imparting some value to that pay-token or ticket, he would
have asserted a truth but a platitudinous one. Had he asserted that such ac-
tion of the state will determine the value of that pay-token or ticket, he would
have asserted an interesting but false proposition. But he did neither. He ex-
plicitly denied that he was interested in the value of money. His theory was
simply a theory of the ‘nature’ of money considered as the legally valid means
of payment. Taken in this sense it was as true and as false as it is to say, for
example, that the institution of marriage is a creature of law.

11 See von Mises, Theorie des Geldes (2nd ed., p. 100); B. M. Anderson, The Value
of Money (1917).

12 This idea was actually carried out by Professor Pigou in his paper on the ‘The Ex-
change Value of Legal-Tender Money' (see Essays in Applied Economics, 1923).

13 This is the title of the English (abridged) translation (1924) by H. M. Lucas and
J. Bonar of G. F. Knapp’s Die Staatliche Theorie des Geldes (1905). I shall not go
into the copious Knapp literature, about which the reader finds more than enough in
Professor Ellis’ German Monetary Theory, 1905-1933 (see above, sec. 2). There he
also finds a more generous appraisal of Knapp’s performance than I feel able to present.

MONEY, CREDIT, AND CYCLES

IO9I

If this be so, however, how are we to account for the success of the book
which, though substantially confined to Germany, was spectacular? An attempt
to answer this question might make an interesting study in the social psychol-
ogy of economic analysis. First, Knapp’s exposition was extremely effective.
His forceful dogmatism and his original conceptualization of his theory 4 * * * * * * * * * 14 im-
pressed laymen and those economists who were laymen in economic theory.
Second, many people and especially politicians at that time welcomed a theory
that seemed to offer a basis for the growing popularity of state-managed money
— during the First World War it was in fact widely used to ‘prove’ that the
inflation of the currency had nothing to do with soaring prices. Third, in al-
most complete ignorance of both the literature and the logic of the subject,
Knapp believed that his theory offered not only an alternative to theoretical
metallism — his pet aversion — but the only possible one and that it alone was
capable of explaining why such a thing as paper money can exist at all. And
this absurd claim was widely accepted , although Knapp entirely failed to work
out a non-metallist theory of the value of money . 15 Fourth, leaders such as
Wieser and Hawtrey, who were themselves advancing toward such a theory,
felt some sympathy for the work that bore a superficial resemblance to their
own. He who is interested in the question ‘what it is that succeeds and how
and why’ and who believes that the answer to this question is more revealing
than anything else can be of the conditions prevailing in a field of human
endeavor will do well to ponder this.

4. The Value of Money: Index Number Approach

the most significant facts in the entire history of economics and one of the
most significant strides toward an economic theory that is to be not only
quantitative but also numerical. Index numbers of production followed with
a considerable lag upon those of prices but the foundations for their, postwar
developments were also laid. And there was a beginning in the construction of
wage and employment indices. But precisely because the subject expanded to

vast dimensions, no attempt can be made here to survey its growth. I shall
merely mention the outstanding efforts at systematization of what was becom-

ing a semi-independent specialty or science, and then offer a few comments

14 He was a master in the art of coining new concepts and naming them felicitously.

It should be observed that the Greek words borrowed for the purpose served very well:

the German economists of that time were not as a rule good theorists, but most of

them had had a classical education and knew Greek.

15 To some extent this was done by one of his critics who deserves to be mentioned:

Friedrich Bendixen, Wesen des Geldes (4th ed., 1926) and numerous other publi-

cations.

1092 IV: FROM 1870 TO 1914 AND LATER

that may help the reader to link up the subject with the rest of economic
analysis and to see its more general bearings. 1

[(a) Early Work.] Index numbers having attracted the attention of the Brit-
ish Association for the Advancement of Science, Edgeworth, acting as secre-
tary of the committee that was appointed for the study of the subject, wrote
his- two famous reports (1887 and 1889), 2 remarkable not so much on account
of the recommendations proffered as regards practical methods of index mak-
ing as on account of the comprehensive analysis of meanings and purposes —
labor standard, consumption standard, question of all-purpose index, and so
on. In 1901, C. M. Walsh published his Measurement of General Exchange
Value, which also based discussion of statistical technique upon a compre-
hensive economic theory of index numbers elaborated in his important book.
The Fundamental Problem in Monetary Science (1903). Next must be men-
tioned Professor W. C. Mitchell’s monograph on wholesale price index num-
bers, Index Numbers of Wholesale Prices in the United States and Foreign
Countries (Bulletin 173 of U.S. Bureau of Labor Statistics, 1915, to be used in
its revised edition. Bulletin 284, 1921). But the American century in index
numbers was to be ushered in by Professor Irving Fisher’s monumental work
on The Making of Index Numbers (1922), 3 the fountainhead of almost all
the best later work. But all that can be noticed here of the wealth of its results
is this: Fisher analyzed, classified, and ‘rectified’ existing and possible index
number methods by means of certain previously established ‘tests’; that is to
say, he formulated certain conditions which index numbers ought to satisfy;
and ever since most of the theory of index numbers has really been the theory
of these tests. This is much more important than is the search for an ‘ideal
index number’ per se, though of course the tests were devised in order to
rationalize this search.

[(b) The Role of the Economic Theorists .] The point about index numbers
that is most relevant to a history of economic analysis is the dominant role
played by economic theorists in their development. On the face of it, index

1 The reader will find what he needs in the way of background in C. M. Walsh’s
article on 'Index Numbers’ in the Encyclopaedia of the Social Sciences. On produc-
tion indices, see A. F. Bums, ‘The Measurement of the Physical Volume of Produc-
tion,’ Quarterly Journal of Economics, February 1930. The best reference on wage and
employment indices is to the outstanding work of A. L. Bowley, especially Statistics
of Wages in the United Kingdom during the Last Hundred Years, fourteen articles
in the Journal of the Royal Statistical Society, 1898-1906 (partly with G. H. Wood,
whose work on ‘Real Wages and the Standard of Comfort since 1850,’ ibid. March
1909, complements this investigation) and ‘Measurement of Employment,’ ibid. July
1912.

2 They are most easily accessible in his Papers Relating to Political Economy (vol. 1,
sec. m), where they have been reprinted under the title ‘Measurement of Change in
Value of Money.’

3 The links with monetary theory are more in evidence in the parts of the Purchas-
ing Power of Money (1911) that are devoted to index numbers. These parts should be
perused together with the book mentioned above.

MONEY, CREDIT, AND CYCLES

i°93

numbers pertain to the province of the statistical technician and their theory
should accordingly be part of the theory of statistics, just as is, for example,
the theory of sampling. A great part of the work on index numbers was in
fact done by statisticians or by economists who cared little for 'economic
theory.’ For instance, the formula that of all displayed the most indestructible
vitality is due to a man who cannot without qualification be called an econo-
mist at all, Laspeyres. 4 But almost all the decisive impulses and ideas came
from economic theorists as they had in the eighteenth century and in the first
half of the nineteenth. In order to establish this point it is enough to mention
the names Jevons, Edgeworth, and Fisher, to which should be added that of
A. A. Young. 5 But these were not isolated cases. An ever-increasing number of
economists whom everyone would class primarily as theorists took an interest
either in developing the method or in elucidating, critically and constructively,
the meaning and purposes of index numbers. Marshall suggested the chain
system. 6 Lexis, Walras, Wicksell, Wieser, Pigou, to mention but a few leaders,
contributed substantially to the theoretical foundations. 7 Their work was con-
tinued, on an enlarged scale, during the twenties and thirties. Unfortunately,
we shall not be able to notice in any detail the developments since 1920. But
three performances of this period will, nevertheless, be mentioned in what
follows — those of Divisia, Haberler, and Keynes.

Before going on let me restate the reason why I thought it necessary to in-
sist on the share of economic theorists in developing the index number

4 E. Laspeyres published the formula

(prices weighted by quantities in the base

year), which secured him immortality — a student can no more go through any com-
plete training in economics without hearing of Laspeyres than he can without hearing
of A. Smith — in the Jahrbiicher fur Nationalokonomie und Statistik , 1864; also 1871.

5 Jevons’ two papers that gave indeed a decisive impulse but do not justify Fisher’s
statement that he ‘may perhaps be considered the father of index numbers’ or the
concurring statement of Keynes, are: ‘A Serious Fall in the Value of Gold . . .’ (1863)
and ‘The Variation of Prices and the Value of the Currency since 1782’ (1865), both
included in Investigations in Currency and Finance. Splendid work of seminal impor-
tance but, for a theorist, surprisingly unmindful of the theoretical questions involved.
Edgeworth’s work, which partly remedied this shortcoming, and Fisher’s have already
been mentioned. Allyn A. Young’s work in the field is in less danger than is the rest
of his work of being entirely forgotten because some of it is embodied in his contribu-
tion to H. L. Rietz’s well-known Handbook of Mathematical Statistics (1924).

6 In the article on ‘Remedies for Fluctuations of General Prices,’ Contemporary
Review, 1887.

7 W. Lexis was, of course, not primarily an economic theorist. But his paper ‘Uber
gewisse Wertgesamtheiten . . .’ in Zeitschrift fur die gesamte Staatswissenschaft (1886)
was a piece of theoretical reasoning of great importance, though it attracted little no-
tice. Walras’ contribution (1874, 1885) has been included in his Etudes d’economie
politique appliquee (ed. definitive, 1936, pp. 20 et seq.); Wicksell’s is in Interest and
Prices, ch. 2; Wieser’s — ‘Ober die Messung der Veranderungen des Geldwerts’ — in
Schriften des Vereins fiir Sozialpolitik (vol. 132, 1910); Pigou’s in Economics of Wel-
fare (1920; and earlier in Wealth and Welfare, 1912).

1094 IV: FROM 1870 TO 1914 AND LATER

method. Some statisticians and some economists of anti-theoretic bent seem to
think that this piece of ‘realistic’ analysis is something to set against the flimsy
structures of theory, something that has been created, in the true scientific
spirit, for the purpose of replacing mere speculation. It seemed important to
correct this opinion. The subject of index numbers affords a good example of
the manner in which theoretical? research and statistical research are really re-
lated and in particular how statistical methods may ,grow out of the theorist’s
work. •• •<

[(c) Haberler, Divisia, and Keynes.] With the exception of Wieser, most of
the leading Austrians took a critical, not to say hostile, attitude toward the idea
of ‘measuring’ variations in the purchasing power of money (reciprocal of price
level) by index numbers. They were inclined to refuse citizenship to the con-
cept of price level and, in any case, to deny its measurability on principle . 8
In view of the fact that so many economists placed and place an uncritical
trust in index figures without troubling themselves about their meaning , 9 this
attitude provided a much needed antidote. And not only that. The criticism,
at first merely negative, eventually turned constructive in Professor von Haber-
ler’s book on the meaning of index numbers . 10

The core of his analysis is an interpretation of price index numbers that
turns upon the following proposition: for a given individual of unchanging
tastes , the price level has fallen (risen) between the points of time t Q and i x if,
his money income remaining the same, the individual is able to buy at t x a
collection of goods which he prefers to the collection he was able to buy at
t 0 (is unable to buy at t x a collection of goods which he prefers to the collec-
tion he bought at t 0 ). This interpretation connects index numbers with welfare
economics. But its chief importance is in the fact that it bases them upon the
theory of choice and thus makes them come to anchor in the very center of
modern value theory . 11

Whereas Haberler abandoned the idea of an ‘objective’ price level and re-
placed it by what may be termed a subjective one, Divisia produced the theory
of the objective price level or monetary parameter, or monetary index ( indice
monetaire), an achievement of first-rate importance. An attempt at a simple
explanation of the essential idea is made in the footnote below . 12

8 This attitude found its strongest expression in Professor von Mises’ Theory of
Money and Credit.

9 This applies to any index figures, including those of physical output. In the last
ten years or so a reaction has set in of which the most important symptom is that
Lord Keynes, who in the Treatise on Money (1930) evidently attached much impor-
tance to price indices as tools of theoretical analysis, entirely avoided their use in his
General Theory (1936).

10 G. von Haberler, Der Sinn der Indexzahlen (1927).

11 Pareto’s suggestion in a similar direction (Corns, vol. r, pp. 264 et seq.) and a
number of related ones (of which one is contained in Edgeworth’s reports mentioned
above) were much less convincing. We cannot stay, however.

12 If expenditure upon all goods and services, E, changes by a (positive or negative)
increment AE, then it is evidently possible, in a purely formal way that does not imply

It stands to reason that the idea of an over-all price level, even if admissible,
is for many purposes much le§s useful than is the idea of sectional price levels,
for example, of a price level of consumers' goods (Consumption Standard) and
services as distinguished from a price level of producers' (or else investment)
goods, or of a price level of finished products as distinguished from a price
level of productive services and so on. The over-all price level in particular
hides the relative movements as against each other of these sectional levels, and
these relative movements are of pivotal importance for certain cycle theories,
especially for that of Professor von Hayek. They are also of pivotal importance
for the 'monetary dynamics' of Keynes's Treatise, Book n of which, entirely
devoted to this subject, is the chief reference for this type of analysis. [This
section was left unfinished.]

5. The Value of Money: the Equation of Exchange and the 'Quantity

Approach’

We have seen that, so far as the large majority of writers on money are con-
cerned, there is some truth in the statement that monetary analysis of that
period dwelt, as it were, in a separate compartment. It is also true — though we
have noticed exceptions such as Walras and the Austrians — that the furniture
of this separate compartment was designed for the special purpose of explain-
ing the value or purchasing power of money and not intended for any other
use. Now, whenever we propose to explain the behavior of a single variable
of the economic system, it is evidently convenient to bundle up all the others

anything about causation, to divide up AE into three parts: one that is 'due’ to the
changes in prices , that have occurred — this part is equal to the quantities previously
bought each multiplied by the changes in the respective prices or, symbolically, to 2qAp,
another part is 'due' to the changes in the quantities bought and is equal to the
prices previously obtaining each multiplied by the changes in the respective quantities
or, symbolically, to 2 pAq; and the third part is ‘due’ to the fact that the increments of
the quantities have also been bought at the changed prices and is therefore equal to
those increments of the quantities each multiplied by the increments in the respective
prices or, symbolically, to 2 AqAp. Now, if the changes in prices and quantities (the
Aq’s and Ap’s) are small fractions of the quantities and prices themselves (the q’s and
p’s ) — which can be the case only if we consider a very short period of time — then their
product will be still smaller, so small that we may neglect it for practical purposes. But
then we are left with two terms only, the one expressing that ‘effect’ upon expenditure
that we should observe if prices had remained unchanged and therefore free from the ‘ef-
fects’ of any changes in prices; the other expressing that ‘effect’ upon expenditure that we
should observe if quantities had remained unchanged and therefore free from the ‘effects’
of any changes in quantities. And the latter figure ( 2 q A p), expressed as a percentage
of the original expenditure (E = pq), then serves to define the change that has oc-
curred in the price level or monetary index — which thereby acquires an unambiguous
and analytically important meaning. This theory, which had been partly anticipated
by Lexis (op. cit.), was published by Professor Frangois Divisia in several numbers of
the Revue d’economie politique , 1925-6, under the title ‘L’Indice mon^taire et la
theorie de la monnaie,’ and again in his Economique rationelle (1928), ch. xiv.

1096 IV: FROM 1870 TO 1914 AND LATER

into a few big aggregates and to consider these as the ‘causes' that determine
the one to be explained. The so-called Equation of Exchange is certainly the
simplest possible system of such aggregates that contain, the value of money
or the price level at all. And if the latter be the thing to be explained, the
others drop naturally (though illogically) into the role of its ‘causes' — and the
Equation of Exchange, in itself nothing but the statement of a formal relation
without any causal connotation, then turns or may turn into the Quantity
Theory. This is why during that period both the equation, of exchange and the
quantity theory enjoyed another lease on life and why so "much of the discus-
sion on the theory of money took the form of arguments for and against the
quantity theory. We must therefore try to find out what the quantity theory
of these writers really amounted to. To accomplish this in the way most useful
to the reader, we shall concentrate on the outstanding achievement in this
line. Professor Fisher’s theory of the purchasing power of money. 1

In itself there is nothing new about what has come to be called the Fisher
or Newcomb-Fisher equation. It simply links the price level (P) with (1) the
quantity of money in circulation (M); (2) its ‘efficiency’ or velocity (V); and
(3) the (physical) volume of trade (T). Let us express this by writing P =
/(M, V, T). To this functional relation the Fisher equation imparts the par-

ticular form: P = f(M, V, T) = or MV = PT. Again, this equation is not

an identity but an equilibrium condition. For Fisher did not say that MV is
the same thing as PT or that MV is equal to PT by definition: given values
of M, V, T tend to bring about a determined value of P, but they do not
simply spell a certain P. But the really interesting monetary analysis begins be-
hind the fagade of the equation. Two sets of questions arise.

[(a) The Definition of the Concepts .] First, what are the precise meanings
of P, M, V, T? Whatever may be urged against the quantity theory approach,
one virtue it certainly has: the obvious vicinity of its concepts to statistical ma-
terial forces theorists to do what without this compulsion they often fail to
do, namely, to define their concepts accurately and operationally. We cannot
discuss or even list, but can only point to, all the problems that lurk behind
the question which prices should, for the general purposes of the equation of
exchange, be included in P, and consequently which transactions in'T. 2 Fisher

1 In doing so, we take quantity theory analysis at its highest. On the whole, the
cost we incur thereby in terms of information about numerous other formulations is
not great. But it must be stated that, though overshadowed by Fisher’s performance,
Kemmerer’s (Money and Credit Instruments in Their Relation to General Prices, 1907)
would serve our purpose nearly as well. Fisher gave generous credit to Simon New-
comb's treatment of Societary Circulation ( Principles , 1885; see above, ch. 5, sec. 7a)
which is in fact an important contribution. But we cannot go into the merits peculiar
to it.

2 An idea of these problems may be derived by perusal of the Appendices to Fisher’s
Purchasing Power of Money (1911). The notion of giving up altogether the concept of
a general price level of everything that is bought and sold for money (an idea that was
to be carried in the twenties to its extreme by Carl Snyder’s general price-level concept;

MONEY, CREDIT, AND CYCLES 10 97

himself, although in his introductory considerations he defined T as the
amount of ‘goods' bought by money, adopted a wider concept — that included
securities' — in his statistical work. But attention must be called to some prob-
lems concerning the definition of M.

Most writers on money displayed reluctance to calling checking deposits
money — at least to doing so without qualification. As We have seen, they usu-
ally stressed the difference between money and ‘credit' (see below, sec. 6) or
‘primary' and ‘fiduciary' money. But when it came to working the equation
of exchange, the majority — especially the Americans, who did by far the great-
est part of the statistical work — 'included the quantitatively most important
type of ‘credit instruments,' checking deposits, as a matter of course, often
going so far as to call them ‘deposit currency.' The M of their equation of
exchange, then, meant substantially coin, government fiat, banknotes, demand
deposits. Since this means including practically ‘everything that buys,' it might
seem that they should have, on the one hand, taken account of barter (and
also of the fact that part of the social product is consumed directly by its pro-
ducers) and, on the other hand, excluded non-circulating money (the cash re-
serves of banks and hoards). The first difficulty was, so far as I can see, not
taken very seriously; as regards the second I shall simply quote Kemmerer's
opinion (op. cit. p. 23): ‘it makes no difference to the truth of the quantity
theory whether new money is offered for commodities all at once, slowly, or
not at all,’ because money that does not circulate has simply the velocity zero..

In Europe, especially on the continent of Europe, this conceptual scheme
was much less popular, in part, because most Europeans did not face up to
the statistical task. To give a front-rank example for an alternative scheme:
Wicksell (as Rodbertus before him) confined M to metallic money (and, I
suppose, fiat paper money that does not carry any title to redemption in
metal), and interpreted banknotes and deposits as devices for increasing the
velocity of ‘money’ — so that bank reserves instead of having the velocity zero,
would have a very high one (Fisher’s ‘virtual velocity’). The reader should ob-
serve that there is no intrinsic merit or demerit in either arrangement: con-
venience alone is the criterion for choosing between them. This criterion, of
course, tells heavily for the ‘American alternative.’. But there is another point
to attend to. Fisher introduced the checking deposits (M'_) with. a . distinct ve-
locity (V') separately into his equation so as to make it read: MV -f M'V' =•
PT. But he introduced two additional hypotheses. First, he assumed that there
exists a very stable relation between the primary money (the hand-to-hand
cash) people carry in their pockets or keep in their chests or vaults and the
amounts of liquid means they keep on checking account. Second, he assumed

see ‘A New Index of the General Price Level from 1875/ Journal of the American
Statistical Association, June 1924) and bf replacing it by several sectional price levels
(consumers’ goods, investment goods,, and so on) was not, so far as I know, discussed
during that period except that it was implied in the Austrian group’s hostility to the
price-level concept. The trend of opinion in favor of the idea of multiple price levels
eventually triumphed conspicuously in Lord Keynes’s Treatise of 1930, Book n.

1098 iv: FROM 1870 TO 1914 AND LATER

that, in equilibrium, and for periods that are not too long, there exists a very
stable relation between the reserves of the banking system and the sum total
of checking, deposits. Let us consider what this means. By virtue of these
two hypotheses Fisher’s position lies somewhere between the position of those
who simply include in M demand deposits along with ‘currency outside of
banks’ without making any distinction between these two categories (so far
as purchasing-power problems are concerned) and the position of those who,
like Wicksell, include only coin and irredeemable paper. For that part of the
quantity of money which Fisher called ‘primary’ and which, envisaging Anglo-
American conditions of 1911, he identified with gold acquires a position not
shared by the checking deposits. These remain indeed ‘deposit currency,’ but
the idea is suggested that the variation in the amount of this currency is gov-
erned by the Variation in the quantity of the ‘primary currency’ or, under those
conditions, of gold. The reader will see how well this links up with the com-
pensated-dollar plan, which aims at controlling the price level by appropriate
variations of the gold content of the monetary unit.

Two additional points must be mentioned about the V — additional, that
is, to the observation made above that the velocity concept depends upon the
quantity concept we choose to adopt. First, no great advance beyond Mill
was made in the analysis of the factors behind the velocity of money. 3 In fact,
it was not before the publication of Pigou’s Industrial Fluctuations 4 that the
various types of velocity were clearly distinguished and that the most impor-
tant of them, the now familiar Income Velocity, was brought home to the
profession at large. But it should not be said that the economists of that period
habitually considered velocity to be a constant. Kemmerer’s 5 emphasis on its
variability as a function of the general business situation should suffice to
refute an accusation that is constantly being repeated and that has created, in
many minds, an entirely unrealistic impression to the effect that it is the chief
merit of modern analysis to have recognized this variability. Second, we must
pay our respects to some pioneer efforts in statistical measurement of velocity —
landmarks, even though only partly successful, on the road toward numerical
economics, principally associated with the names of des Essars, Kinley, Kem-
merer, and, above all, Irving Fisher. 6

3 On the fortunes of the concept of velocity of goods, see Marget, op. cit. passim.
Kemmerer introduced it into his equation of exchange.

4 A. C. Pigou, Industrial Fluctuations (1st ed., 1927), Part 1, ch. 15. Prior to this
work, there is not much besides Wicksell’s contribution ( Interest and Prices, ch. 6).

5 See above, sec. 3a.

6 Pierre des Essars in 'La Vitesse de la circulation de la monnaie,’ Journal de la so-
ciete de statistique de Paris, April 1895; David Kinley, Doc. No. 399 in Reports of
National Monetary Commission, ‘The Use of Credit Instruments in Payments in the
United States,’ and also two papers in Journal of Political Economy, ‘Credit Instru-
ments in Retail Trade,’ March 1895, and ‘Credit Instruments in Business Transactions,’
March 1897; Kemmerer, op. cit.; Irving Fisher, op. cit., but originally in ‘A Practical
Method of Estimating the Velocity of Circulation of Money,’ Journal of the Royal
Statistical Society, September 1909. Having derived his figures for velocity, Fisher

MONEY, CREDIT, AND CYCLES IO99

[(b) Distinction between the Equation of Exchange and the Quantity
Theory.] The second set of questions turns upon our distinction between equa-
tion of exchange and quantity theory. How far did the writers of that period
actually go beyond the statement of the formal equilibrium relation MV — PT?
The task of answering this question is rendered more difficult by the fact that
those writers themselves did not make that distinction but often described
themselves as adherents of the quantity theory when all they meant was that
they saw some advantage in the use of the equation of exchange or its equiva-
lents. However, so far as the majority of first-flight authors are concerned, we
may well take as typical the opinion that Pigou was to express a little later
(‘The Value of Money/ Quarterly Journal of Economics, November 1917 ): 7
‘The “Quantity Theory” is often defended and opposed as though it were a
definite set of propositions that must be either true or false. But in fact the
formulae employed in the exposition of that theory are merely devices for en-
abling us to bring together in an orderly way the principal causes by which
the value of money is determined.’ This statement, in which the words Quan-
tity Theory should be replaced by Equation of Exchange, certainly holds true
for Marshall himself and all Marshallians : they did not go at all beyond using
their variant of the equation of exchange. The same applies to the Wicksellian
treatment of the influence upon, price levels of autonomous variations in the
quantity of money: Wicksell put so much emphasis upon the role of the rate
of interest as to leave little room for direct influences of autonomous varia-
tions in the quantity of money. Of course, from the standpoint of those ex-
tremist opponents of the quantity theory, presently to be noticed, who denied
that autonomous variations in the quantity of money have any influence upon
its value, he-^-and Marshall — would have to be classed as quantity theorists. 8
The case of Walras was different, at least on the surface.

actually proceeded ( Purchasing Power . . . and papers there quoted, p. 492) to present
the whole equation of exchange in numerical terms — a truly Napoleonic victory even
though more like Borodino than Austerlitz.

7 See also Essays in Applied Economics (1923; ‘The Exchange Value of Legal-Tender
Money’).

8 Wicksell was so preoccupied with driving home his point that autonomous in-
creases in the quantity of money act on the economic process, via the rate of interest
on bank loans, by expanding bank credit that he often came near to denying the direct
influence. But he always recovered himself. For instance he showed that an increase in
the gold stock must have a direct influence on prices, at least to the extent to which it
increases the incomes and the expenditure of gold producers. On this see below sec. 6b.

The position taken by von Mises illustrates to perfection the difficulties with which
t we have to contend. He is the foremost critic of the price-level concept. He denied that
there is sense in holding that an increase in money will ever increase the price level pro-
portionately. All he averred was (op. cit. 2nd ed., p. 111) that there is 'a relation’ be-
tween changes in the value of money and changes in the proportion of demand for to
supply of money. This he called the useful element in the quantity theory — which,
moreover, he defends against many objections. I think we had better take the clue prof-
fered by himself and pigeonhole him with the opponents of the quantity theory in the
historical sense, i.e. the quantity theory opponents meant to combat.

1 1O0 IV: FROM 1870 TO 1914 AND LATER

Walras' position is extremely difficult to understand. His purely analytic
work upon the problem (see liis treatment in th e Elements and in the 'Note
sur la “Theorie de la Quantit6” ’ in the Etudes d’ economic politique appliquee,
pp. 153 et seq.) presents first of all a most interesting feature: he did not
simply posit that the value of money is inversely proportional to its quantity,
but he tried to deduce it rationally from the marginal utility principle, going
so far as to say that one would have to reject the latter in order to have a
right to reject the former. Another interesting feature is that he lets the quanti-
ties of fixed and circulating capitals be determined beforehand as a function
of a given rate of interest. But, proved under these restrictions, the theorem
in question, while of course true, is extremely weak and fully open to the
objection we so often meet, that the quantity theory is true only under as-
sumptions that render it trivial and quite valueless. For Walras’ theorem really
amounts to not more than that, all other things being strictissime equal, a
given amount of transactions could be effected as well by means of a smaller
amount of monetary units if all prices were reduced in the same proportion.
However, not only did Walras call this the theorie de la quantite — which in
itself would entitle us to class him with its opponents for, if this is really its
formule exacte, then there is certainly nothing to it — but he also seems to have
been a victim of the delusion that this theorem was all the analytic basis
needed for his plan of currency reform, that is, he identified this theorem with
the proposition that practical control of the price level can be achieved by
controlling the quantity of money, a proposition which, right or wrong, has
certainly little to do with the theorem proved.

Kemmerer’s proposition that the amount of the circulating medium that is.
being hoarded varies widely in the short run amounts to renunciation of the
quantity theory in the strictest sense and reduces so much of it as we may
impute to him to the statement that P is determined by the three variables
M, V, and T, whereas we cannot say just as well that M is governed by P, V,
and T, or V by P, M, T, or T by P, M, V. Fisher expressed this by saying
( Purchasing Power, p. 172) that 'the price level is normally the one absolutely
passive element in the equation of exchange.’ 9 But he went further than this.
He also held, not indeed as a matter of general theory but as a matter of sta-
tistical fact, that in practically all cases of substantial fluctuations of price
levels it was M only, and neither V nor T, which varied sufficiently to be con-
sidered as the explaining variable, in other words, that M was normally the
most important 'active’ variable as P was normally the passive one. This seems

9 The reader will realize that the words 'just as well’ in the first formulation and the
word 'normally’ in the second are quite essential. To repeat a comment made on this,
point in Part in, ch. 7, nobody ever has denied or can deny that a rise (fall) of the
price level will induce a fall (rise) in gold production and an outflow (inflow) of gold
so that, in the case of a free gold currency, the price level cannot be 'absolutely passive.’
Moreover, Fisher’s assertion applies only for states in the neighborhood of equilibrium,
not to states of disequilibrium ('transitional periods’) as we shall presently see — a fact
which, and the implications of which, the unwary reader is practically certain to over-
look.

MONEY, CREDIT, AND CYCLES ■ HOI

to come as near to teaching quantity theory in its boldest acceptance as any
front-rank economist’s teaching ever did. 10 If in addition we remember the
rigid assumptions that Fisher made concerning the relation between total
checking deposits and gold, by virtue of which the total quantity of the circu-
lating medium is (under the Anglo-American conditions of ign) governed by
gold production and gold exports or imports, we seem to get not only a quan-
tity theory of the value of money but (for those particular conditions) a gold-
quantity theory of it.

All the more important is it to realize that those critics were wrong who
classed Fisher as a sponsor of the most rigid and most mechanical type of
quantity theory and who on the strength of this see a well-nigh unbridgeable
gulf between the monetary theory of the period under survey, as represented
by Fisher, and the monetary theory of the twenties and thirties. They are
wrong for two reasons: (1) the monetary theory of the twenties and thirties is
much more under quantity theory influence than is generally realized; 11 (2)

10 It is interesting to compare Fisher’s presentation with that of the only other front-
rank economist who went equally far, Cassel (see, e.g., his Theory of Social Economy,
Third Book). He first expounds a strict quantity theory hut only for the imaginary case
of two disconnected states of the economy exactly equal in every respect except for a
difference in M — and hence in P. He then stresses what nobody else had ever stressed
with such energy, that this proves nothing whatever concerning the effect which a
change in M, introduced in a real economy, would exert — adopting at this point the
view usually held by opponents of the quantity theory. But then, having stated that
nothing can he said a priori about the effects of actual changes of M in real life and
that we must simply look at the facts, he finds for 1850-1910 (and, with less confi-
dence also for the first half of the nineteenth century) that the quantity theory holds
after all, not as a theory but as a statistical fact. Boldly generalizing from this, he then
puts forth his famous ‘Law of 3 per cent’: the Sauerbeck index number having been
approximately equal in 1850 and 1910 and the world’s gold stock having approxi-
mately increased during that period at the rate of 2.8 per cent per annum, the T must
have a tendency to increase at approximately that rate — and price level will hence in-
crease or decrease according to whether gold production increases the world’s gold stock
by more or less than this per year. This is indeed unconventional theory. But it is in-
teresting not only in itself but also on account of its methodology. The reader should
observe that a physicist would have much less objection to the latter than most econo-
mists had. On the facts, see e.g. J. T. Phinney, ‘Gold Production and the Price
Level . . .’ Quarterly Journal of Economics , August 1933.

11 This most important fact unfortunately cannot be fully displayed here. I shall
give a mere pointer toward the bridge between the old quantity theory analysis and
more modern works. All those, especially American, writers on money who, e.g., in con-
nection with the open-market operations of the Federal Reserve System, reasoned in
a manner involving belief in the possibility of controlling (‘stabilizing’) business by con-
trolling the quantity of the circulating medium were quantity theorists with a venge-
ance, a fact partly obscured because, faced by a different institutional set-up, they nat-
urally expressed themselves in ways different from the authors of the Currency School.
Particularly interesting in this connection is the theory that hanks are normally ‘loaned
up,’ that is to say, that banks will normally extend, their loans as far as regulative legis-
lation will permit them to go. The theoretical importance of this proposition is that it

1102

IV: FROM 1870 TO 1914 AND LATER

it should be. clear, not only from all the other writings of Fisher but especially
from his Theory of Interest, that he cannot be classed with quantity theorists
except in a special sense.

First, he stopped short of the quantity theorem in its fullest possible sense
by admitting the influence of T on both V and M ( Purchasing Power .. . ,
eh. 8, § 6) — this weakens the theorem considerably, at least as a long-run
proposition, because it introduces a relation between the 'independent vari-
ables' that interferes with the direct effects of variations in T on P. Second,
since the quantity theorem holds only in a state of equilibrium, it is of course
neither a qualification nor an objection to say that it does not hold in what
Fisher calls ‘transition periods.' But actually, since the economic system is
practically always in a state of transition or disequilibrium, phenomena that
seem incompatible with the quantity theorem and have in fact furnished many
of their arguments to its opponents are almost always in evidence. By paying
careful attention to them — especially to one type of them, namely, the tend-
ency of the interest rate to adjust itself to both rising and falling prices with
a lag (see below, sec. 8) 12 — Fisher entirely changed this situation. In strict
logic, of course, he thereby merely supplemented the information that the
quantity theorem conveys. But for practical purposes and, especially, if we
place ourselves on the standpoint of naive friends and foes of the quantity
theorem, we might say with almost equal justice that, in a large and particu-
larly valuable part of his work, he shelved it. Third, Fisher untiringly empha-
sized that M, V, T were only the ‘ proximate causes' of P. Behind them there
are almost a dozen indirect influences on purchasing power (op. cit. chs. 5 and
6) which act on price levels through M, V, T. All quantity theorists of all
times would have accepted this, at least under critical fire. But there is a
point beyond which emphasis upon those indirect influences begins to impair
the status of the proximate causes, which then easily degenerate into inter-
mediate causes and finally into mere names for what we are then led to label
'real' causes. And this point Fisher seems to have reached: particularly in
dynamic analysis (his analysis of ‘transitional periods'), which is really the
thing that matters, those indirect causes become much more interesting than

makes the quantity of ‘money' (deposits) strictly dependent upon the action of ‘mone-
tary authorities’ — i.e. that, from the standpoint of the economic process,' M becomes
a datum or a strictly independent variable. For a characteristic example of this type of
neo-quantity theory, see L. (Currie, The Supply and Control of Money in the United
States (1934). But even the Keynesian group, which more than any other emphasizes
antagonism to the quantity theory, is not free from its influence. Lord Keynes himself
at first professed to accept it. (See Tract on Monetary Reform, p. 81.) But, like Pigou,
he actually only accepted the equation of exchange. In the General Theory he pro-
fessed to renounce it. But he did not succeed entirely in freeing himself from its shackles.
Whoever treats M as an independent variable inevitably pays some tribute to it.

12 Reference must be made in passing to one of Fisher’s most original contributions,
viz., his work on the problem of Lag Distribution. See his papers in the Journal of the
American Statistical Association, 'The Business Cycle Largely a “Dance of the Dollar,” ’
December 1923, and ‘Our Unstable Dollar and the So-Called Business Cycle,’ June
1925.

•1

MONEY, CREDIT, AND CYCLES IIO3

the question whether or not they can be forced into the straitjaCkets of M,
V, T.

But why should that great economist have insisted on adopting what on
closer scrutiny turns out to be a particularly narrow and inadequate, if not
actually misleading, form of his own thought? I will hazard a hypothetical
answer: he had conceived a scheme— the compensated-dollar plan — which he
believed to be of great and immediate practical utility; for the success of a
practical scheme simplicity is essential; 13 hence it was the simplest aspect of
Fisher's analysis, the quantity theory aspect, which presented itself to his
mind and dominated his exposition. The theory in the Purchasing Power of
Money is conceived as a scaffolding for statistical work that in turn was to
serve a piece of social engineering. This is what pushed aside all other con-
siderations. But they were there and by virtue of their presence his quantity
theory, if quantity theory it must be, is something quite different from other
quantity theories.

As the argument above amply shows, it is not easy to draw a convincing
boundary line between economists who adhered to, and economists who re-
jected, the quantity theorem. But there were all the time many professed ene-
mies of it — in Germany 14 and in France they were in the majority — who held
that that theorem was untenable or else completely valueless. Compared with
Fisher’s performance and indeed with the performances of any of those leaders
who may be credited (or debited) with having used the quantity theorem in
some sense or other, the arguments of those professed enemies do not show
up very well. This is due to the fact that, so far as those top-flight quantity
theorists are concerned, opponents were really fighting windmills: as is so
often the case in economics they were trying to knock down a creation of
their own fancy; they were trying to refute what had never been held— for ex-
ample, that the amount of money in circulation is the sole regulator of its
value — or to urge what, unknown to them, was fully taken into account by
any of the better expositions of the obnoxious theorem. They thus often
raised objections that asserted nothing but what was factually and theoretically
correct but were nevertheless incorrect qua objections. Vice versa, where their
arguments would have constituted valid objections — for example, the argu-
ment that quantity of money has nothing at all to do with its value — they
were often patently wrong. Finally, they sometimes made points that were

13 That simplicity was a major consideration may be inferred from two facts: first
that he stowed away all the most important things into the compartments labeled
'transitional periods,’ a label that suggests the desire to focus the reader’s attention
upon the simple equilibrium proposition; second, that he expressed the latter in an'
equation instead of expressing it much more satisfactorily in a system of equations which
could have been easily 'dynamized’ so that the equilibrium proposition would have
naturally taken its true place as a special case. In another author, the failure to adopt
the latter course would be easily understandable. In the case of an expert mathemati-
cian like Fisher, only the intention to simplify can account for it.

14 See S. P. Altmann, 'Zur deutschen Geldlehre des 19 Jahrhundert’ in Festgabe filr
Schmoller, 1908, 1.

1104 lv: FROM 187O TO 1914 AND LATER

both valid and relevant but not decisive: this holds for Anderson’s criticism,
which otherwise stands out brilliantly from the rest . 15 These shortcomings also
impair the critical implications of the factual research, very valuable in itself,
that was done with a view to 'refuting the quantity theory.’ Again and again
such phenomena as that in the earlier phases of an inflation prices rose less
than M, and in the later phases more than M, were adduced against its valid-
ity — a shot that completely fails to hit the target . 16 Fisher’s attempt at verifi-
cation, though open to certain criticisms concerning the correlation of time
series, is greatly superior to anything done by opponents . 17 Nevertheless, these

15 B. M. Anderson, Value of Money (1917). A sample of his criticism may be use-
ful. Suppose that the wages of domestic servants be increased (without any servant be-
ing dismissed) and that these servants use their additional income exactly as their em-
ployers had used the same sum before. Therefore nothing has changed except that the
price of directly consumed services that should be included in the price-level index has
gone up: M and.T have remained constant, yet P has risen. In his review of Ander-
son’s book in the Economic Journal, March 1918, Edgeworth replied to this by point-
ing out that though M and T have remained constant, V has been increased. But, ob-
viously, an increase in V which occurs, automatically in certain cases of price changes
cannot be set against Anderson’s objection; Hence he was right. But while his objec-
tion stands, it would not tell heavily against any quantity theory that does not pre-
tend to be more than a broad approximation.

16 The following small sample from this literature may be welcome to some readers:
H. P. Willis, 'History and Present Application of the Quantity Theory,’ Journal of Po-
litical Economy, September 1896; Alfred de Foville, ‘La Theorie quantitative et les
prix,' L’Economiste Franqais, April and May 1896; D. Berardi, La Moneta nei suoi
rapporti quantitativi (1912); J. L. Laughlin, ‘A Theory of Prices,’ Publications of the
American Economic Association, 3rd series (February 1905); W. C. Mitchell, Gold
Prices and Wages under the Greenback Standard (1908) and ‘Quantity Theory of the
Value of Money,’ Journal of Political Economy, March 1896; J. Lescure, ‘Hausses et
baisses gen&ales des prix,’ Revue d'economie politique, July 1912; B. Nogaro, ‘Contri-
butions a une throne realiste de la monnaie,’ ibid. October 1906; E. DollOans, La
Monnaie et les prix (1905). For Germany, I will mention two of the period’s best men
bn money and monetary policy, though they do not present themselves favorably in
their arguments against the quantity theorem — which were in part developed for the
particular purpose of showing that the fall in prices, 1873-98, had nothing. to do with
gold production or with the extension of the area of the gold standard: Erwin Nasse
(‘Das Sinken der Warenpreise . . .’ Jahrbilcher fur Nationalokonomie , July and Au-
gust 1888) and W. Lexis (the famous statistician), numerous papers, see, e.g., his criti-
cism of Walras’ plan in his review article, ‘Neuere Schriften liber Geld- und Edel-
metalle’ (ibid. July 1888); see, however, Rist (op. cit. p. 25311.) for quotations to the
effect that Lexis accepted the quantity theory in principle. Their inability to handle
properly what after all was not a very complicated argument is astounding. So is K.
Marx’s failure to see that the cost of producing money (however defined) must act on
commodity prices through its effect upon the supply of money: he denies any in-
fluence of quantity of money upon prices, Capital (English trans., Kerr ed., vol. 1,
p. 136).

17 Another attempt that corroborates. Fisher’s result is conspicuous for excellence of
workmanship: Oskar Anderson, ' 1 st die Qua.ntitatstheorie statistisch nachweisbar?’ in
Z eitschrift fur Nationalbkonomie (March 1931). One of the reasons why both verifica-

MONEY, CREDIT, AND CYCLES H05

did not yield. And they were justified in refusing to do so. For they had a
case.

A simple example will elucidate this apparently paradoxical situation. Con-
sider a case of war inflation that runs its course like this: disturbance of do-
mestic production and of export and import trade first raises most prices, the
government’s war demand being financed by means that would without the
war have been spent by private individuals; this rise in prices together with an
increase, at an increasing rate, in war demand in physical terms then enforces
resort to the manufacture of ‘money’ (or credit instruments that do not have,
in this case, the properties of the ordinary credit instruments of commerce);
and finally there develops an increasing demand for loans by producers — a
credit expansion in the commercial sense but incessantly fed by ever-increasing
prices. Now, historians, politicians, businessmen will certainly describe such a
process in terms of the war itself and of the disturbance on the one hand and
the excess demand on the other which the war entails. They will be surprised
to learn that, instead of war and war disturbance and war demand, it is just
M, V, and T that ‘cause 7 inflation and that it is only M and V that really
matter. And if they are told that these are the ‘proximate causes’ whereas war,
war disturbance, war demand are ‘indirect’ ones — the quantity theorist will
always have to admit the ‘direct’ role of variations in T — which are operative
but only at one , remove, they will not be content. If anything, they will be
annoyed, especially, if they suspect that more is at stake than a mere theo-
retical argument. In this they were right, of course; in the nineteenth century
as well as in the twenties and thirties of the twentieth a rigid quantity theory,
one that attributed to M an altogether unjustifiable . role in economic therapy,
had a way of suddenly emerging from more careful formulations. Especially in
the United States, the sound-money men— and all those economists who felt
quite rightly that currency troubles are but the reflex of deeper things— had
plenty of reason for distrusting the possible practical implications of the quan-
tity theorem, a distrust that then extended, however unfairly, to the quantity
theory analysis itself. But they could have urged purely scientific reasons also.
What I have described as straitjackets may be useful for certain restricted
purposes exactly as are all such oversimplified set-ups, for example, the
Keynesian system. Outside of the range of. these purposes, they become in-
convenient and impediments to more fundamental analysis. If, moreover, we
admit cyclical variability of V and stress the importance of such ‘indirect^
causes as the rate of interest, the rate of change of P (vs. P itself), and so On,
they become in . addition useless. And it is hardly an exaggeration to say that

tions and refutations from statistical material failed to convince should be noted in
passing: to a large extent, the decision to accept, or to refuse to accept, given statistical
evidence, is a highly subjective matter. Since no material can ever bear out the quantity
theory with a 100 per cent accuracy and no material that covers, say, at least ten years
can ever fail to show some relation between P, T, and M, there must in most cases
be room for fair difference of opinion as to what given statistical findings really mean.
It is the merit of more refined methods, such as those of O. Anderson, that they offer
criteria that are more reliable than is simple ‘impression.-

llo6 IV: FROM 1870 TO 1914 AND later

the chief progress of monetary theory in more recent times has been the re-
sult of a tendency to tear up the straitjackets and to introduce explicitly and
directly all that the best presentations of the quantity theory relegated into the
limbo of indirect influences. Lesson: in economics more than elsewhere, a
good cause and one that will win out eventually may be so inadequately de-
fended as to appear to be bad for decades together.

[(c) Purchasing Power Parity and the Mechanism of International Pay-
ments. ] Before going on, let us touch upon two other matters. In that period,
more definitely than before, we find in the neighborhood of the quantity
theorem its old ally, the purchasing-power-parity theory of foreign exchange,
that is, the proposition that, if left to itself, the price of a country’s monetary
unit in terms of foreign currencies tends to be inversely proportional to the re-
lations between the respective price levels. It was repeatedly stated, for example,
by Marshall and Schlesinger, but when, in the discussion on the exchange
troubles that arose during and after the First World War, Cassel pressed it
energetically into service, it struck most people like a new discovery . 18 As I
have stated it, the proposition does not seem very exciting. Both Marshall and
Schlesinger noticed it as they went along, without putting much emphasis
upon it. And we may discern, in the torrent of publications which ‘purchas-
ing power parity’ was to produce, a quiet little inlet of discussions about the
merits of that proposition as a tool of analysis . 10 The excitement sprang from
the fact that Cassel linked it up with a strict quantity theory and, in appli-
cation, with the problems of war inflation. In consequence of this, the purchas-
ing-power-parity theory turned into the so-called ‘inflation theory’ of foreign
exchange, which reads: increase in M raises the price level; the rise in a coun-
try’s price level decreases the value of its monetary unit in terms of non-inflated
foreign currencies. Opposing arguments were marshalled under the flag of a
‘balance-of-payment’ theory, which often, though not always, went so far as
to make the causal nexus ran from exchange rate to price level instead of
from price level to exchange rate. We cannot go into this controversy in
which opponents never met each other’s arguments on the same plane of fact
and of abstraction and which, though better things were not lacking, on the

18 Cassel’ s many publications on the subject started in 1916. The references that are
likely to be most useful to the reader are to Cassel’s Theory of Social Economy (ch. 12)
and to Professor H. Ellis’ work on German Monetary Theory (Part in), which goes
far beyond the German discussion and will prove helpful to those readers who wish to
enter more fully into a subject to which I can only draw attention.

19 This inlet was mainly fed from English sources. See especially A. C. Pigou, ‘The
Foreign Exchanges,’ Quarterly Journal of Economics, November 1922, and J. M.
Keynes, Tract on Monetary Reform (ch. 3, glorified by an excellent treatment of for-
ward trading in exchange). The discussion had the merit of raising several worth-while
questions, but ended in the anaemic result that the purchasing-power-parity theorem,
when properly qualified, was of hardly any value at. all. As a matter of fact, this is not
true, and Lord Keynes might have arrived at a better definition of the equilibrium rate
of exchange than he produced when preparing his Clearing Union and Bretton Woods
plans, if he had not disposed so. lightly of what is a quite valuable, starting point.

MONEY, CREDIT, AND CYCLES II07

whole presents a sad example of the futility — largely due to inadequate ana-
lytic power of the participants — of so many economic controversies.

I take this opportunity of noticing another controversy (or set of contro-
versies) that proved more fruitful: the controversy on the mechanism of inter-
national payments. It ran its course and produced its results in the twenties
and thirties, but its sources are in the work of the nineteenth century and
some of the most important participants drew inspiration from the contest
between Thornton and Ricardo (see above, Part hi, ch. 7, sec. 3). 20 We have
before us what is indeed a typical case of normal scientific development. The
older authors had, more or less explicitly, noticed all the essential elements of
the problem. But when J. S. Mill summed up their work, it was nevertheless
an incomplete and one-sided picture that emerged, namely, the schema of the
mechanism of unilateral international payments (tributes, or loans, or repay-
ment of loans), according to which the paying country first transfers gold,
thereby increasing the price level of the receiving country and reducing its own
so as to acquire an export surplus, which then takes care of the subsequent
payments. The glaring inadequacy of this account, which not only puts the
whole burden of adjustment on the price level but also neglects the phe-
nomena inevitably associated with such an adjustment, was indeed felt and
noticed by Bastable ('On Some Applications of the Theory of International
Trade,' Quarterly Journal of Economics, October 1889) and others, but the
theory proved a hardy plant and survived in current teaching right into the
twenties, in spite of protests (e.g., Wicksell's in ‘International Freights and
Prices,' Quarterly Journal of Economics, February 1918). When the problem
of German reparations drew everybody's attention to these questions of mech-
anism, relatively rapid progress was made in building up an organon of analysis
that was new as such though none of its elements were. Ohlin's performance
(Interregional and International Trade, 1933) supplies a convenient landmark
in this as it does in other respects. The role of Taussig’s teaching should be
particularly noticed. He started from Mill's schema and, in spite of a number
of improvements he added, personally never abandoned it. But by virtue of the
criticism he elicited and of the work of his pupils, whom his leadership in-
spired, he helped the new analysis into existence almost as effectively as if he
had created it himself. On the one hand, much of the most significant theo-
retical work developed from his teaching, Viner's especially. On the other
hand, he started off an important sequence of factual researches. 21

20 The following brief and inadequate comments that cannot do more than indicate
another ‘bridge’ between our own work and the past may be supplemented by J. Viner’s
treatment of the subject in Studies in the Theory of International Trade (chs. vi and
vii). It is a pleasant duty to criticize the author for having impaired his picture by
stressing inadequately the importance of his own contribution in Canada’s Balance of
International Indebtedness (1924). Relying once more on this reference, I shall in what
follows mention contributions with great brevity.

21 In general, that period’s factual research on international capital movements is
among its major titles to our gratitude. C. K. Hobson’s The Export of Capital (1914)
will serve as an example.

no8

IV : FROM 1870 TO 1914 AND LATER

6. The Value of Money: the Cash Balance and Income Approaches 1

The Newcomb-Fisher equation of exchange and expressions closely similar
to it were indeed widely used (or implied by verbal circumlocutions) but not
universally. We are now going to glance at two other important formulae. In
both cases, it is as important to grasp that they were fundamentally equiva-
lent to the Newcomb-Fisher equation as it is to understand the nature of the
differences that induced many economists to prefer them. Or to put the same
thing from a different angle: the important thing to understand is why those
formulae, in spite of their fundamental equivalence with the Newcomb-Fisher
equation, nevertheless suggested advance in a different direction.

(a) The Cash Balance Approach. Walras often spoke of the quantity of
money. But the central concept of his analysis of money is the encaisse desiree,
that is, the amount of cash that people individually desire to hold at any mo-
ment. Similarly, the Cambridge economists, following Marshall's lead and in
obedience to the Petty-Locke-Cantillon tradition, adopted a formula that ex-
pressed the same idea. Let n be the amount of 'cash in circulation' with the
public, p the index number of the cost of living, k the number of 'consump-
tion units,’ also an index figure, representing the physical complement of the
public’s holdings of hand-to-hand cash, k! the number of consumption units
representing similarly the physical complement of the public’s checking de-
posits, and r the fraction of k' that banks keep as a cash reserve against k r ,
then we have 2

n - p(k + rk')

1 Specific reference should again be made to Professor Marget’s treatment of these
subjects (op. cit., vol. x, chs. 12-16).

2 See, e.g., J. M. Keynes, Monetary Reform, American ed., 1924, pp. 82-6. Three
things should be observed with respect to this particular formulation. (1) The 'public’ in-
eludes the business world; though business does not spend on consumers’ goods, the
physical complement of its holdings of cash in hand and at banks is nevertheless meas-
ured in ‘consumption units,’ exactly as is the physical complement of consumers’ cash
and balances. (2) In the chapter in which this exposition of the Cambridge theory oc-
curs, Keynes confused — as did so. many others — use of the equation of exchange and
acceptance of the quantity theory; as a matter of fact, he did not mean to accept the
quantity theorem in any strict sense. (3) In particular, he emphasized, already in
Monetary Reform, the wide variability of k, k', and r, and he also protested, though
mildly, against the uncritical assumption that 'a mere change in the quantity of the
currency cannot affect k, k r , and r — statements that foreshadow certain features of
the analysis of the General Theory. The Treatise takes up an intermediate position, the
main features of which are the breaking up of the general price level into sectional
price levels, and the explicit introduction of Saving and Investment among the variables.
The equations of the Treatise (Book hi) must be looked upon as developments of the
equation above. They illustrate the meaning of my statement to the effect that progress
of monetary analysis in the twenties and thirties largely consisted in brushing aside the
comprehensive aggregates of equation-obexchange analysis and in introducing explicitly
the variables expressive of the 'indirect influences.’

MONEY, CREDIT, AND CYCLES

n'09

This is the so-called Cambridge equation, which is to embody the Cash
Balance Approach. It assumes and asserts exactly what the Newcomb-Fisher
equation assumes and asserts. In particular, it is not more and not less of an
identity. The feature that at first sight may seem to constitute a substantive
difference, namely, the absence of velocity, is not very important: for all the
problems that, in the Newcomb-Fisher equation, are treated under the head-
ing Velocity turn up in much the same form when we try to work with the
Cambridge equation. But there is nevertheless something about it which de-
serves notice because it sheds light on an important aspect of the Filiation of
Scientific Ideas. In expressing the Cambridge equation in words, it is natural
to say — and all Cambridge economists did say — that ‘the public choose' or
‘elect' to keep p(k + rk') in cash and balances, and this manner of speaking
constitutes a psychological bridge to later, especially Keynesian, opinions: for
it points toward the individual decisions that are behind the public's behavior
in the matter of holding liquid assets and suggests analysis of the motives that
prompt them. Especially, if we express the matter by saying that there is such
a thing as a ‘balance of advantage' as between holding money and holding
other forms of wealth, we cannot help seeing the signpost that points toward
the Liquidity Preference Theory of Keynesian fame. But once more we have to
add that this does not amount to the liquidity preference theory. It is clear;
especially in the case of Walras' encaisse desiree, that we need additional as-
sumptions concerning people’s attitude toward holding cash to carry us from
the one to the other.

(b) The Income Approach. We have noticed that Tooke, in his ‘13th
thesis,’ had suggested that the explanation of money prices should start from
consumers’ incomes. As we know, he offered this as an alternative to the ex-
planation of price levels by the quantity of money which he rejected. Ever
since, the Income Approach has appealed to analysts — though it was also
adopted by others — who disliked the quantity theory or even the equation of
exchange. 3 But it is easy to see that, in itself, the former is nothing but an-
other way of writing the latter. Moreover, the amendment might seem to be of
doubtful value since incomes evidently ‘determine’ prices in the same sense
only in which prices ‘determine’ incomes. Yet Wieser’s 4 and Hawtrey’s pref-
erence for this approach is quite understandable, though it yields no result that
cannot be obtained via the equation of exchange: like the cash balance ap-

3 This holds for A. Aftalion (L ’Or et sa distribution mondiale, 1932), or for R. Lief-
mann ( Geld und Gold, 1916), who said categorically: incomes determine prices, and
also for Tooke’s follower, Adolf Wagner, but not for the most eminent of the spon-
sors of the income approach, R. G. Hawtrey ( Currency and Credit, 3rd ed., 1928),
who starts from Consumers’ Outlay, which is ‘proportional jointly to the unspent mar-
gin [equivalent to encaisse desiree, J. A. S.] and the circuit velocity of money.’ He calls
this ‘a form of the quantity theory’ (p. 60). Several German writers, however, refused
to see this and had to be taught by Hans Neisser, Tauschwert des Geldes (1928) that
there is no contradiction between the income and the quantity theory.

4 See his Social Economics or his article ‘Geld’ , in the Handworterbuch (4th ed.,

1927). -

iv: FROM 1870 TO 1914 AND LATER

proach, it points to individual behavior; more than the cash balance ap-
proach, it removes mere quantity of money from the position of a proximate
‘cause of the price level’ and substitutes for it one that is still nearer to prices —
income, or even consumers’ expenditure; 5 finally it relieves the theory of
money prices from such questions as what is to be considered as money. The
effect of an increase of money upon prices is indeterminate so long as we do
not know who gets the additional money, what he does with it, and what the
state of the economic organism is on which the new money impinges. The
income formula does not in itself take account of all these questions but it
directs our attention toward them and thus helps monetary analysis to step
out of its separate compartment. This advantage is particularly obvious in ana-
lyzing an inflationary process. Though there is really not much more sense in
quarreling over the question whether it is the increased quantity of money or
the increased pay roll that ‘causes’ inflation than there would be in quarreling
over the question whether it is the bullet or the murderer’s intention that
‘causes’ the death of the victim, there is still something to be said for concen-
trating on the mechanisms by which the increased quantity of money becomes
operative — not to speak of the additional advantage which counts for so much
in economics, namely, that the income-expenditure formula does not meet
with some of the prejudices that the equation of exchange encounters.

7. Bank Credit and the ‘Creation’ of Deposits

The important developments that occurred during that period in the bank-
ing systems of all Commercialized countries and in the functions and policies
of central banks were, of course, noticed, described, discussed. We cannot sur-
vey the vast literature which performed this task and of which reports of offi-
cial commissions and the articles of the best financial journals, the London
Economist in particular, formed perhaps the most valuable part. It was written
by businessmen, financial writers, business economists of all types who 'knew
all about the facts, the techniques, and the current practical problems of bank-
ing but who cared little about ‘principles’ — except that they never failed to
refer to established slogans — and cannot be said to have had any very clear
ideas about the meaning of the institutional trends they beheld. Considered
from the standpoint of scientific analysis, these works were, therefore, raw
material rather than finished products. And since .the ‘scientific analysts’ of
money and credit largely failed to do their part, namely, to work up this ma-
terial and to fashion their analytic structures to its image, we might almost —
though not quite — characterize the situation by saying that that literature on
banking and finance was as much of a separate compartment within the litera-

5 The reader will recall that this particular advantage does not amount to a great
deal if, when using the equation of exchange, we pay proper attention to the factors
that govern the variations, especially the cyclical variations, in velocity. On the other
hand, it might be said that if we do this we have really accepted what the income ap-
proach is meant to convey.

1111

MONEY, CREDIT, AND CYCLES

ture on money and credit as the latter was a separate compartment within the
literature on general economics.

There are a number of books for England, in particular, such as W. T. C. King’s
History of the London Discount Market (1936) and the various histories of the Bank
of England (e.g., the recent one - by Sir John Clapham, The Bank of England, 1944),
which will supply part of the information that cannot be given here. For other refer-
ences, see the little bibliography attached to the article on ‘Banking, Commercial’ in
the Encyclopaedia of the Social Sciences (especially the books of the following authors:
C. A. Conant, A. W. Kerr, A. Courtois, E. Kaufmann, A. Huart, J. Riesser, O. Jeidels,
C. Supino, C. Eisfeld, H. P. Willis). This bibliography contains two items which,
owing to their high quality, should be particularly mentioned: C. F. Dunbar’s Theory
and History of Banking (5th ed., 1929, but essentially a work of the nineteenth cen-
tury) and F. Somary’s Bankpolitik (1st ed. 1915; 2nd ed. 1930). Perusal of A History
of Banking Theory by L. W. Mints (1945) will show the reader how far the de-
scriptive literature ‘spilled over’ into the books on monetary and banking theory, though
the author’s presentation of his huge material is somewhat impaired by undue empha-
sis on the shortcomings of a particularly narrowly defined commercial theory of bank-
ing (the ‘real-bills doctrine’).

The situation described above by the separate-compartment simile accounts for the
emergence of a special type of book which was written not only for the general reading
public but also for economists in order to enlighten them on the facts and problems
of banking or finance. The success of these books proves, better than anything else
could, how far the separation of those departments, between which they sought to es-
tablish connection, had actuailly gone. Two famous instances call for notice. The one is
W. Bagehot’s Lombard Street: A Description of the Money Market (1873), one of
the most frequently and most admiringly quoted books in the whole economic litera-
ture of the period. No doubt it is brilliantly written. But whoever now turns to that
book with its fame in mind will nevertheless experience some disappointment. Barring
a plea for the reorganization of the management of the Bank of England and for a
reform of English practice concerning gold reserves, it does not contain anything that
should have been new to any student of economics. Obviously, however, it did teach
many economists things they did not know and were glad to learn. Our other instance
is the not less brilliant book by Hartley Withers, The Meaning of Money (2nd ed.,
1909), whose chief merit consists, as we shall presently see, in having boldly spoken of
the ‘manufacture’ of money by banks. But this should not have surprised anyone. Yet
it was considered as a novel and somewhat heretical doctrine.

Thus, academic analysis of credit and banking — including the contribution
of writers who, without being academic economists themselves, conformed to
the academic pattern, as did some bankers — went along on the stock of ideas
inherited from the preceding period, refining, clarifying, developing no doubt
but not adding much that was new. Substantially, this meant the prevalence
of the commercial theory of banking which made the commercial bill or,
somewhat more generally, the financing of current commodity trade the theo-
retical cornerstone of bank credit. We shall, of course, trace this position to
Tooke and Fullarton. But the currency school influence was stronger than ap-
pears on the surface. Toward the end of the period, it asserted itself particu-
larly in the precincts of the theory of cycles (see below, sec. 8).

1112

IV : FROM 1870 TO 1914 AND LATER

As regards central banking, economists enlarged indeed their conception of
the functions of central banks, especially the controlling and regulating func-
tion of the ‘lender of last resort/ But most of them were surprisingly slow in
recognizing to the full the implications of Monetary Management, which as
we have seen was developing under their eyes. Adherence to the commercial
theory was, of course, partly responsible for this. Because of it, control contin-
ued to mean — not wholly but primarily — control by ‘discount policy/ The
economics profession was not even sure whether it was in the power of central
banks to regulate market rates or whether bank rate was merely ‘declaratory/ 1
Votaries of both opinions then discussed the effects of bank rate in terms of
the two classic modi operandi: on the one hand, pressure on prices by restric-
tion of credit ( almost equivalent to amount of commercial bills presented for
discount); on the other hand, attraction from abroad of foreign funds or recall
from abroad of domestic funds.

As regards banking in general, it is quite true that strict adherence to the
commercial theory caused economists to overlook or misconceive some of the
most important banking developments of that time. Nevertheless, the deroga-
tory criticism leveled at it in our own day is not entirely justified. To begin
with, it was not so unrealistic for England, and English prestige in matters of
banking tended to make English practice the standard case. But, quite apart
from this, it should be emphasized that acceptance of the commercial theory
does not necessarily involve uncritical optimism about the working of the
discounting mechanism. Economists stressed the ‘elasticity’ of the system that
turns on financing commodity trade. But they had grown out, or were grow-
ing out, of the opinion that if banks simply finance the ‘needs of trade/ then
money and production will necessarily move in step and no disturbance will
arise — which is the really objectionable thesis. On the one hand, most of them
realized, as Ricardo and Tooke had done before them, that there is no such
thing as a quantitatively definite need for loans or discounts and that the
actual amount of borrowers’ demand is as much a question of the banks’ pro-
pensity to lend and of the rates they charge as it is a question of borrowers’
demand for credit. On the other hand, they realized ntore and. more that the
practice of financing nothing but current trade — discounting good commercial
paper — does not guarantee stability of prices or of business situations in gen-
eral or, in depression, the liquidity of banks . 2 And it was Wicksell’s achieve-

1 The futility of this discussion, which could have been settled by a glance at the
facts, should be obvious. We shall, however, think more kindly of it if we observe
that the technique of ‘making bank rate effective’ was only slowly developing during
that period and that economists were still slower in discovering what was actually be-
ing done. Without this technique it is indeed a fair question to ask whether central
banks can do much more than follow the market — which is what is meant by the
phrase that their rates are ‘declaratory.’

2 In other words — putting the matter, from the standpoint of the policy of credit
control — it was being increasingly realized that attention to the purpose to be financed
(current commodity transaction) arid to the quality of the credit instruriients involved
(good commercial paper) did not enable central banks to dispense with attention to

MONEY, CREDIT, AND CYCLES 1 1 1 3

ment to introduce both facts into the general theory of money by means of
his famous model of the Cumulative Process (see below, sec. 8).

Finally, there is another point, quite independent of all this, that must, be
noticed: the curious narrowness and lack of realism in that period’s conception
of the nature of bank credit. In order to make this point stand out clearly, let
us restate how a typical economist, writing around 1900, would have explained
the subject of credit, keeping in mind, however, all the limitations and dan-
gers inherent in speaking of typical views. He would have said something like
this. In the (logical) beginning is money — every textbook on money, credit,
and banking begins with that. For brevity’s sake, let us think of gold coin only.
Now the holders of this money, so far as they neither hoard it nor spend it
on consumption, 'invest’ it or, as we may also say, they 'lend’ their ‘savings’
or they 'supply capital’ either to themselves or to somebody else. And this is
the fundamental fact about credit. 3 Essentially, therefore, credit is quite inde-
pendent of the existence or non-existence of banks and can be understood
without any reference to them. If, as a further step in analysis, we do intro-
duce them into the picture, the nature of the phenomenon remains unchanged.
The public is still the true lender. Bankers are nothing but its agents, middle-
men who do the actual lending on behalf of the public and whose existence
is a mere matter of division of labor. This theory is satisfactory enough in
cases of actual 'lending on account of others’ 4 and of savings deposits. But
it was also applied to checking deposits (demand deposits, the English current
accounts). These, too, were made to arise from people’s depositing with banks
funds that they owned (our gold coins). The depositors become and remain
lenders both in the sense that they lend (‘entrust’) their money to the banks
and in the sense that they are the ultimate lenders in case the banks lend out
part of this money. In spite of certain technical differences, the credit sup-
plied by deposit banking— the bulk of commercial credit in capitalist society —
can therefore be construed on the pattern of a credit operation between two
private individuals. As the depositors remain lenders, so bankers remain middle-
men who collect ‘liquid capital’ from innumerable small pools in order to
make it available to trade. They add nothing to the existing mass of liquid
means, though they make it do more work. As Professor Cannan put it in an
article in Economica ('The Meaning of Bank Deposits’) which appeared as late
as January 1921: 'If cloak-room attendants managed to lend out exactly three-
quarters of the bags entrusted to them ... we should certainly not accuse
the cloak-room attendants of having “created” the number of bags indicated by

the quantity of credit outstanding: this is implied, though perhaps not adequately, in
the theory of the bank rate.

3 We know that leading theorists described the process in terms of the commodities
that credit operations were in the last analysis intended to transfer. But for our present
purpose it is not necessary to go into this again.

4 By this is meant a contractual arrangement by which an owner of large funds
which he does not immediately need, e.g. an industrial corporation that has just re-
ceived the proceeds, of a bond issue, employs the services of a bank to lend out these
temporarily idle funds in the money market, to stock brokers or bill brokers.

1114 IV : FROM 1870 TO 1914 AND LATER

the excess of bags on deposit over bags in the cloak rooms.’ Such were the
views of 99 out of 100 economists.

But if the owners of those bags wish to use them, they have to recover them
from the borrowers who must then go without them. This is not so with our
depositors and their gold coins. They lend nothing in the sense of giving up
the use of their money. They continue to spend, paying by check instead of
by coin. And while they go on spending just as if they had kept their coins,
the borrowers likewise spend 'the same money at the same time.’ Evidently this
phenomenon is peculiar to money and has no analogue in the world of com-
modities. No claim to sheep increases the number of sheep. But a deposit,
though legally only a claim to legal-tender money, serves within very wide
limits the same purposes that this money itself would serve. Banks do not, of
course, ‘create’ legal-tender money and still less do they ‘create’ machines.
They do, however, something — it is perhaps easier to see this in the case of
the issue of banknotes — which, in its economic effects, comes pretty near to
creating legal-tender money and which may lead to the crea6on of ‘real capi-
tal’ that could not have been created without this practice. But this alters the
analytic situation profoundly and makes it highly inadvisable to construe bank
credit on the model of existing funds’ being withdrawn from previous uses by
an entirely imaginary act of saving and then lent out by their owners. It is
much more realistic to say that the banks ‘create credit,’ that is, that they
create deposits in their act of lending, than to say that they lend the deposits
that have been entrusted to them. And the reason for insisting on this is that
depositors should not be invested with the insignia of a role which they do
not play. The theory to which economists clung so tenaciously makes them
out to be savers when they neither save nor intend to do so; it attributes to
them an influence on the ‘supply of credit’ which they do not have. The
theory of ‘credit creation’ not only recognizes patent facts without obscuring
them by artificial constructions; it also brings out the peculiar mechanism of
saving and investment that is characteristic of fullfledged capitalist society and
the true role of banks in capitalist evolution. With less qualification than has
to be added in most cases, this theory therefore constitutes definite advance
in analysis.

Nevertheless, it proved extraordinarily difficult for economists to recognize
that bank loans and bank investments do create deposits. In fact, throughout
the period under survey they refused with practical unanimity to do so. And
even in 1930, when the large majority had been converted and accepted that
doctrine as a matter of course, Keynes rightly felt it to be necessary to re-
expound and to defend the doctrine at length, 5 and some of its most impor-

5 Treatise on Money, ch. 2. It is, moreover, highly significant that, as late as June
1927, there was room for the article of F. W. Crick, ‘The Genesis of Bank Deposits’
(' Economica ), which explains how bank loans create deposits and repayment to banks
annihilates them — in a manner that should have been indeed, but evidently was not
even then, ‘time-honored theory.’ There is, however, a sequel to Lord Keynes’s treat-
ment of the subject of credit creation in the Treatise of 1930 of which it is necessary
to take notice in passing. The deposit-creating bank loan and its role in the financing

MONEY, CREDIT, AND CYCLES 111 5

tant aspects cannot be said to be fully understood even now. This is a most
interesting illustration of the inhibitions with which analytic advance has to
contend and in particular of the fact that people may be perfectly familiar
with a phenomenon for ages and even discuss it frequently without realizing
its true significance and without admitting it into their general scheme of
thought. 6

For the facts of credit creation — at least of credit creation in the form of
banknotes — must all along have been familiar to every economist. Moreover,
especially in America, people were freely using the term Check Currency and
talking about banks’ ‘coining money’ and thereby trespassing upon the rights
of Congress. Newcomb in 1885 gave an elementary description of the process
by which deposits are created through lending. Toward the end of the period
(1911) Fisher did likewise. He also emphasized the obvious truth that deposits
and banknotes are fundamentally the same thing. And Hartley Withers
espoused the notion that bankers were not middlemen but ‘manufacturers’
of money. Moreover, many economists of the seventeenth and eighteenth cen-
turies had had clear, if sometimes exaggerated, ideas about credit creation and
its importance for industrial development. And these ideas had not entirely
vanished. Nevertheless, the first — though not wholly successful — attempt at
working out a systematic theory that fits the facts of bank credit adequately,
which was made by Macleod, 7 attracted little attention, still less favorable at-
tention. Next came Wicksell, whose analysis of the effects upon prices of the
rates charged by banks naturally led him to recognize certain aspects of ‘credit
creation,’ in particular the phenomenon of Forced Saving. 8 Later on, there

of investment without any previous saving up of the sums thus lent have practically
disappeared in the analytic schema of the General Theory , where it is again the saving
public that holds the scene. Orthodox Keynesianism has in fact reverted to the old
view according to which the central facts about the money market are analytically ren-
dered by means of the public’s propensity to save coupled with its liquidity preference.

I cannot do more than advert to this fact. Whether this spells progress or retrogression,
every economist must decide for himself.

6 In consequence, there may be merit and even novelty in a piece of work which can
be proved to say nothing that has not been said before in some form or other — which
in fact we have had occasion to observe many times. It seems to me that Professor
Marget’s account of the development of the doctrine of credit creation (op. cit. vol. 1,
ch. 7) does not attach sufficient weight to this consideration.

7 Henry Dunning Macleod (1821-1902) was an economist of many merits who some-
how failed to achieve recognition, or even to be taken quite, seriously, owing to his
inability to put his many good ideas in a professionally acceptable form. Nothing can
be done in this book to make amends to him, beyond mentioning the three publica-
tions by which he laid the foundations of the modem theory of the subject under dis-
cussion, though what he really succeeded in doing was to discredit this theory for quite
a time: Theory and Practice of Banking (1st ed., 1855-6; Italian trans. 1879); Lectures
on Credit and Banking (1882); The Theory of Credit (1889-91).

8 In itself the idea was not new, see F. A. von Hayek, ‘Note on the Development
of the Doctrine of “Forced Saving,” ’ Quarterly Journal of Economics, November 1932,
republ. in Profits, Interest and Investment (1939). But it now appeared in a larger con-.

in6

IV: FROM 1870 TO 1914 AND LATER

were other contributions toward a complete theory, especially, as we should
expect, in the United States. Davenport, Taylor, and Phillips may serve as ex-
amples. 9 But it was not until 1924 that the theoretical job was done com-
pletely in a book by Hahn, and even then success was not immediate. 10 Among
English leaders credit is due primarily to Professors Robertson and Pigou not
only for having made the theory palatable to the profession but also for hav-
ing added several novel developments. 11 Elsewhere, especially in France, re-
sistance has remained strong to this day.

The reasons why progress should have been so slow are not far to seek. 5
First, the doctrine was unpopular and, in the eyes of some, almost tinged
with immorality — a fact that is not difficult to understand when we remember
that among the ancestors of the doctrine is John Law. 12 Second, the doctrine
ran up against set habits of thought, fostered as these were by the legal con-
struction of 'deposits': the distinction between money and credit seemed to
be so obvious and at the same time, for a number of issues, so important that

text and with a new emphasis. During the last decade, the concept has fallen into un-
merited disfavor. But it has its merits. In particular, it clears up a point that has
caused difficulties to many. Banking operations, so Ricardo had said, cannot create
‘capital’ (i.e. physical means of production). Only saving can do this. Now, whenever
the expenditure from deposits that are created by banks increases prices, i.e. under con-
ditions of full employment (and also in other cases), a sacrifice of consumption is im-
posed upon people whose incomes have not risen in proportion, which achieves what
otherwise would have to be achieved by saving, and there is point in calling this, meta-
phorically, Involuntary or Forced Saving and in contrasting it with what is usually
called Saving (Voluntary Saving). That under conditions of unemployment and excess
capacity no such sacrifice need necessarily be imposed upon anyone is no reason for
discarding the concept.

s Davenport’s contribution merely consisted in hints which he threw out in his Value
and Distribution (1908) without making much of them: he emphasized, e.g., that it is
not correct to say that banks ‘lend their deposits.’ W. G. L. Taylor, in a book which
(like Davenport’s) never received the recognition it deserved, went much further ( The
Credit System , 1913). A great stride was made by C. A. Phillips ( Bank Credit, 1920),
who not only did much to clear up the theoretical questions involved but in addition
pointed out the difference between the expansion of loans and investments that is pos-
sible for an individual bank which competes with others and the expansion that can
be performed by a system of competing banks, considered as a whole.

10 Albert Hahn, V olkswirtschaftliche Theorie des Bankkredits (3rd ed., 1930). One
reason why this book left so many economists unconvinced was, however, the fact that
the theory of bank credit there presented was wedded to certain highly optimistic views
about the possibility of achieving permanent prosperity, which prejudiced some econo-
mists against its essential achievement.

11 D. H. Robertson, Banking Policy and the Price Level (1926). Forced saving fig-
ures there under the name of Imposed Lacking. A. C. Pigou, Industrial Fluctuations
(1927), Part 1, chs. 13 and 14.

12 Thus Walras saw the phenomenon of credit creation quite clearly (though he con-
fined himself to banknotes). But he considered it as an abuse that ought to be suppressed
and refused for this reason, to make it a normal element of his general schema ( Etudes
d’economie politique appliquie, ed. of 1936, pi. 47 and pp. 339 et seq.).

MONEY, CREDIT, AND CYCLES III7

a theory which tended to obscure it was bound to be voted not only useless
but wrong in point of fact— indeed guilty of the elementary error of con-
fusing legal-tender money with the bookkeeping items that reflect contractual
relations concerning this legal-tender money. And it is quite true that those
issues must not be obscured . 13 That the theory of credit creation does not
necessarily do this seemed small comfort to those who feared its misuse.

8. Crises and Cycles: the Monetary Theories

We have seen on the one hand that, broadly speaking, the monetary anal-
ysis of that period centered in the problems of Value of Money (or price level)
but on the other hand that some leading economists were working their way
toward monetary analysis of the economic process as a whole in which mere
price-level problems fall into secondary place. This tendency has been illus-
trated by the implications of the cash balance and income approaches but it
asserted itself also in many other ways. It is significant, for instance, that Mar-
shall originally intended the volume that appeared as Money, Credit, and
Commerce to carry the title Money, Credit, and Employment: and there are
in fact many things in it that come within the range of recent Income and
Employment Analysis. Much more significant was it that Wicksell, in his
somewhat hesitating way that is so engaging, eventually made up his mind to
the effect that we need a concept of monetary demand for output as a whole : 1
This revived the Malthusian idea and anticipated, though in an incompletely
articulate manner, the consumption function of Keynes’s General Theory.

But the most considerable advance in the direction of monetary analysis in
the present-day sense occurred within the precincts of the problems of interest
and business cycles. We have already noticed symptoms of a growing inclina-
tion of economists to recognize and to use a monetary concept of capital.
Nothing came of this, nor did the few attempts that were made to interpret

13 One of them is the old issue: control of 'money’ vs. control of 'credit.’ Consid-
erations of the kind alluded to explain the aversion of many French authorities to the
credit-creation idea. For instance, one of the leading purposes of Professor Rist’s History
of Monetary and Credit Theories is to combat the 'confusion’ of money and credit.

1 The reference that will bemost useful to the reader is to Myrdal’s Monetary Equi-
librium (Swedish ed. 1931, English trans. 1939; see above, sec. 2c). Once more, the
point to grasp is this: demand schedules are defined for a single commodity. Accord-
ing to 'classical' theory (Say’s law), there would be no sense in speaking of a demand
schedule for all goods and services (or all consumers’ goods and services) taken to-
gether. If we do so, nevertheless, we are for a special purpose doing something that
is not covered by the ordinary theory of demand and are taking therefore a step be-
yond it. This special purpose may or may not be meaningful. It may or may not be
well served by the aggregate-demand technique. But in any case, it should be recog-
nized as a thing sui generis that carries its own particular problems. Wicksell’s adop-
tion of it spelled renunciation of Say’s law. He is, therefore, the patron saint of all
those economists who renounce Say's law at present.

1 1 1 8

TV. FROM 1870 TO 1914 and later

interest as a purely monetary phenomenon meet with any success . 2 Through-
out the period, the rate of interest remained, for practically all economists, a
rate of return — however explained — to physical capital and the money rate a
mere derivative of the real rate . 3 It had long been recognized, of course, that
the two may diverge from one another: Ricardo’s explanation of how new
money inserts itself into circulation implies recognition of this fact, and
writers on banking must always have been aware of it. Rut nobody attached
much importance to it until Wicksell made it the center of his theory of the
value of money and the subject of an elaborate analysis that produced the
Wicksellian Cumulative Process: he pointed out that, if banks keep their loan
rate below the real rate — which as we know he explained on the lines of
Bohm-Bawerk’s theory — they will put a premium on expansion of production
and especially on investment in durable plant and equipment; prices will even-
tually rise; and if banks refuse to raise their loan rate even then, prices will
go on rising cumulatively without any assignable limit even though all other
cost items rise proportionally . 4

The analytic situation created by this argument may be described like this.
In itself the Wicksellian emphasis upon the effects of possible divergences be-
tween money and real rates of interest does not constitute a compelling rea-
son for abandoning the position that the fundamental fact about interest is a
net return to physical goods, a position from which Wicksell himself never
departed. However, it does constitute a good and sufficient reason for treating
the money rate as a distinct variable in its own right that depends, partly at
least, upon factors other than those that govern the net return to physical
capital (natural or real rate). The two are related, of course. In equilibrium
they are even equal. But they are no longer 'fundamentally the same thing .’ 5

2 They were so little noticed or so completely forgotten that they were not even
mentioned in the discussion on this topic in the 1930’s. One of them, Silvio Gesell’s,
was however rescued from oblivion by Lord Keynes, see General Theory, ch. 23, vi.

8 This meaning of real or 'natural’ rate must not be confused with the wholly dif-
ferent meaning in which Marshall used the phrase ( Principles , Book vi, ch. 6, conclud-
ing note), namely, the meaning of money rate (or 'nominal’ rate) corrected for price-
level changes. The two are related but not identical and Marshall has, so far as I can
see, no share in the Wicksellian idea l am about to discuss. His own merit in empha-
sizing what may be termed the distinction between nominal and actual rate is shared
by Irving Fisher ( Appreciation and Interest, 1896).

4 Bohm-Bawerk’s comment on this argument was: ‘Wicksell must have been dream-
ing when he wrote that.’

5 The following paraphrase of the paragraph above may prove helpful. Into the
Walrasian system enters just one rate of interest, which is a rate of net return on
physical 'capitals.’ Strictly, this implies that the money rate of interest is not only
equal to this rate of net return in equilibrium but identical with it, in the sense that
the money rate is merely the monetary expression of the rate of net return on physical
‘capitals.’ If we want to recognize explicitly that instead of being identical with this
rate of net return (equivalent to saying that it is ‘fundamentally the same thing’) the
money rate has some measure of independence, we must introduce it as another vari-
able and posit equality with the 'real rate’ as an additional equilibrium condition. This

MONEY, CREDIT, AND CYCLES IH9

And so soon as we recognize this, they will drift further and further apart and
we shall drift further and further away, from the position that the net return
to physical goods of one kind or another is the fundamental fact about the
interest rate of the loan market-— the position which we have traced to Barbon
and which Lord Keynes was to condemn on the ground that it involved ‘con-
fusion’ between rate of interest and the marginal efficiency of (physical) capi-
tal . 6 Other factors, such as the loan policy of banks, will then seem to us to
be just as fundamental, and the road opens toward the purely monetary theo-
ries of interest that emerged later and of which the Keynesian was to attract
more attention than any other. Let us, however, keep in mind three things.
First, we have been sketching a most interesting line of doctrinal develop-
ment, which starts with Barbon and runs a course that, for the moment, ends
with Keynes. But it is not suggested that the individuals who made them-
selves responsible for the newer monetary theories of interest consciously ar-
rived at their conclusions by working out the implications of the situation
created by the Wicksell analysis: this may have been the case with his Swed-
ish disciples — though I do not wish to question anyone’s subjective originality
— but it was certainly not so with the others. Second, it is not suggested that,
by retracing Barbon’s steps, the economists of our epoch have simply returned
to the monetary theories of pre-Barbonian times: though similar to them in
important respects — and especially to those of the scholastics — theirs are un-
questionably novel in others. Third, by defining the new variable of our eco-
nomic system, money interest, as a thing that is monetary in nature and not
only in form, we do not eliminate from the problem of the loan rate the
‘real’ factors as completely as some modern economists seem to think: the
rate of net return to physical investment remains, at the very least, a factor in
the demand for loans and therefore cannot vanish from any complete theory
of the money rate . 7

is what Wicksell did. His investigations into the conditions of monetary equilibrium
were not entirely successful. They made history of analysis, however, through the im-
pulse they gave to contemporaneous and later research, especially by his Swedish fol-
lowers (see e.g. Myrdal, op. cit.) .

6 Wicksell’s real or natural rate of interest is the marginal productivity of (physical)
capital (more precisely, the marginal productivity of Bohm-Bawerk’s roundabout proc-
ess). It is, therefore, not identical with Keynes’s marginal efficiency, which is the same
as Fisher’s marginal rate of return over cost ( Theory of Interest , p. 169) and means
marginal productivity of current investment. But the two concepts stand in a unique
relation to one another so that, for the purpose in hand, they, may nevertheless be used
interchangeably. Lord Keynes may hence be said to have condemned the 'confusion’
between money and real rate of interest or, better, the habit of nineteenth-century econo-
mists to link them together too closely. It then appears that Wicksell was the first to
undermine this habit.

7 This fact is important precisely because it is so often denied and because Keynes’s
exposition in the General Theory tended to obscure it, although it is not less essential
for his monetary theory of interest than it is for any other. It comes in by way of the
condition that the equilibrium amount of current investment is the amount for which
‘marginal efficiency' is equal to the money rate. The statement that interest is the

1 120 IV : FROM 1870 TO 1914 AND LATER

Wicksell’s position in the development of modern monetary cycle theories
is quite similar to his position in the development of modern monetary inter-
est theories. He himself no more held a monetary cycle theory than he held
a monetary interest theory. But he opened the road for the former as he
opened it for the latter. In fact, the Cumulative Process itself need only be
adjusted in order to yield a theory of the cycle. Suppose that banks emerge
from a period of recovery or quiescence in a liquid state. Their interest will
prompt them to expand their loans. In order to do so they will, in general,
have to stimulate demand for loans by lowering their rates until these are
below the Wicksellian real rate, which, as we know, is Bohm-Bawerk's real
rate. In consequence, firms will invest-— especially in durable equipment with
respect to which rate of interest counts heavily 8 — beyond the point at which
they would have to stop with the higher money rate that is equal to the real
rate. Thus, on the one hand, a process of cumulative inflation sets in and, on
the other hand, the time structure of production is distorted. This process can-
not go on indefinitely, however — there are several possible reasons for this,
the simplest being that banks run up against the limits set to their lending by
their reserves — and when it stops and the money rate catches up with the
real rate, we have an untenable situation in which the investment undertaken
on the stimulus of an ‘artificially' low rate proves a source of losses: booms
end in liquidation that spell depression.

This theory has been sketched out by Professor von Mises , 9 who, while ex-
tending critical recognition to Wicksell, described it as a development of
currency school views. It was further developed by Professor von Hayek into a
much more elaborate analytic structure of his own , 19 which, on being pre-
sented to the Anglo-American community of economists, met with a sweeping
success that has never been equaled by any strictly theoretical book that failed
to make amends for its rigors by including plans and policy recommendations
or to make contact in other ways with its readers' loves or hates. A strong criti-
cal reaction followed that, at first, but served to underline the success, and
then the profession turned away to other leaders' and other interests . 11 The
social psychology of this is interesting matter for study.

factor that limits investment is as true as to say that the price of motor cars is the
factor that limits the demand for them, and is equally incomplete.

8 Obviously the rate of interest, a minor factor in short-run investment, is a major
one in long-run investment such as investment in durable machines, railways, utilities,
the capital value of which increases rapidly as the interest rate is reduced. [J. A. S. in-
tended to expand this — he penciled ‘This is obscured by risk — otherwise.’]

s Theorie des Geldes . . . 1924, Third Part, ch. 5, secs. 4, 5. This reference is to
the 2nd ed., in which the line of reasoning above is presented as an essentially com-
plete explanation of cycles. The fundamental ideas, however, are already contained in
the original edition of 1912.

10 Geldtheorie und Konjunkturtheorie (1929); Prices and Production (1931). A new
version that altered the argument in several important respects appeared in 1939:
Profits, Interest, and Investment; and a further installment that covered much new
ground, in 1941 : The Pure Theory of Capital.

11 Other successes of ‘theoretical’ books, in our time, for example, the success of
Professor E. H. Chamberlin’s Monopolistic Competition and Hicks’s Value and Capital,

1121

MONEY, CREDIT, AND CYCLES

Hawtrey’s 12 analysis makes business cycles, as he himself put it, a purely
monetary phenomenon in a sense in which the Mises-Hayek cycle is not. Haw-
trey makes no use of the element of disturbance (or maladjustment) in this
time structure of plant and equipment; fluctuations in the flow of money in-
come, themselves caused by exclusively monetary factors, are the only cause of
general cyclical fluctuations in trade and employment. But he does use the
Cumulative Process and traces it like Mises to the inherent instability of the
modem credit system. Banks, then, are again supposed to start abnormal activ-
ity by easy conditions for loans. Only the main link of this with general boom-
ing conditions is not increase in orders for new plant or equipment but in-
crease in the stocks held by the wholesale trade that also react to small changes
in loan rates. Expansion leads to further expansion, hence to increased money
incomes and to loss of hand-to-hand cash by the banks, whose inability to go
on expanding loans indefinitely then leads to a rise in rates which reverses
the process — -which is why the central bank rate plays so great a role in this
analysis. Thus, similarities are sufficiently pronounced to entitle us to speak of
a single monetary theory, the votaries of which disagree on one issue only:
whether bank-loan rates act primarily on 'durable capital’ or via the stocks of
wholesalers. Throughout the twenties, Hawtrey’s theory enjoyed a consider-
able vogue. In the United States, especially, it was the outstanding rationaliza-
tion of the uncritical belief in the unlimited efficacy of the open-market opera-
tions of the Federal Reserve System that prevailed then.

Nor is the fundamental unanimity of the votaries of the monetary theory of
cycles 13 seriously disturbed by those economists who place responsibility for
the phenomenon with the vagaries of gold. This idea commanded more assent
when it was used to 'explain’ those longer spans of prevalent prosperity or
prevalent depression that are in fact associated (more or less) with significant
changes in the rate of gold production, such as, roughly, 1849-72 or 1872-91.
But it has also been used to 'explain’ business cycles proper. In this case, since
an accession of gold acts on bank reserves and hence makes banks more will-

were more enduring and therefore greater in the end. But they lacked the spectacular
quality of Hayek’s. The much greater success of Keynes’s General Theory is not com-
parable because, whatever its merit as a piece of analysis may be, there cannot be any
doubt that it owed its victorious career primarily to the fact that its argument imple-
mented some of the strongest political preferences of a large number of modem econo-
mists (see below Part v, ch. 5). Politically, Hayek’s swam against the stream.

12 R. G. Hawtrey, Good and Bad Trade (1913), and many later works. Perusal of
Capital and Employment (1937) will show the extent to which Mr. Hawtrey modified
his earlier views.

13 When we speak of monetary theories of cycles, a double meaning of the word
theory (see Part i) leaps to mind. A monetary theory of cycles is an explanatory hy-
pothesis of cycles that runs in terms of money and lending. But nobody denies that
any explanation of the phenomenon must take account of its monetary features. We
may, therefore, use the word monetary, theory also for the sum total of propositions
about the ways in which money and credit behave in the cycle. And, considered as
contributions to monetary cycle theory in this sense, many arguments, such as Haw-
trey’s, retain importance even for those who do not accept them as adequate in the
role of explanatory hypothesis.

1122

iv: FROM 1870 TO 1914 AND LATER

ing and able to lend, we have a particular reason for expecting expansion in-
stead of the more general reason formulated by Mises and Hawtrey but, for
the rest, the argument will be much the same: again credit inflation owing to
low money rates, again the point at which interest'" catches up with prices,
and reversal of the process. The most eminent sponsor of this type of mone-
tary theory, Professor Irving Fisher, at first stated it in this unsophisticated
manner in his Purchasing Power of Money, 1911 (ch. 4). 14 But, though he
continued to emphasize the monetary aspects of the phenomenon, he so
broadened the basis of his analysis as to end up with the Debt-Deflation
Theory, which, contrary to his unduly restricted claim, applies to all recorded
business cycles and is in essence not monetary at all. Ostensibly, the burden
is chiefly laid upon the fact that in the atmosphere of prosperity debts are
accumulated, the inevitable liquidation of which, with the attendant breaks in
the price structure, constitutes the core of depression. Behind this surface
mechanism there are the really operative factors— new technological and com-
mercial possibilities chiefly — which Fisher does not fail to see but which he
banishes to the apparently secondary place of ‘debt starters’ ( Econometrica ,
October 1933, p. 348), so that, exactly as in the case of his general mone-
tary analysis (see above, sec. 2), the true dimensions of what is really a great
performance are so completely hidden from the reader’s view that they have
to be dug out laboriously and in fact never impressed the profession as they
should have done.

9. Non-Monet ary Cycle Analysis

It will be convenient to go on in order to glance briefly at some analyses
of cyclical phenomena other than Hayek’s that are non -monetary in the sense
defined , 1 although we shall have to cross the frontiers of this chapter’s subject
in doing so. But we shall go no further than is necessary in order to establish
one important proposition, namely, that all the essential facts and ideas about

14 The version presented in Purchasing Power had been published before, in sum-
mary, in Moody's Magazine under the title ‘Gold Depreciation and Interest Rates,’
February 1909. The main stepping stones to the Debt-Deflation Theory are the ar-
ticles: 'The Business Cycle Largely a “Dance of the Dollar,” ’ Journal of the American
Statistical Association, December 1923, and ‘Our Unstable Dollar and the So-Called
Business Cycle’ (ibid. June 1923), both of which concentrate on fluctuations of prices
and interest rates that are traced to purely monetary conditions, and the book Booms
and Depressions (1932) partly summarized and partly complemented in ‘The Debt-
Deflation Theory of Great Depressions,’ Econometrica, October 1933, to which refer-
ence is made in the text.

1 The italicized words should be kept in mind because, in view of the fact noticed
in the preceding section, namely, that the demand for money and especially for bank
credit must always play some role, and mostly an important one, in explanations of
fluctuations, any less strict definition of ‘purely monetary theories’ would result in the
inclusion of many more. But even so dividing lines are very much a matter of sub-
jective judgment and cannot be drawn sharply. Not all historians will, e.g., call the
Mises theory purely monetary or the Hayek theory non monetary.

MONEY, CREDIT, AND CYCLES

II23

business-cycle analysis had emerged by 1914: the subsequent thirty, years
brought forth, indeed, a flood of statistical and historical material, and many
new statistical and theoretical techniques; by clarification and elaboration they
may be said to have expanded the subject into a recognized branch of eco-
nomics; but they added no principle or fact that had not been known before. 2

(a) Juglar’s Performance. As we have seen, it was the spectacular phenome-
non of ‘crises’ and the less spectacular but still more irritating phenomenon
of depressions (‘gluts’) which, in the preceding period, first attracted the atten-
tion of economists. We have also seen, however, that some of them did look
beyond depressions: such men as Tooke and Lord Overstone fully realized that
crises and gluts were but incidents or phases of a larger process; many more
displayed symptoms of a vague awareness of this fact. Nevertheless, it was only
during the period under survey that the ‘cycle’ definitively ousted the ‘crisis’
from its place in economists’ minds and that the ground was cleared for the de-
velopment of modern business-cycle analysis, though practically all workers in
the field continued to use the old phrase — an interesting case of ‘terminological
lag.’ This is why the decisive performance is considered here although it was
published in 1862. It was the work of a man who was a physician by training,
but must be ranked, as to talent and command of scientific method, among
the greatest economists of all times, Clement Juglar.® This evaluation rests

2 This statement and my failure to make the (impossible) attempt to survey the
achievements of this later literature on cycles must not be interpreted in a derogatory
sense. On the contrary, I believe the work embodied in this literature to be as valu-
able as any ever done by economists. This much at least will be evident from what I
shall say about it in Part v. It is nevertheless essential to realize the extent to which
this work rests upon bases laid before 1914. Attention is called to Professor R. A.
Gordon's ‘Selected Bibliography of the Literature on Economic Fluctuations, 1930-36,’
Review of Economic Statistics, February 1937, and to the list of books about Business
Cycles published by the Bureau of Business Research, University of Illinois, College of
Commerce and Business Administration, 1928. Professor von Haberler’s masterly pres-
entation of the modem material ( Prosperity and Depression, 1937; 3rd enlarged ed.,
1941) is recommended as an introduction to the subject: reliance on. the fact that
few if any students of economics fail to consult this work is my main excuse for keep-
ing my own comments upon it as brief as possible. The reader will understand, how-
ever, that my admiration for it does not involve agreement in every point. Work prior
to 1895 is fairly well covered by a history that appeared in that year: E. von Bergmann,
Geschichte der ndtionalokonomischen Krisentheorieen. From a lengthy list of other
historical and critical publications, I will mention only: Alvin H. Hansen, Business-
Cycle Theory (1927); then, once more, F. Lutz, Das Konjunkturproblem in der Na-
tionalokonomie (1932); and W. C. Mitchell’s Business Cycles . . . (1927), espe-
cially ch. 1.,

3 Clement Juglar (1819-1905) abandoned medicine for economics in 1848. He had
no formal training in the latter subject and cared even less than he knew about formal
theory. His was the type of genius that walks only the way chalked out by himself
and never follows any other. Many people do this in a subject like economics. But then
they mostly produce freaks. The genius comes in where a man produces, entirely on
his own, truth that will stand. Of his many publications it is only necessary to mention
the principal one: Les Crises commerciales et deur retour pdriodique en France, en

1124 rv: FROM 1870 TO 1914 AND later

upon three facts. To begin with, he was the first to use time-series material
(mainly prices, interest rates, and central bank balances) systematically and
with the clear purpose in mind of analyzing a definite phenomenon. Since this
is the fundamental method of modern business-cycle analysis, he can be justly
called its ancestor. Second, having discovered the cycle of roughly ten years’
duration that was most obvious in his material — it was he who discovered the
continent; islands near it several writers had discovered before — -he proceeded
to develop a morphology of it in terms of -‘phases’ (upgrade, ‘explosion,’ liqui-
dation). Though Tooke and Overstone had done the same thing, the modern
morphology of cycles dates from Juglar. And so does, in the same sense, ‘peri-
odicity.’ This morphology of a ‘periodic’ process is what he meant when he
proudly claimed to have discovered the ‘law of crises’ without any precon-
ceived theory or hypothesis. 4 Third, he went on to try his hand at explanation.
The grand feature about this is the almost ideal way in which ‘facts’ and
‘theory’ are made to intertwine. In themselves, most of his suggestions concern-
ing the factors that bring about the downturn (loss of cash by banks, failure
of new buying) do not amount to a great deal. But all-important was his diag-
nosis of the nature of depression, which he expressed with epigrammatic force
in the famous sentence: ‘the only cause of depression is prosperity.’ This means
that depressions are nothing but adaptations of the economic system to the
situations created by the preceding prosperities and that, in consequence, the
basic problem of cycle analysis reduces to the question what is it that causes
prosperities— to which he failed, however, to give any satisfactory answer.

Economists were at first slow to follow up Juglar’s lead. Later on, however,
most of them, even those who were more inclined than he was to commit
themselves to particular hypotheses concerning ‘causes,’ adopted his general
approach — so much so that today Juglar’s work reads like an old story very
primitively told. And at the end of the period stands a work that, on the one
hand, was entirely conceived in his spirit and, on the other hand, ushered in a
most important part of the cycle analysis of our own time: Wesley C. Mitch-
ell’s Business Cycles ®

Angleterre et aux Etats Unis (‘crowned’ by the Academie des Sciences Morales et Poli-
tiques in 1860, publ. as a book in 1862, 2nd ed. 1889, English trans. by W. Thom,
from 3rd ed., 1916). There is a Notice of his life and work by Professor Paul Beaure-
gard, in the Comptes rendus of the Acaddmie des Sciences Morales et Politiques (1909).

4 Juglar seems not to have considered the implications of the fact that his 9-10 year
cycle could not be expected to be the only wavelike movement in his, material. Later
workers naturally discovered others. At least the names of N. D. Kondratieff (1922)
and Joseph Kitchin (1923) should be mentioned (on these and predecessors, see Mitch-
ell, op. cit. pp. 227 and 380). But we can do no more than advert to this line of ad-
vance. Juglar’s merit is hardly diminished by these developments — -in; fact, they only
serve to enhance his historical position.

5 Business Cycles (1913); entirely re-written version. Business Cycles: the Problem
and Its Setting (1927); Measuring Business Cycles by A. F. Bums and W. C. Mitchell
(1946). I do not mean to suggest, however, that Professor Mitchell derived his ap-
proach from Juglar, any more than I would suggest that the inventors of the ‘Harvard

MONEY, CREDIT, AND CYCLES 1 12 5

(b) Common Ground and Warring ‘Theories.’ That period, then, estab-
lished a method, .at least the fundamental principle of a method, on which,
by the end of the period, a majority of business-cycle analysts agreed arid
which was to serve the bulb of the work of our own time. Agreement went
further than this however. By the end of the period the lists of the features or
symptoms that characterize cyclical phases — which different economists did
draw up or would have drawn up — looked much alike. And not only that: by
the end of the period most workers agreed — or tacitly took for granted — that
the fundamental fact about cyclical fluctuations was the characteristic fluctua-
tion in the production of plant and equipment. Now, how is this? We seem
to be discovering a lot of common ground that should have assured much
parallelism of effort and much agreement in results. Yet this is not at all what
a survey of that literature reveals. On the contrary, we seem to behold noth-
ing but disagreement and antagonistic effort — disagreement and antagonism
that went so far as to be discreditable to the science and even ludicrous. The
contradiction is only apparent however. Agreement on the list of features, even
if it had been complete , 6 does not spell agreement as to their relations with
one another, and it is the interpretation of these relations and not the list
per se which individuates an analytic scheme or business-cycle 'theory/ Even
. agreement to the effect that it is the activity in the plant-and-equipment ('capi-
tal goods’) industries which is the outstanding feature in cyclical fluctuations
does not go far toward ensuring agreement in results since it leaves the. de-
cisive question of interpretation wide open. And, in order to avoid misunder :
standing, we must emphasize at once that the outstanding feature of cyclical
phases, whatever it is, need not contain within itself the 'cause’ that explains
why cyclical fluctuations exist: this 'cause’ may still lie somewhere else, for
example, in the sphere of consumption. But in spite of all this, it remains
Both true and important that agreement went further than the troubled sur-
face suggests and that most of the analysts of the business-cycle phenomenon
who produced theories, which look so different, really started from a common
basis.

1. The fact that the ‘relatively large amplitude of the movements in con-
structional, as compared with consumption, industries’ is one of the most ob-
vious 'general characteristics of industrial fluctuations ’ 7 can hardly fail to ob-

Barometer’ were subjectively dependent on him. All I want to point out is the ob-
jective contour line of the development of that method — Filiation of Scientific Ideas is
an objective process which may, but need not, involve any subjective relation. Similarly,
Menger had not heard of Gossen until long after he had developed his version of
the marginal utility analysis. Yet Monger's work stands in an objective sequence in
which Gossen stands, in time, above him.

6 It was substantial but not complete. An example will illustrate: nobody can fail to
recognize that prices move characteristically in the course of a cycle; but their behavior
is not quite regular and there are prosperities in which they failed to rise; this left room
for difference of opinion on whether or not they should be included in a list of ‘normal’
features.

7 Pigou, Industrial Fluctuations (1927), Part x, ch. 2.

1126

iv: from 1870 to 1914 AND LATER

trude itself upon anyone 8 who has learned to look at a cycle as a whole,
though it may escape attention so long as one looks merely at the depression
phase. Nevertheless, it took time for it to be recognized consciously and with
full awareness of its pivotal importance. Speaking very roughly, we may asso-
ciate this achievement— or a decisive share in this achievement — with the
work of Tugan-Baranowsky . 9 It is, however, only the emphasis upon the pivotal
importance of that fact which constitutes the historical merit of the work. His
own interpretation of it — that is, his distinctive theory — which runs in terms
of alternating accumulation and release of liquid saving, is valuable only as an
example of how short the way is from a promising starting point into a blind
alley, even for an able and serious worker.

11. The outstanding work in the line under discussion is Arthur Spiethoff’s . 10
His analytic schema first lists a number of possible starters of a process of ex-
pansion of plant and equipment, which process then accounts without diffi-
culty for all the other observed phenomena of booms, great care being taken to
account for the individual peculiarities of every historical instance. This em-

8 Walras, it is interesting to note, treated as common knowledge the fact that the
production des capitaux neufs goes on in alternating high tides and low tides — charac :
terized by respectively high and low rates of discount and of prices — and identified it
(in 1884) with what we call business cycles of about 10 years’ duration. He does not
quote Juglar but Jevons. (Etudes d’economie appliquee, 1936, p. 31.)

9 Mikhail Ivanovich Tugan-Baranowsky (1865-1919) was the most eminent Russian
economist of that period and should perhaps have been mentioned also in other con-
nections. The methodological aspect of his work is particularly interesting: he did much
historical work of high quality; but he was also a ‘theorist’; and he combined, or
welded into a higher unit, these two interests in a way which he had learned from Marx
and which was by no means common. From Marx, too, he had learned to theorize,
though he experienced the influence both of the English ‘classics' and of the Austrians
with the result that his theoretical work in the end amounted to a ‘critical synthesis.’
But neither his Theoretische Grundlagen des Marxismus (1905) nor his Sozicde Theorie
der Verteilung (1913) made any mark. This was but natural in view of the deficiency
in rigorous thinking both displayed, which is as deplorable as it is curious in a man
of his ability. More important were his work on the history of industrial capitalism
in Russia (1st Russian ed., 1898; German trans. 1900) and Modern Socialism in Its
Historical Development (1906; English trans. 1910). The only other iteiri that need
be mentioned out of what no doubt was an imposing total is the most important of
all, for this did make a mark and did exert influence far and wide, viz., his history of
commercial crises in England (first in Russian, 1894; German version, 1901; French,
1913). Again, the first and theoretical chapter is a distinctly poor performance. The
rest stands in the history of our science.

10 On Spiethoff, see above, ch. 4, sec. 2d. The main reason why his work developed
so slowly was his heroic resolve to carry out a vast program of minute factual research
single-handed — practically without any research assistance at all. Though he began to
publish fragmentary results in 1902 (in Schmoller’s Jahrbuch), a provisional presenta-
tion of the whole— really a preview only — was not published before 1925 in vol. vi of
the 4th ed. of the Handworterbuch der Staatswissenschaften, article ‘Krisen.’ I un-
derstand that preparations are being made for the publication of a fuller version in
English.

MONEY, CREDIT, AND CYCLES 11 27

phasis upon the expansion of plant and equipment is reflected in the choice,
for the role of fundamental index, of iron consumption (production plus im-
ports minus exports). The problem that remains, namely why this expansion
eventually runs into a general condition of production at a loss (‘overproduc-
tion'), is then solved by means of several factors, such as shortage of working
capital and temporary saturation of demand in particular directions. This
schema, which at every step leaves plenty of room for alternatives, is admirably
suited for absorbing, into their proper places and without exaggerating their
importance, many other factors that are worked up into unique motors of the
cyclical movement by other theories, such as ‘psychological’ factors, monetary
factors, acceleration, undersaving. SpiethofFs analysis, therefore, comes nearest
to an organic synthesis of relevant elements and to full utilization of the co-
ordinating power of that starting point. And it has still another virtue: with
the possible exception of Marx, Spiethoff was the first to recognize explicitly
that cycles are not merely a non-essential concomitant of capitalist evolution
but that they are the essential form of capitalist life. Also he was one of the
first to observe that there are long periods during which prosperity phases of
cycles are accentuated by favorable conditions (‘spans of prosperity’) and other
long periods during which depression phases are accentuated (‘spans of depres-
sion’). He refused, however, to combine these drawn-out spells of predomi-
nant prosperity and depression into ‘long cycles' and he reserved judgment as
to their causation.

It would be extremely interesting to compare Spiethoff’s work on cycles
with the work of Robertson, which though independent of Spiethoff’s, displays
affinity in important respects . 11 There is no similarity in method. Spiethoff

11 Professor D. H. Robertson’s publications start in January 1914 with an important
but all but unknown article (‘Some Material for a Study of Trade Fluctuations’) in the
Journal of the Royal Statistical Society that presented historical material in support of
the promising idea — which Robertson failed to exploit but which never vanished com-
pletely from his horizon — that cycles have something to do with the impact upon the
economic process of new industries, some booms being connected, e.g. with railroad
building, others with inventions in steel production, electricity, the explosion motor,
and so on. Next came his Study of Industrial Fluctuation (1915), which drew a pic-
ture closely similar to Spiethoff’s. The monetary complement (saving, forced saving,
credit creation, and so on) was added in his famous Banking Policy and the Price Level
(1926; 3rd ed., 1932) and elaborated in various papers most of which are reprinted in
Essays in Monetary Theory (1940). A passage in Banking Policy . . . (p. 5) is so im-
portant for the histoire intime of the monetary analysis of our day that quotation is
imperative: ‘I have had so many discussions with Mr. J. M. Keynes on the subject-
matter of Chapters v and vi [containing the monetary analysis], and have re-written
them so drastically at his suggestion, that I think neither of us now knows how much
of the ideas therein contained is his and how much is mine.’ This, of course, was J. M.
Keynes of the Treatise and not of the General Theory., but there were in Robertson’s
book some pointers also toward the latter. In view of the later disagreements between
these two eminent men, it is desirable to notice that, whatever their immediate cause,
there was always this fundamental difference: Keynes concentrated on monetary as-
pects and monetary policy from the first, whereas Robertson emphasized ‘real factors’-—

1128

IV: FROM 1870 TO 1914 AND LATER

started, in the spirit of Juglar, from minute investigations of available statis-
tics; Robertson worked first and last as a 'theorist/ taking only the broadest
and most obvious facts as a base and concentrating on forging tools of inter-
pretation. Therefore, their work is complementary rather than competitive.
But their general visions of the cyclical process and its causation were closely
similar . 12

in. A few examples will suffice to display the fact that most theories of
cycles are nothing but different branches of that common trunk, 'plant and
equipment/

First, the reader will realize without difficulty that even the purely monetary
theories of cycles may be included among the 'investment theories/ For al-
though they locate the causes of the cyclical movement in the monetary
sphere, effects upon the plant-andequipment industries are bound to play
some role. If, in particular, explanation pivots on the money rate of interest,
disturbance in the structure of 'physical capital’ must always be a factor in
cyclical situations though, especially from a short-run point of view like, for
example, Hawtrey’s, it need not be made the decisive one. If we do make it
the decisive one, we get the non-monetary or semi-monetary theory of Hayek —
increased production of durable plant and equipment ('lengthening of the
period of production’) through a fall of the money rate of interest below the
marginal rate of profit.

Second, writers who agree to interpret business cycles primarily as invest-
ment cycles — in the physical sense of the term investment — may still differ
as to the 'starter’ and such differences will then individuate their theories.
Thus, what may be termed the perpetuum-mobile theory contents itself with
the fact that depression itself will in its course produce conditions favorable,
first, to revival and, then, to the construction of new plant and equipment. To
give another example, Mrs. England, with a keener sense of the necessity for
a more convincing cause, pointed to the activity of promoters or, more gener-
ally, to the intrusion into the horizon of entrepreneurs of new technological
or commercial possibilities . 13

Third, whatever it is that gives the prosperity impulse, we may derive a dis-

as against both monetary and psychological ones — from the first. There were thus wide
stretches of ground that were Robertson’s own and into which Keynes’s analysis never
penetrated. Within this wider frame, monetary propositions acquire a meaning — and
one that is very relevant for practical applications — that is wholly different from the
meaning and implications which the same monetary propositions convey if taken by
themselves.

12 Robertson repeatedly expressed awareness of this fact, regretfully hinting at the
prohibitive barrier of language. It can, I believe, only happen in economics that a
scientific worker would leave it at that. I do not say this in reproach. I say it because
the case illustrates a state of things that is very general and explains much in the his-
tory of economics.

13 Of the interesting papers by Minnie Throop England, we note especially "Promo-
tion as the Cause of Crises,’ Quarterly Journal of Economics, August 1915, and 'An
Analysis of the Crisis Cycle,’ Journal of Political Economy , October 1913.

MONEY, CREDIT, AND CYCLES

II29

tractive theory, by emphasizing the indubitable fact that the plant and equip-
ment, construction of which is undertaken in reaction to such an impulse,
takes time to get into existence and working order — time during which there
is nothing to blunt the edge of that impulse. Consequently, when later on
the stream of additional products impinges upon consumers’ goods markets,
something like ‘general overproduction,’ that is, a price fall that turns expected
profits into actual losses, may result. If we trust this explanation sufficiently,
we can speak of a ‘lag theory’ of the cycle. We get another version if we put
the main emphasis, instead of on the fall in the prices of consumers’ goods,
on the rise in the price of cost items. The former version may be exemplified
by the works of Bouniatian and Aftalion, the latter by that of Lescure, though
there is much in all three of them to relieve the pressure on the factor pri-
marily stressed. 14 Incidentally, we may infer from this that he who says that
business cycles are primarily cycles in prices may mean exactly the same thing
as he who says that they are primarily cycles in investment.

Fourth, there was again, as there had been in the preceding period, a crop
of those theories which, in one way or another, impute responsibility for de-
pressions to the inadequacy of money incomes in general — more precisely their
failure to expand pari passu with the production, actual or potential, of con-
sumers’ goods 15 — or to people’s saving habits or, finally, to inadequacy of the
incomes of some classes and the saving habits of others. I have had occasion
already to comment on the indestructible vitality they owe to their popular
appeal. It was to this appeal — particularly strong in prolonged periods of pre-
dominant depression — and not to any great improvement in their analytic
foundations that they owed their survival. Leading scientific opinion, however,
continued to be unfavorable to them and they continued, to borrow Lord
Keynes’s felicitous phrase, to live in a scientific underworld. So much was this
the case that leading economists did not even bother to make the concessions
that were obviously indicated. For though the argument against oversaving

14 Mentor Bouniatian, W irtschaftskrisen und Ueberkapitalisation (1908), enlarged as
Les Crises 6conomiqv.es (Russian original, 1915; French trans. 1922); A. Aftalion,
Les Crises p6riodiques de surproduction (1913); J. Lescure, Des Crises generates et
periodiques de surproduction (19 06; 3rd ed., 1923). All three of these authors, but
especially the two last, are particularly notable for strict adherence to Juglar’s methodo-
logical principles.

15 This was sometimes called ‘the flaw in the price system’ and may also be ex-
pressed by saying that the expansion of production in capitalist society is normally at-
tended by a long-run tendency in prices to fall (‘deflation’). It is highly characteristic
of the mental habits that prevail in economics that this fact, which received much at-
tention, was hardly ever seen in its organic significance. Some economists — I think that
Marshall was among them — noticed it with approval much as A. Smith had approved
of ‘cheapness and plenty.’ For others, it was just a ‘flaw.’ The best that can be reported
was that some writers pointed out that falling prices did not spell disturbance where
they were a consequence of cost-reducing improvement; and that others pointed out
that monetary remedies for falling prices would create disturbance of their own (profit
inflation).

II30 IV: FROM 1870 TO 1914 AND LATER

theories may be strong so long as they aver that saving is an ultimate and in-
dependent 'cause’ of disturbance* it should never be denied, on the one hand,
that there are plenty of hitches in the saving-investment mechanism and,
on the other hand, that saving, in a depression that has already set in for
reasons other than saving, may make things worse on balance than they
otherwise need be, especially if saving takes the form of hoarding as it is
likely to do in a depression. But the leaders of prevailing opinion, though they
had occasional glimpses of all this , 16 completely failed to go into the matter
properly — a fact that explains much in the recent history of economics. They
evidently attached but little importance to these possibilities of disturbance.
They did not even emphasize the role in the cycle of that saving which is be-
ing used for the repayment of bank loans. Thus a considerable tract of open
country was left unguarded in which, to the backward glance of the economist
of today, there seems to stand, in something that to many looks very like a
halo of glory, the figure of J. A. Hobson. Actually, his was not a solitary figure.
Nor did he come Very near to having anticipated the. doctrines of present-day
Keynesianism. But we shall confine ourselves to him . 17

In most cases, there is no sharp dividing line between underconsumption
theories and others. Some, though not all of them, might just as well be
couched in terms of overproduction or overinvestment, monetary or 'real’ —
whereupon it becomes easy to see that they are but another branch of the
plant-and-equipment tree. This is particularly clear in the case of the type of
oversaving argument that was espoused by Hobson. Today most writers who
see saving in the role of villain of the piece aver that the mischief arises from
savers’ not spending at all, either on current consumption or on ‘investment
goods’: the problem then is to show why, having saved, people refuse to in-
vest, thereby creating unemployment and pools of idle money . 18 But though
Hobson notices this aspect of the matter he based, not quite logically, his ex-
planation of cyclical fluctuations and of the incident unemployment upon an
entirely different argument. With him saving produces alternating prosperities
and depressions precisely because savers do invest promptly and thereby in-
crease the productive powers of the economic engine beyond the possibility
of sale at cost-covering prices. This line of reasoning may be labeled Overpro-
duction-through-Saving and is certainly not Keynesian. But Hobson, -like Tugan-
Baranowsky before him, went on to point out that most saving is done by the
relatively rich, and he used this fact to arrive at the proposition that the ulti-
mate cause of cyclical disturbance and of the incident unemployment is the

16 For such a glimpse, in the case of Marshall, see Keynes’s General Theory, p. 19m

17 See above, ch. 5, sec. 2a. The two books that bear most directly on the sub-
ject of this section are: The Industrial System (1909) and Economics of Unemploy-
ment (1922).

18 This way of looking at the matter is, of course, related to the fact that present-day
analysis is primarily short-run analysis. In the short run, saving can create trouble only
if savings are hoarded; if they are quickly disbursed in acts of investments, they sus-
tain activity in the first instance; and their long-run effects do not enter into a short-
run picture.

MONEY, CREDIT, AND CYCLES 11 31

inequality of incomes. Therefore, we shall understand why economists who are
interested in nothing hut politically relevant results will hail Hobson as a fore-
runner of Keynes. 19

Fifth, it is only for the sake of convenience that I put Marx at the end of
our list of examples. In justice, he ought to have been put first because more
than any other economist he identified cycles with the process of production
and operation of additional plant and equipment.

Both followers and enemies have experienced difficulty in attributing to
Marx any clear-cut theory of cycles. The obvious reason for this difficulty is
that Marx did not live to systematize his ideas on the subject: his theory re-
mained the great ‘unwritten chapter’ of his work. But there is another and
more fundamental reason. His topic was capitalist evolution. Everything he
ever wrote, even his scheme of a stationary society, was written to elucidate
this topic. Capitalist evolution was to end in tire breakdown of the system.
But he early adopted the idea — it is already in the Communist Manifesto —
that the current crises were previews of this breakdown, that is to say, the
same kind of phenomenon that need only intensify itself in order to bring
about definitive breakdown (the economic complement of the Revolution). 20
Therefore, all the elements of capitalist reality were, directly or indirectly, rele-
vant also to his vision of the cyclical phenomenon. The ‘unwritten chapter’
would have had to sum up the whole of his analysis of capitalism. And the
whole of this analysis in turn centered in (1) the production of ‘real capital’
and (2) in the factors that change its composition (relative increase of constant
compared with variable capital 21 ). These are the unifying conceptions to
which must be referred what otherwise may easily appear to be disjointed and
even contradictory hints. There are, of course, many of these, such as: capi-
talists’ ineluctable craving for accumulation (regardless of return) that is to
motivate bursts of investment activity — the weakest point, though buttressed
by various suggestions about more substantial factors; the ever-present impulse
that produces manias and crashes (vividly but superficially described by

19 As Lord Keynes himself has pointed out ( General Theory, ch. 23, vi), Gesell’s
claims to that honor are much stronger.

20 This is why it was essential for Marx to assume, and if possible to prove, that
crises would increase in intensity as time went on, a thesis that was abandoned by
Hilferding (1910) and eventually also by Kautsky, who had put up the most elaborate
defense of it in 1902. Most other cycle analysts of that period either did not pro-
nounce upon the subject — which means, I take it, that they did not see any reason
why depressions should grow either more or less severe — or were inclined to take the
opposite view. It is important to bear in mind that this opposite view may mean two
different things: first that the fundamental movement would decrease in amplitudes or,
second, that people would leam to handle surface phenomena and effects (speculation,
swindling, bank failures, shrinkage of expenditure owing to unemployment) so that the
observed amplitudes would grow smaller though the underlying process remains the
same. No such distinction was explicitly made, however, so far as I know, in any of
the more influential writings.

21 Constant capital is, of course, not the same as plant and equipment, but the rela-
tive increase in the latter is the salient point about that process.

1132 rv: FROM 1870 TO 1914 AND. LATER

Engels); the tendency of the rate of profit to fall (whether or not satisfactorily
motivated); overproduction and anarchy (uncertainty) of capitalist decision;
recurring periods of reinvestment (renewal of the physical apparatus of produc-
tion) with periods of reduced activity to follow. There were others, among
them a clear pointer toward underconsumption by the laboring masses as the
‘last cause of all real crises’ ( Capital , vol. 111, p. 568) and toward the conse-
quent inability of capitalists to ‘realize’ the surplus value that ‘exists’ in the
commodities that have been produced. Conflicting evidence makes it impos-
sible, however, to impute to Marx an underconsumption, theory of cycles
though it remains possible to attribute to underconsumption a role in condi-
tioning an ultimate state of stagnation. 22

But none of these hints, taken by itself, nor their sum total amounts to a
theory of cycles. So far as Marx himself is concerned, the historian of analysis,
after having noticed the basic conception and also perhaps the particularly un-
satisfactory handling of money and credit, must leave it at that. All the same,
there are a number of Marxist cycle theories. But they should be attributed
not to Marx but to their authors — Marxists who, either selecting hints that
appealed to them more than others or trying to develop, from the Marxist
basis, ideas of their own, provided substitutes for the ‘unwritten chapter’ rather
than reconstruction of it — fully believing, no doubt, that they were interpret-
ing Marx and always keeping in mind the cherished relation between the
crises of experience and the ultimate catastrophe of capitalism. It is not pos-
sible to survey them in a sketch like this. 23

(c) Other Approaches. Though it is impossible to survey all the other ideas
that emerged during that period about the nature and causation of economic
fluctuations, it is both possible and necessary to point out that most of them,
besides being suggested by untutored observation, were bound to appeal to
economists who had developed economic statics as the centerpiece of their
science. As we have seen above, they naturally exaggerated the importance
of their central achievement. They saw more in it than do we, that is, more
than a logical schema that is useful for clearing up certain equilibrium rela-
tions but is not in itself directly applicable to the given processes of real life.
They did not realize how many and how important the phenomena are that
escape this logical schema and loved to believe that they had got hold of all
that was essential and ‘normal.’ Now, from the standpoint of this type of

22 The conflicting evidence is widely scattered. But see, e.g., Capital , vol. it, p. 476,
where Marx avers that the share of the working class in the consumable product in-
creases in the period preceding a crisis. The weight of this passage is enhanced not so
much by the fact that Marx, a few lines before, declared the proposition that crises
were caused 'by the scarcity of solvent consumers’ to be ‘purely a tautology,’ as by
the fact that the proposition follows logically from his own scheme.

23 P. M. Sweezy’s work, though in this matter somewhat impaired by an evident
desire to turn Marx into a Keynesian, will again prove extremely useful as a help for
further study. I will merely repeat names already mentioned: O. Bauer, Bukharin,
Grossmann, Hilferding, Kautsky, Luxemburg, and Sternberg. The best analysis of Marx’s
own views that I know of is that by H. Smith, ‘Marx and the Trade Cycle,’ Review
of Economic Studies, June 1937.

MONEY, CREDIT, AND CYCLES

H33

analysis, it is natural to locate the 'causes’ of observed disturbances either out-
side of the economic system 24 or in the fact that the economic engine, like
any engine, never works with precision. And this attitude toward observed
fluctuations was the common root — or common characteristic — of another
group of theories that also seem at first sight to have nothing to do with
one another . 25 We shall notice three examples.

First, the most exogenous of all factors that influence economic life is varia-
tion of harvest in so far as due to weather, a factor pressed into service for,
the purpose of explaining business fluctuations by W. S. Jevons, H. S. Jevons
(his son), and H. L. Moore . 26

Second, the fact that the economic engine is likely to stall may be exploited
for the purposes of business-cycle analysis in various ways. The most direct one
is to attribute responsibility to uncertainty in general, which will result in 'er-
roneous’ decisions. But since this uncertainty is, in many respects, due to the
fundamental properties of the private enterprise economy, we may also di-
rectly accuse the latter’s institutions . 27 And since individual errors cannot con-

24 Factors that act upon the economic system from outside are called external or
exogenous factors, theories that work with such factors, exogenous (as distinct from
endogenous) theories. It should be borne in mind, however, that this concept does not
carry as definite a meaning as it might seem to do. On the one hand, its content will
vary according to what we include in the economic system: everybody excludes un-
controllable natural events, but not everybody will also exclude 'politics.’ On the other
hand, even if we exclude from the concept everything that is not covered by the theory
of ‘business behavior’ — difficult though this is in such cases as central bank action and
the like — the content of the concept will still vary according to whether we mean by
endogenous processes such processes only as are uniquely determined by an initial situa-
tion (Tinbergen’s meaning) or also such processes as are influenced by factors not pres-
ent in the initial situation, e.g. unexpected introduction of new methods of production.

25 Another group of theories that would overlap with ours also may be related to the
unduly great confidence that the best theorists of the period placed in the equilibrium
analysis. This group may be called the Disproportionality Theories and comprises theo-
ries that locate the source of cyclical troubles, in ‘maladjustments’ as between different
groups of prices and quantities. This idea comes naturally to anyone who accepts Say’s
law as a starting point of his analysis of cycles ( not necessarily his general theory of the
economic process) and is moreover easy to substantiate from observation of certain very
obvious facts. A large number of economists could be quoted — though principally econ-
omists who were not specialists of business-cycle analysis — who were, content to accept
it. But I have not chosen this point of view for discussion, because Disproportionality
remains an empty phrase so long as it is not linked with definite factors that are to
account for it and because, so soon as it is so linked, those factors and not dispropor-
tionality per se will individuate an author’s theory. As an example of an analysis that
stresses certain types of disproportionalities — that are mainly due to lags — E. Lederer’s
Konjunktur und Krisen (in Grundriss der Sozialokonomik, Part iv, xi, 1925) may,
however, be mentioned.

26 W. S. Jevons’ papers were reprinted in Investigations in Currency and Finance
(1884); H. S. Jevons, The Sun’s Heat and Trade Activity (1910); H. L. Moore, Eco-
nomic Cycles: Their Law and Cause (1914).

27 The reader will realize that this ‘explanation’ may easily degenerate into generali-

11^4 IV: FROM 1870 TO 1914 AND LATER

vincingly be held to produce big disturbances, unless they are overwhelmingly
one way, we may put our trust in ‘waves of optimism and pessimism/ a version
that was quite common and later on was to appeal to such authorities as Pigou
and Harrod. 28 There are many other variations of this theme, none of which
is entirely void of a modest element of truth and all of which are unequal to
the burden put upon them.

Third, so long as we do not see much ground for believing that the eco-
nomic system produces general fluctuations by virtue of its own logic, we may
easily conclude that these fluctuations arise simply whenever something of suf-
ficient importance goes wrong, no matter for what reason. Roscher had al-
ready delivered himself to this effect, and no lesser man than Bohm-Bawerk
once expressed the opinion 29 that there was no general explanation of either
cycles or crises: they belong in a ‘last chapter’ of an economic treatise where
all their possible causes should be listed. There is more in this opinion — I am
inclined to believe that Marshall would have agreed with it — than appears at
first sight, though Juglar’s achievement suffices to show up its inadequacy. It
takes account of, though it overstresses, the fact which is so often neglected
by ardent ‘theorists/ namely, that every cycle is a historical individual to some
extent and that unique combinations of circumstances must enter largely into
every analysis of a particular case. Moreover, it bars effectively all those single-
factor explanations that rest on nothing but their author’s pet aversions — such
as saving or exploitation. Finally, it invites detailed study of individual mech-
anisms, which carries us a long way, though not the whole way. The bulk of
what has been done on this line belongs, however, to the postwar period: the
necessary analytic techniques were slow to develop. 30 [On these postwar de-
velopments, see below Part v, ch. 4, Dynamics and Business Cycle Research.]

All this — together with what has been said above in section 8 — seems to
establish our thesis: the essentials of both the methods and the explanatory
principles that serve in today’s business-cycle analysis, barring refinements of

ties that are as indubitable as they are empty. A classical example of this is the state-
ment that ‘the “cause” ... of business cycles ... is to be found in the habits and
customs [institutions] of men which make up the money economy. . .’ (L. K. Frank,
‘A Theory of Business Cycles/ Quarterly Journal of Economics, August 1923).

28 See Pigou’s Industrial Fluctuations (1927) and Harrod’s Trade Cycle (1936). In
justice to both authors it must, however, be added that their important contributions
to our understanding of cyclical phenomena are entirely independent of, and but little
impaired by, their partiality to that theory. In England, Professor Robertson is its most
eminent opponent.

29 I am sure of this but am unable to provide the reference. If my memory serves me,
he said it in a review. [Professor Haberler, who read this work in manuscript, suggests
that J. A. S. is referring to Bohm-Bawerk’s review of E. von Bergmann’s Geschichte
der nationalokonomischen Krisentheorieen (1895), Z eitschrift fur Volkswirtschaft, So-
zialpolitik und Verwaltung (vol. vii, 1898).]

30 Several authors of the period under survey made, however, use of the ‘principle of
acceleration’ (see Haberler, op. cit. pp. 85 et seq.). And there were several contribu-
tions that, though ' they passed unnoticed, foreshadow later developments. The ‘hog
cycle/ e.g., was discovered by S. Benner as early as 1876 (Benner’s Prophecies of Fu-
ture Ups and Downs in Prices ) .

EQUILIBRIUM ANALYSIS

IO35

last was omitted, without warning, or motivation, from the edition definitive
(1926): (1) free competition brings about minimum average costs; (2) in
equilibrium and if average cost equals price, the prices of productive services
are proportional to the partial derivatives of any production function [that
contains only substitutional (compensatory) services] or to the marginal pro-
ductivities; (3) the whole amount of product is distributed among the pro-
ductive services. 22 In 1897 ( Cours 11, §§ 714-19) Pareto criticized the mar-
ginal productivity theory — mainly on the ground that it breaks down in the
case of what are now called limitational factors — and blocked out a theory that
covered all the more important possibilities and which was technically im-
proved in the Manuel. But he looked upon this not as an improvement — espe-
cially not as an improvement on Walrasian lines — but as a renunciation of the
marginal productivity theory, which in the Resume of his Paris course (1901)
he declared 'erroneous.’ It was necessary to inflict these details upon the reader
because they serve to clarify the situation in the late 1890’s. 23

By 1900, then, the production function had established itself, as a result
of the efforts of many minds, 24 in its key position, alongside the utility func-

22 In proposition (2) I have italicized the word 'and’; and I have inserted the proviso
that only substitutional factors are included because this was clearly Walras’ meaning,
as a preceding sentence on the same page (375) shows, where he explicitly recognized
the existence of other, non-substitutional ones. I think that both alterations only em-
phasize Walras’ true meaning. But I am unable to offer an explanation why, changing
his careless (and meaningless) original statement that each service’s rate of remunera-
tion is 'equal’ to the partial derivative of the production function into the statement
that it is proportional to it, he did not say what the factor of proportionality is, namely,
in full equilibrium of pure competition, the price of the product. And I am also un-
able to say why, seeing that he imposed the condition that total receipts be equal to
total cost, he dropped the exhaustion theorem which follows from this condition. Ob-
serve that, since firms will always try to minimize total cost, whatever their output,
propositions (1) and (2) hold also for outputs other than the equilibrium output. of
pure competition. Then the factor of proportionality is no longer product price, but is
still marginal cost.

23 The reader finds many further details in Stigler’s work (especially pp. 323 et seq.)
and in H. Schultz, 'Marginal Productivity and the General Pricing Process,’ Journal
of Political Economy , October 1929. This paper contains much useful information and
especially the simplest exposition in English of Pareto’s theory of production. Un-
fortunately it is also misleading not only in individual points but also in the total im-
pression it conveys. In this respect, perusal of J. R. Hicks’s 'Marginal Productivity and
the Principle of Variation,’ Economica, February 1932, and of the subsequent con-
troversy between Hicks and Schultz (ibid. August 1932) would provide an antidote.

1036

IV : FROM 1870 TO 1914 AND LATER

tion, as the second of the two descriptive functions that I have called the two
pillars of the classic theory of that time. 25 The old daws of returns,’ properly
generalized and polished, lay at hand to supply the properties which the pro-
duction function was to enjoy, either generally or ‘normally,’ and which we
shall now restate again. If we wish to define marginal productivity of a service
as the partial derivative of the production function with respect to the quan-
tity of that service, we must, as has been pointed out already, assume first of
all that these partial derivatives exist. We may postulate in addition that they
are positive, that is, that a small increase in the quantity of any services will in-
crease the quantity of the product. 26 Following Turgot we may postulate fur-

( 52 / \

^—2 > o J , then passes

through a single maximum and, after having reached this point, keeps on de-

^ f - -- i- — J — J - 1 -- A . In this

dining

< o; law of decreasing returns in the primary sense

case two corollaries follow: (1) there exists a point beyond which the average
productivity of every service (x/v*) decreases also (law of decreasing returns in
the secondary sense); (2) cross derivatives are positive, which means that if I
increase the quantity of a productive service v* by a small amount, this will not
only decrease (after the point indicated) its own marginal productivity but
also increase the marginal productivities of all the other productive services

Vsv,5v, )

A methodological remark may be usefully inserted here. Among the prop-
erties to be assigned to the production function, there are some that follow
from others and therefore may be ‘proved deductively’ or ‘stated as theorems.’
Thus decrease of average productivity (after a certain point) may be deduced
from, or proved by, the decrease of marginal productivity and there is then
no need for any separate observational or experimental proof. Thus Wicksell
(see his article in the Thiinen Archiv, 1909) was right in holding, and F.
Waterstradt (ibid.) was wrong in denying, that the ‘law’ of decreasing average
productivity follows from other properties of the production function which
we usually assume. But, though we have in general some latitude in deciding
which properties we wish to postulate and which we wish to formulate as

26 Beyond an ‘operative interval’ this need not be so of course: so many workmen
may be already employed in a plant that additional workers would reduce output —
everybody treading on the toes of somebody else. It does not make any real difference
whether this possibility is expressed by saying that after a certain point marginal pro-
ductivity becomes negative or by saying that, since no employer, if a free agent and
acting upon the rules of economic logic, will take on any service increments that will
decrease output, marginal productivity cannot fall below zero. For certain purposes the
first alternative is preferable.

EQUILIBRIUM ANALYSIS

i°37

I take this opportunity to mention Edgeworth’s analysis of the iaws of return’ (pub-
lished originally in the Economic Journal, 1911; republished in Papers Relating to
Political Economy, vol. x, pp. 6 j et seq. and 151 et seq.), which has been rightly
called one of his most important contributions to economic theory by Professor Stigler
(op. cit. pp. 112 et seq. to which the reader is referred). It is as interesting to note- that
Edgeworth had still to struggle for the recognition of quite elementary matters such
as that the ‘law’ of diminishing returns does not apply to land only, as it is to note
that Edgeworth, whose chief merit it was to teach the distinction between decreasing
marginal and decreasing average returns, had repeatedly confused the two himself and
that his presentation in the paper in question is not correct in every detail. The matter
was taken up again by Karl Menger (the mathematician, son of the economist) in his
‘Bemerkungen zu den Ertragsgesetzen’ (two articles in Z eitschrift fur Nationalokono-
mie, March and August, 1936; see also a comment by K. Schlesinger, ibid.). We must
be grateful to the eminent mathematician for the lesson on slovenly thinking which
he administered to us and which may serve as a shining example of the general tend-
ency toward increased rigor that is an important characteristic of the economics of our
own period. But in effect, the logical crimes revealed — -except the confusion between
decreasing marginal and average returns — have hardly been productive of serious er-
rors in results. Even as regards that confusion it should be mentioned that, though no
less a thinker than Bohm-Bawerk committed it, it remained quite harmless in his

1038 IV: FROM 1870 TO 1914 AND LATER

case, for he reasoned correctly about decreasing marginal returns to his roundabout
process.

The reader will have no difficulty in understanding why it was that the
properties of the production function — that is, the use of a production func-
tion that constitutes the only relation between the productive services em-
ployed, all of which are assumed to be ‘substitutional’ — recommended them-
selves to theorists, particularly for classroom and textbook purposes. Such a
production function is easy to handle and yields simple results. Moreover it
picks up, from the mass of relevant technological facts, just those that are
subject to economic choice and thus serves well to display the economic logic
of production. It cannot be repeated too often that this production function
is valid only on a high level of abstraction, for planned and not for existing
plants, and for a limited region of the production surface at that. But on that
level, and for that range, it is an advantage and not a blemish that it discards
all the cases in which the economic logic is thwarted by additional restrictions
of a purely technological nature. These additional restrictions exist however,
even in the stage of planning an enterprise; many more impose limits upon
long-run and still more upon short-run adaptations of existing concerns; and
as we approach the patterns of real business life we lose that pure logic more
and more from sight, especially because the restrictions prevent even immedi-
ately adaptable services — such as labor that can be hired by the week or day
or hour — and their prices from behaving according to the marginal productiv-
ity rules, even apart from the facts that perfect equilibrium and pure compe-
tition are never fully realized. And the reader will also understand that some
economists will express this situation by saying: 'the marginal productivity
theory is of universal application on a high level of abstraction,’ whereas other
economists will prefer to say: 'the marginal productivity theory is erroneous.’
Barring the regrettably frequent cases of failure to grasp the meaning of the
theory, this is all there is to the controversy on the production side of ‘mar-
ginalism’ that has been carried on to this day . 27 In particular, all that Pareto

27 Telling illustrations of this statement may be gleaned, e.g., from the controversy
between Professor R. A. Lester, ‘Shortcomings of Marginal Analysis for Wage-Employ-
ment Problems' ( American Economic Review, March 1946) and Professors F. Machlup,
‘Marginal Analysis and Empirical Research’ (ibid. September 1946) and G. J. Stigler,
‘Professor Lester and the Marginalists’ (ibid. March 1947, where the reader also finds
Lester’s reply to Machlup and the latter’s rejoinder). In this connection a warning
to the reader suggests itself: in appraising an author’s view on marginal productiv-
ity theory it is always necessary to make sure what an author means by this term:
Pareto and Stigler, e.g., seem in places to mean only theories that assume all ‘factors’
to be connected by one relation only, this relation expressing universal substitutability.
Statements may be true of this marginal productivity that are not true of marginal
productivity theories that admit also other relations between the factors. The latter is
the meaning adopted here. For instance, Walras’ original theory, which worked with
constant coefficients of production and admitted no substitution except the substitu-
tion of production of a product for production of another product, and Wieser’s theory
which did the same are still marginal productivity theories for us. This is important
to remember: the circumstance that a theory includes boundary conditions, which will

EQUILIBRIUM ANALYSIS

10 39

can have meant by renouncing the .marginal productivity theory is that we
cannot be content to deal with the case of substitutable services — the case of
the single substitutional relation-^-any more than we can be content to deal
with the case of constant coefficients, but that we must take both into account
and, in addition, cases in which coefficients of production vary with the quan-
tity produced 28 — which simply amounts to saying that the fundamental ana-
lytic schema that uses nothing but the substitutional relation needs to be sup-
plemented if we wish 'to approach reality more closely , 29 but remains valid
within its proper sphere.

[(c) The Hypothesis of First-Order Homogeneity .] If, following Wicksteed,
we further endow the production function with first-order homogeneity, that
is, if we assume that there are no economies or diseconomies of scale, we se-
cure further simplifications which explain why many authors cling to it , 30
even though it is generally recognized by now that we do not need it for prov-
ing that distribution according to marginal productivity rules will just exhaust
the product. Again I have to report a long, inconclusive, and unnecessarily

prevent some factors from earning at the rate of marginal physical productivity multi-
plied by either the prices of the product or the marginal revenue, does not prevent ns
from calling this theory a marginal’ productivity theory.

IO4O IV: FROM 1870 TO 1914 AND LATER

acrimonious discussion 31 which hardly deserves more than the following com-
ments.

First of all, he who asserts first-order homogeneity of the production func-
tion asserts a fact, at least hypothetically. Since this fact is not implied in any
of the other properties that, in general, normally, or for particular purposes we
have previously agreed to attribute to the production function , 32 it can be es-
tablished or denied only by factual evidence if at all. Edgeworth’s early criti-
cism of Wicksteed’s use of first-order homogeneity is indeed disfigured by
misplaced irony. But it had at least the merit of realizing correctly that it is
facts and not speculations which are needed to refute the hypothesis: this is
why he hunted for contradicting instances. The vast majority of participants in
the discussion, however, have tried to this day to 'prove’ or to 'refute’ it by
logical argument or by appeal to its obviousness or lack of obviousness , 33 which
inevitably leads into deadlock.

Second, we must not forget that asserting (denying) the practical possibility
of multiplying all ‘factors’ by a constant A is one thing; and asserting (deny-
ing) that output would also be multiplied by A, if it were practically possible
to multiply all ‘factors’ by A, is quite another thing . 34 Nobody denies that the

31 It is not possible — and neither would it be profitable — to follow this discussion in
detail. Therefore I shall mention here, besides Wicksteed and his earliest and most
severe critic, Edgeworth, only a few modem contributions, namely: F. H. Knight, Risk ,
Uncertainty and Profit (1921); N. Kaldor, ‘The Equilibrium of the Firm,’ Economic
Journal , March 1934; A. P. Lemer, Economics of Control (1944), pp. 143, 165-7;
G. f. Stigler, Theory of Price (1946), p. 202m — all of whom stand for first-order homo-
geneity. Strongly on the other side of the fence: P. A. Samuelson, Foundations, p. 84;
and E. H. Chamberlin, ‘Proportionality, Divisibility, and Economies of Scale,’ Quar-
terly Journal of Economics, February 1948. See ibid. February 1949 for two criticisms
and Chamberlin’s rebuttal.

33 Appeal to obviousness can of course be met by simple denial, but it should not
be met by saying, as has been said by Professor Samuelson ( Foundations of Economic
Analysis, p. 84) that the hypothesis is ‘meaningless’ since anyone who declares it to
be obviously valid will, if challenged, defend it by labeling any contradicting facts as
'indivisibilities’ (see footnote 35, below), thus making the hypothesis true by definition.
This is not so, though I do not deny that uncritical reference to indivisibility of some
factor 'which must of course exist if the production function does not display first-
order homogeneity’ does give some color to the indictment: indivisibilities, too, are
facts that call for, and admit of, empirical verification. Nor is it relevant (see Samuel-
son, ibid. p. 84m) to point out that any function may be made homogeneous in a
variety or hyperspace of higher dimension: the relevant question is whether it is homo-
geneous in the n factors (or a subset of these) which it is always possible to enumerate
completely.

34 Pareto for instance denied validity of the first-order homogeneity assumptions on
both grounds (Cours 11, § 714).

EQUILIBRIUM ANALYSIS

IO4I

have been greatly reduced if this distinction had been kept in mind. It is a
striking illustration of the lack of rigor prevailing in economic discussion that
this was not done.

Third, one obstacle to first-order homogeneity that is universally recognized
by its sponsors is indivisibility or ‘lumpiness’ in some factor or factors — such
as management, railroad tracks, rolling mills. Such factors cannot be varied by
small quantities even in the blueprints of a plant that is still in the planning
stage — where size of plant is a variable — and much less so within the frame-
j; work of a going concern , 35 where it is only or mainly variation of output from

35 To deny the existence or importance of such indivisibilities and their relation to
often very large intervals of increasing physical returns would be absurd. The claim
l that they account satisfactorily for observed deviations from first-order homogeneity

can therefore certainly be made good to some extent, and the theorist, especially the
teacher of elementary theory, who assumes homogeneity of the production function
(with proper qualification as regards a direct relation between output and the quantity
of some ‘factor’ or ‘factors’), disturbed by indivisibilities, may feel sure that he is cover-
ing perhaps all the ground he cares to cover. Also, indivisibilities may be reduced by

taking account of the cases in which ‘lumpy’ factors, such as managers, may be varied

by hiring the part-time services of consultants or again the cases in which the ‘lumpy’
units in which a ‘factor’ is available (units of costly machinery for instance) may be
explained by the structure of the demand for it and not by technological necessity. I
am not denying anything of that. All I wish to show is, on the one hand, how all
this explains the duration and inconclusiveness of the debate and, on the other hand,
how easy it is to slip, from the tenable assertion of these facts, into a habitual and
-s thoughtless appeal to indivisibility in general. Indivisibility of course also interferes

; j with the assumptions of continuity and differentiability of production functions. On

K this see P. A. Samuelson, op. cit. especially pp. 80-81.

economies of scale to be ‘evident’ if all services in a combination and the product are
'continuously divisible.’ This is an assertion about supposedly unchallengeable facts
i and not meaningless in Samuelson’s sense: we may challenge either the facts or, even

if we do not challenge the facts of any particular case, we may deny that the proposi-
tion in question is universally ‘evident.’ If a product requires n kinds of services and
i if one of them is a lubricant — all of them being substitutional and as divisible as you

(4 please — it is not evident to me that the quantity of lubricant applied must be pro-

|| portionately increased in order to increase the product in the same proportion, even if

,?f all the other services must.

1042 IV : FROM 1870 TO 1914 AND LATER

a plant of given ‘size’ which is under discussion. We conclude by glancing at a
circumstance of a different type.

Fourth, then, we note that a given hypothesis may be verified not only by
observations that bear upon its validity directly but also by observations that
do so indirectly by verifying consequences that follow from it: many physical
hypotheses are verified in this way alone. Now, if there were any sense in
speaking of a national production function at all, first-order homogeneity of
this function would supply a very simple explanation of a remarkable fact,
namely, the relative constancy of the main relative shares of ‘factors’ in the
national dividend. For two factors, and v 2 , such a ‘social’ production func-
tion of the form, x = v 1 a v 2 1_a , (a < 1), was first suggested by Wicksell (Lec-
tures, 1, p. 128) and has been extensively used by Douglas and Cobb. 36

So far we have, throughout this section, defined marginal degree of pro-
ductivity by means of a partial derivative, that is, our marginal product has
been the increment of product which we get when adding an infinitesimally
small amount to the quantity of a service employed while keeping the quanti-
ties of all other services strictly constant. 37 We have indeed seen that the lat-
ter is not always technologically possible and that when it is not, marginal
productivity breaks down. But now we have to add that even where the addi-
tion of an infinitesimal amount to some service employed, all other condi-
tions remaining the same, yields a determined increment of product, this pro-
cedure need not be the most economical method for securing this increment:
it may be more economical to adjust the quantities of the other services em-
ployed as well. It is true that these adjustments may be of the second order of
smallness, especially if we are very strict about the smallness of the increment
we contemplate adding in the first place. But this need not be so. Further-
more it is true that there are purposes for which it is proper and useful to
keep all other services constant in order to isolate the effects upon product
of the one singled out for study; 38 but there are other purposes, among them

36 C. W. Cobb and P. H. Douglas, ‘A Theory of Production,’ American Economic
Review, Supplement, March 1928. This was the original paper that was to be fol-
lowed by an impressive series of econometric studies, Professor Douglas’ treatise on
The Theory of Wages (1934), and further studies summed up in his Presidential ad-
dress, ‘Are there Laws of Production?’ American Economic Review, March 1948. Also
see V. Edelberg, ‘An Econometric Model of Production and Distribution,’ Economet-
rica, July 1936. Professors Cobb and Douglas inserted a second constant into the for-
mula above so as to make it read: x = cv t a v 2 1_a , but this does not make much dif-
ference.

37 See Marshall’s Principles, p. 465.

38 We then get the marginal productivity curves turned out, e.g., by agricultural ex-
periment stations. Thus, a steer may be kept in strictly invariant conditions except for
the number of pounds of hay he is being fed: this will isolate the effects upon his
weight of successive increments of hay. Or, the wheat yield of a given plot of land may
be studied in this manner as a function of the quantity of nitrogen contained in a
fertilizer applied. It will be observed that this method will produce a theoretically in-
finite number of marginal productivity curves for each ‘factor,’ one for each of the
theoretically infinite number of combinations of other circumstances.

EQUILIBRIUM ANALYSIS

1043

the analysis of business behavior and of the behavior of distributive shares, for
which it may be quite misleading to do so. This difficulty worried Marshall
greatly and induced him to emphasize the dangerous concept of Net Mar-
ginal Product, 39 that is to say of the marginal product that results from an in-
crement in the quantity of a factor, after corresponding rearrangement of the
others. Marginal productivity in this sense is no longer properly expressed by a
partial differential coefficient. 40

Output being evidently measurable, the production function is not exposed
to the criticism that induced economists, oi most of them, to drop the utility
function: you can see and count loaves of bread; you cannot see and measure
satisfaction, at least not in the same sense. Technically it is however just as
possible to do without the production function as it is to do without the
utility function: the fundamental theorem that the marginal productivity
(utility) of a dollar’s worth of each ‘factor’ (consumers’ good) must be (at
least) equal to the marginal productivity (utility) to the firm (household) of the
marginal productivity (utility) of a dollar’s worth of any other ‘factor’ (con-
sumers’ good) follows in both cases, though in a different garb, whether we use
production (utility) functions or simply marginal rates of substitution or trans-
formation. This can be visualized, if we agree to admit two factors only, Vj
and V 2 , and mark off their quantities, v x and v 2 , on the two axes of a rectangu-
lar system of co-ordinates in space, reserving the third axis for output: the
latter then swells up from the factor plane in a loaflike fashion, forming the
production surface. 41 Sections parallel to the factor plane will cut out contour

39 See Principles, pp. 585-6. The net marginal product is a value concept and the
difficulty in question arises in the precincts of the cost problem rather than in the
immediate neighborhood of the production function. We may, however, bring it in
here by defining the marginal degree of productivity by means of an ordinary instead
of a partial differential coefficient. Suppose again that there are two ‘factors’ only,
v x and v 2 , so that the production function reads: x = f(v ± , v 2 ). Write the total dif-
ferential

8 f

. _ 8/ ,
dx — - — ay, -J- — uto
8Vj 1 ^ 8 v 2 2

dvo

Then, dividing through, e.g. by dv., we can define marginal degree of productivity as

dv.

j8f

i dv 2

1 8v 2 dv 1

For use to be made presently, note that if dx = o, we have

8v i /

8v 0

1044 IV: FR0M 1870 TO 1914 AND LATER

42 The term 'isoquant’ was introduced by R. Frisch but originally for a different
concept, for which it should have been reserved.

43 That is, along each equal product curve, dx = o. The marginal rate of substitu-
tion (dv 2 /dv 1 ) is subject to the usual restrictions (to which homogeneity of the pro-
duction function may or may not be added). The 'law of decreasing returns’ to any
(substitutional) service is expressed by the condition that equal-product curves be convex
to the origin in the operative interval.

46 For a good presentation of Pareto’s theory of cost, see H. Schultz, op. cit. sec. v.
Along with Pareto we should again mention W. E. Johnson. For modern presentations
see Allen, passim; J. R. Hicks, Value and Capital (1939), Part 11; P. A. Samuelson,
Foundations, ch. 4. Also see von Stackelberg, Grundlagen einer reinen Kostentheorie
(1932) and L. M. Court, 'Invariable Classical Stability of Entrepreneurial Demand and
Supply Functions,’ Quarterly Journal of Economics, November 1941.

EQUILIBRIUM ANALYSIS IO45

(d) Increasing Returns and Equilibrium. Marshall himself undoubtedly did
more than any other leader to pack a maximum load of business facts upon his
theoretical schema. The width of his grasp shows nowhere more impressively
than in his theory of production. But we may duly admire this performance
and yet feel that his marvelous comprehension both of purely analytic and of
‘realistic’ aspects resulted in an exposition that seemed to leave many loose
ends about and certainly left plenty of problems for his successors. Thus, his
emphasis upon the element of time in relation to the phenomena of decreasing
marginal and average cost 47 constitutes a major contribution . 48 His familiar
concepts of prime and supplementary costs, of quasi-rent, of the representa-
tive firm , 49 of normal profit, and, above all, of internal and external economies,
together with his attention to particular patterns of the data that individual-
ize almost every firm’s environment , 50 go far toward presenting all the clues that
are needed for a satisfactory treatment of decreasing costs in all its various
meanings and aspects. Nevertheless we get clues only and Keynes was right in
asserting that in this field Marshallian analysis was least complete and left

50 See, e.g., Principles, p. 506. But chs. 10 and 11 of Book v are full of suggestive
remarks — and warnings — of this kind. It should be emphasized again that Marshall
made it more difficult for himself to express his meaning, and for his readers to under-
stand him, by the false or at least misleading parallelism that he had before (pp.
397-8) set up between the ‘laws’ of decreasing and increasing returns which he him-
self disavowed repeatedly, e.g. by the statement that increasing return shows seldom
in the short run (pp. 511-13).

1046 IV: FROM 1870 TO 1914 AND LATER

most to do (Essays in Biography , pp. 225-6). This was, I think, because of
Marshall’s aversion to going through with pure analytic schemata and to his
bent toward misplaced realism. He insisted on including internal and external
economies in his (industrial) ‘supply’ schedules (though he noticed the objec-
tion to this, Principles, p. 514m) — I suppose, in order to make these more
realistic — in spite of the fact that he thereby destroyed their reversibility and
rendered them useless for the purposes of static theory: they really represent
pieces of economic history in the form of diagrams. 51 He thus blurred the
clarifying distinctions between falling cost curves and downward shifts of cost
curves and between costs that fall while production functions stay put and
costs that fall in consequence of changes in production functions. 52 At any
rate it is understandable that both the leads given by Marshall and the loose
ends left by him must have started discussion in any environment that took
any interest at all in the foundations of economic theory. The only thing to
wonder at is that this discussion took so long to burst into print and to pre-
sent results to the scientific public at large. For instance. Professor Viner’s fa-
mous paper on ‘Cost Curves and Supply Curves’ that, starting from Marshall’s
analysis, successfully cleared up a large part of the ground, appeared only in
September 1931 ( Zeitschrift fur Nationalokonomie ); Professor A. A. Young’s
paper on ‘Increasing Returns and Economic Progress’ only in December 1928
(Economic Journal). We shall group our brief comments around the topic In-
creasing Returns and Equilibrium, and even so shall have to confine ourselves
to but few of the many valuable contributions that ought in fairness to be
considered. 53

EQUILIBRIUM ANALYSIS

10 47

After rumblings which we must neglect, there appeared in the Economic
Journal (December 1926) the famous paper by Professor Sraffa that was des-
tined to produce the English branch of the theory of imperfect competition. 54
But for our present topic, his criticism was not anything like as 'destructive'
as Keynes, to judge from his introductory remarks to the Symposium, seems
to have considered it to be. Sraffa had simply pointed out that, under condi-
tions of pure competition, a firm cannot be in perfect equilibrium so long as
increase in its output would be attended by internal economies. 55 Partly in-
fluenced by Sraffa and partly by way of developing Marshallian teaching, Pro-
fessor Pigou, in his ‘Analysis of Supply' ( Economic Journal, June 1928, in-
serted in the third ed. of Economics of Welfare, Appendix in), pointed out
that, if we base declining industrial supply curves on external economies only,
we may still retain rising supply curves for individual firms and thus avoid —
formally at least — any conflict between 'increasing returns' and competitive
equilibrium conditions, granted that we really believe in the existence of such
a conflict at all. He added that if the growth of an industry or its environment
induces increased specialization and this again increased size of the firms com-

54 Piero Sraffa, ‘The Laws of Returns under Competitive Conditions.’ But the main
ideas, critical and constructive, had appeared a year before: 'Sulle relazioni fra costo e
quantita prodotta,’ Annali di Economia, 1925, which shows Sraffa's starting points
and the nature of his brilliantly original performance much better than does the Eng-
lish article. See also his contribution to the ‘Symposium.'

1048 IV: FROM 1870 TO 1914 AND LATER

57 The concept of a normal rate of profits has been refined by several modern econo-
mists, particularly by Mrs. Robinson, Mr. Shove, and Mr. Harrod. See especially Har-
rod’s 'A Further Note on Decreasing Costs,’ Economic Journal, June 1933. The con-
cept of windfall profits is now mainly in use for aggregate profits that arise (if for
this purpose we may use the terminology of Keynes’s Treatise on Money ) from a sur-
plus of investment over saving, so that individual profits that are due to chance tend
to drop out of the picture. It might be argued that this arrangement misses the es-
sence of the profit phenomenon and falls below the level attained by Marshall. It
might also be argued that Mr. Harrod’s definition — the normal rate of profit is the
rate of expected profits that leaves a firm without motive either to increase or to de-
crease its capital commitment — re-establishes the connection between profits and re-
turn to physical capital, which it was the main achievement of the period before 1914
to sever. But all this does not matter here where we are concerned only with the
question of the surplus of receipts over payments (actual or imputed) to 'factors’ that
is relevant to the construction of cost curves.

EQUILIBRIUM ANALYSIS

10 '49

has any claim to be called 'pure profit/ and he considered this profit item as
it is rather than as it would be in (static) equilibrium of a stationary process.
Though careful analysis, in this as in other cases, can no doubt unearth the
contours of a comprehensive schema in which everything finds its appropriate
place — but of a schema that is Ulysses’ bow to less powerful minds — the ordi-
nary reader simply finds a fricassee of such things as: earnings of management
of all possible kinds, including also the earnings of better-than-common man-
agement; gains from successful risk-taking and uncertainty-bearing, that is the
sort of thing that gives a favorable bias to the relation between expected and
actual results; gains from advantages incident to the control of particular fac-
tors, some of which would, in other firms, not contribute as much to results
as they do where they are; chance gains that go to the owner as residual claim-
ant, due regard being paid to the wisdom of Goethe’s dictum that only the
able enjoy consistent luck; and, among other things, gains that accrue to a
firm as it grows, or else, because it has grown, relatively to its competitors or
absolutely or both; an element of monopoly entering, implicitly or explicitly,
wherever required. Evidently, these items do not constitute a logically homo-
geneous whole, in the same sense as do for instance wages, in spite of all the
qualifications that have to be added also in their case. Nevertheless Marshall
created a sort of normal rate of profit out of this compound — warily treading
his way through the dangers of circular reasoning — which he associated felici-
tously with the representative rather than with the marginal firm . 58 This nor-
mal rate of profit may be loosely defined as the rate that makes it worth while
to enter, and to stay in, business (these expressions mean the same thing in
the end), and thus acquires a distinction from the managerial salary that is
easier to justify in a common-sense manner than in strict logic. Somehow all
this has grown into the simplified normal profit of Marshall’s followers and
then into the marginal efficiency. of Keynes’s General Theory.

58 Observe the wisdom of this move. Operating with the marginal firm, the theorist
leaves out of account the broad fringe of ‘sub marginal’ firms, the existence of which
often dominates an industry’s situation and casts doubts on the very definition of the
marginal firm. This is another argument for the concept of the representative firm, to
which justice has not been rendered even now.

1050

IV: FROM 1870 TO 1914 AND LATER

can be most easily realized if we analyze the list of causes that produce the
Marshallian rate of profit. We then also realize that the Marshallian theory,
according to which profits have no tendency to vanish, and the Walrasian
theory, according to which they do, not only do not contradict one another
but, referred to the same level of abstraction, turn out to be identical. The
reader can satisfy himself of this by observing, first, that Marshall’s theory, as
he himself presented it, is geared to phenomena of change or growth that static
equilibrium excludes ; 60 second, that the monopoloid elements that enter Mar-
shall’s analysis, though implicitly more than explicitly, and which are not nec-
essarily excluded by the assumptions of static equilibrium, do violate the as-
sumptions of pure competition; and that, if we are resolved to display the log-
ical properties of perfect equilibrium in pure competition, Marshall’s profits
will in fact vanish as completely as will Walras’.

60 In particular it excludes the function of managing uncertainties, whose impor-
tance lihks up with change.

62 These two cases are not always kept distinct. Thus, Mrs. Robinson ( Economics
of Imperfect Competition, 1933) defines such surpluses in the first sense on p. 102,
and in the second sense on p. 103. But it should be noted that her distinction between
cost curves that do and cost curves that do not include such surpluses (ch. 10) spelled
an important advance. She called all these surpluses Rents. We have already noticed
that this concept of rent (foreshadowed, as we know, by Senior, J. S. Mill, and also
Marshall) comes in usefully for some purposes.

EQUILIBRIUM ANALYSIS IO51

64 This is not quite correct, of course. But it will do for our present purpose.

1052 IV: FROM 1870 TO 1914 AND LATER

of the production function clarified other problems, it obscured for a consider-
able time the problem of the relation between the technology and the eco-
nomics of production, or, as we may also say, between technology on the one
hand and cost and distribution on the other. This may be best illustrated by
Wicksteed's own attempt to derive a proposition on the distribution of the na-
tional dividend, namely the proposition that distributive shares determined ac-
cording to the marginal productivity principle will just exhaust the national
dividend, apparently 66 from nothing else than a property of the production
function, namely first-order homogeneity. It is easy to see now that the pro-
duction function alone does not determine either cost of production or distri-
bution and in particular that, by itself, it cannot tell us much about the exist-
ence or absence of net gains to firms. Not less easy is it — now — to see how the
production function fits into the cost and distribution phenomena. All that we
need for this purpose is to keep in mind that, in the sphere of pure economic
logic, the production problem is the problem of maximizing the difference be-
tween a firm’s receipts and costs and that this maximum is subject to the tech-
nological restrictions embodied in the production function. 67 But around 1900
this was not so easy for the average economist to see, especially if he was not
in the habit of throwing his ideas into the simple mathematical form which in
this instance clears up everything. A center of such confusion as there may
have been 68 was of course the zero-profit proposition, the meaning of which
we have taken pains to make clear.

66 I say ‘apparently’ in order to emphasize that this interpretation is unfair and not
only because of his later recantation. Other conditions are partly stated and partly
implied.

EQUILIBRIUM ANALYSIS

i°53

For brevity’s sake we assume away all but substitutional factors — so that the
only restriction upon a firm’s maximizing behavior is the ordinary or 'normal’
production function as defined above — and also the problems that arise in the
case of discontinuities of cost curves. 71 In perfect equilibrium and perfect com-
petition, marginal costs to a firm will be equal to the price of the product
which, like all factor prices, the firm accepts as data. In a large class of cases
this condition determines output uniquely. Since, in strict logic, the firm will
minimize total and average costs for any output, average costs must be at a
minimum also for this output. But in the point of its minimum, the average
cost curve is intersected, from below, by the marginal cost curve. Therefore
marginal and average costs are equal in this point and both are equal to price.
It is true that in the Cambridge theory of the early 1930’s (R. F. Kahn, J. Rob-
inson) average cost includes normal profit. But this schema applies only to sit-
uations of imperfect competition: only in imperfect competition can this normal
profit contain anything besides returns to owned factors evaluated at the mar-
ket prices of these factors. Hence pure profits are zero in perfect competition. 72
This may be unduly 'abstract.’ But there is nothing wrong with it in logic.

Appendix to Chapter 7

Note on the Theory of Utility

IV: FROM 1870 TO 1914 AND LATER

1054

[1. The Earlier Developments]

We know that, from Aristotelian roots, this theory was developed by the
scholastic doctors whose analysis of value arid price in terms of ‘utility and
scarcity’ lacked nothing but the marginal apparatus. We also know that, along-
side of scholastic teaching and presumably not entirely without its influence,
the utility theory of value began to be taught by laymen — Davanzati being our
star instance — and that it went on developing quite normally right into the
times of A. Smith — Galiani’s work being the peak achievement of the epoch,
though Genovesi should not go unmentioned. 1 Even the ‘paradox of value’ —
that comparatively ‘useless’ diamonds are more highly valued than is ‘useful’
water — had been explicitly posited and resolved by many writers, for example
by John Law. And there was, though standing by itself on a side line, Daniel
Bernoulli’s expression for the marginal utility of income (Part 11, ch. 6, sec. 3b).
But then this development came to a standstill: though many economists,
particularly on the Continent and still more particularly in France and Italy,
referred to the element of utility as a matter of course — and though Bentham
formulated explicitly what was to be known as Gossen’s law of satiable wants —
they failed entirely to exploit it any further. Some who tried to do so did it
in so very infelicitous a way as to discredit rather than to spread its use. Con-
dillac, for instance, who may be considered its most important sponsor in the
last quarter of the eighteenth century, explained the utility of air and water
by the effort involved in breathing the one and drinking the other. A. Smith
and, following him, practically all the English ‘classics’ with the exception of
Senior 2 evidently did not realize the possibilities of the utility approach to the
phenomenon of economic value and were content to turn away from ‘value-in-
use’ with a reference to the paradox of value that should not have been a
paradox any more. Let me repeat that it is quite wrong to explain this attitude,
especially in the case of Ricardo, by saying that, while seeing all there is to see
about utility, they did not care to elaborate so obvious an aspect of things: it is
quite clear — and can, for Ricardo, be proved from his correspondence — that
they did not follow up the utility clue because they did not see their way to
using it effectively. But Senior’s treatment does constitute a definite step in
advance. In France and Italy the old tradition that favored the utility approach
did not die out entirely. But neither did it bear fruit. J. B. Say, who made an
attempt on this line, spoiled his chance by his handling of the matter that
was still more clumsy than it was superficial and led nowhere.

A number of ‘forerunners’ began to emerge, however, though none of them
received any recognition at the time. The two who achieved the largest meas-
ure of posthumous fame have been mentioned already, H. H. Gossen and
J. Dupuit. There were several others, but it will suffice to mention three:

1 [These men and their work are discussed in Part 11.]

2 Malthus should not, I think, be listed as another exception, though his criticism
of Ricardo’s theory of value does point in the direction of a utility theory.

EQUILIBRIUM ANALYSIS

10 55

[z. Beginnings of the Modern Development]

3 A. A. Walras, De la Nature de la richesse et de Vorigine de la valeur (1831). His
Theorie de la richesse sociale (1849) adds nothing to the theory of value, so far as I
can see, but contains several other points that are of interest, e.g. the definition of
capital as every good that serves more than once. W. F. Lloyd — ‘student’ of Christ
Church (this admirable title which might be considered the only one fit for a scholar
is at present Mr. Harrod’s) and Professor of Political Economy in the University of
Oxford, ‘A Lecture on the Notion of Value . . .’ delivered before the University of
Oxford in 1833 (1834). It is strange that an Oxford professor of economics should
have needed rediscovering. Nevertheless, such was the case. The merit of having res-
cued Lloyd’s name from oblivion belongs to the late Professor Seligman (‘On Some
Neglected British Economists,’ in Essays in Economics, pp. 87 et seq., the work to
which reference has repeatedly been made already). Our text shows, however, that
Professor Seligman was in error when he allocated to Lloyd the ‘proud position of
having been the first thinker in any country to advance what is known today as the
marginal theory of value, and to explain the dependence of value on marginal utility’
(op. cit. p. 95).

1056 IV: FROM 1870 TO 1914 AND LATER

ity to its possessor depend upon the quantity of that commodity alone. 2

Further work, partly induced by hostile criticism, transformed this 'psycho-
logical’ or 'subjective’ or 'modern’ theory of value before long. In order to
convey the essentials of a story that cannot be told satisfactorily in the space at
our command, we shall confine ourselves to a minimum of names and reduce
to a sequence of logical steps what actually was a sequence of controversies,
which were sometimes as acrimonious as they were pointless.

[3. The Connection with Utilitarianism]

The first task that confronted the sponsors of the 'new’ theory of value was
to defend it against all the misunderstandings — some of them quite puerile —
to which it had given rise. 1 Ever fuller restatements resulted — nourished by
applications to particular cases, which were not valueless though they w^re
sneered at as futile casuistry — that did something to clear the ground for fur-
ther advance. For instance the Austrians, who faced German opponents of
strongly anti-utilitarian tastes, pretty quickly realized the necessity of clearing
their skirts of hedonism. The historical alliance of utility theory with utili-
tarian philosophy was obvious. We cannot blame men who were no theorists
for suspecting that there was also a logical one. Moreover, some of the most
prominent exponents of marginal utility were in fact convinced utilitarians:
Gossen was, and Jevons, and Edgeworth. They, and others too, had used lan-
guage that was apt to create the impression that marginal utility theory de-
pended upon utilitarian or hedonist premisses — Bentham certainly thought so
- — and could be attacked successfully by attacking these. Jevons was the chief
culprit: he even went so far as to call economic theory a 'calculus of pleasure
and pain’ — Verri had done so before — and elicited from Marshall the rebuke
that he was mixing up economics with 'hedonics.’

1 The protagonist of the Austrian group who did most of this work was Bohm-
Bawerk. I shall mention only his controversy with Dietzel in the JahrbiicheT fur Na-
tionalokonomie (1890-92), and both the text of and the appendices to the third edi-
tion of his great treatise on capital and interest ( Kapital und Kapitalzins) . A brilliant
and compact survey of arguments and counterarguments has been presented by P. N.
Rosenstein-Rodan in the article ‘Grenznutzen’ in the German encyclopedia ( Hand -
worterbuch der Staatswissenschaften, 4th ed., vol. iv, 1927).

EQUILIBRIUM ANALYSIS , 1057

Jevons in teaching a doctrine that comes more naturally from a utilitarian
although, again, the relation is one of association rather than logic. From the
standpoint of a calculus of pleasure and pain, ‘disutilities’ — the term is Jevons’
— should be in fact introduced on the same level as utilities. This is what
Jevons did. Walras did not do so and the Austrians, Bohm-Bawerk in par-
ticular, were strongly opposed to doing so. But Marshall and Pigou kept to the
Jevonian standpoint: Marshall developed it into his doctrine of real cost (ef-
forts and sacrifices), which, in a way, was the olive branch presented to his
‘classical’ predecessors. J. B. Clark and, in Vienna, Auspitz and Lieben also
accepted it. Notice that this standpoint, however independently arrived at,
stands in line with old tradition (compare, e.g., what has been said above on
Galiani’s theory of value); and that, outside of the utility theory tradition, it
had the support of A. Smith (and of many philosophers of natural law). In
England, Cairnes sponsored it, but it was renounced by Wicksteed and, more
effectively, by Keynes. The analytic importance of the question lies in its bear-
ing upon the concept of supply of labor and, if we adopt an abstinence theory
of interest, of capital. In all other respects it makes little difference whether
we take the available amount of labor as given or insert into our system an-
other equation (marginal utility of real wages = marginal disutility of labor)
in order to determine it.

[4. Psychology and the Utility Theory]

This belief was encouraged by some Austrian psychologists such as von Meinong
and von Ehrenfels, who held that Menger had made a valuable contribution to psy-

1058 IV: FROM 1870 TO 1914 AND LATER

chology which was capable of more general application. Certain applications, for in-
stance to the psychology of religion, were in fact made which it is impossible to report
without a smile though they were far from being nonsense. Thus, von Ehrenfels actually
spoke of marginal piety and of the marginally pious individual. But many non-Aus-
trian economists, who sympathized with the Austrian theory, also thought (and even
think) a great deal of the importance of its psychological aspects. On this compare:
Maurice Roche- Agussol, La Psychologie economique chez les Anglo- Americains (1918)
and Etude bibliographique des sources de la psychologie economique (1919); also the
same author’s Tsychologische Okonomie in Frankreich,’ Zeitschrift fur Nationalokon-
omie, May 1929 and January 1930.

This was in fact noticed by some economists. But it was brushed aside by the lead-
ing Austrians, Wieser, for example, declaring (T heorie der gesellschaftlichen W irt-
schaft, § 1) that this law had nothing whatever to do with Gossen’s law of satiable
wants. But however that may be, the efforts of psychologists to measure psychical
quantities is not a matter of indifference to any economist who is not entirely lacking
in scientific imagination. For examples of recent progress in the measurement of sensa-
tion, see especially Professor S. S. Stevens’ ‘A Scale for the Measurement of a Psycho-
logical Magnitude: Loudness,’ Psychological Review, September 1936, and his and J.
Volkmann’s, 'The Relation of Pitch to Frequency,’ American Journal of Psychology,
July 1940.

EQUILIBRIUM ANALYSIS

10 59

As a rule, however, the necessity of such an appeal does not arise in tech-
nical economics — it is different, of course, in economic sociology. Most of us
would indeed find it difficult or at least highly inconvenient to avoid entirely
all reference to motives, expectations, comparative estimates of present and
future satisfactions, and the like, however fervently we might hope for an
economic theory that would use nothing but statistically observable facts. But
such use of psychical observations must not be confused with the use of meth-
ods or results borrowed from professional psychology. Like all other research
workers, whatever their field, we take our facts where we find them, irrespective
of whether or not they are also dealt with by other sciences. We do not be-
come dilettantes in physics when we use the physical facts that are im-
plied in the classical law of decreasing returns in agriculture. No more do
we become dilettantes in psycholog) 7 — or borrow from professional psychology
— when we speak of motives or, for that matter, of wants or satisfactions. But
though this practice does not present any problems concerning the rela-
tion between economics and psychology, it does present another. Early utility
theorists talked about psychical facts with the utmost confidence. They in-
cluded them in the stockpot of common experience — that source of knowl-
edge of the course of everyday life, no element of which a reasonable man
could possibly call into question. But so far as these psychical facts are
known to us only from observation of what goes on in our own indi-
vidual psyches — from introspection — their standing evidently leaves something
to desire, even though most of them, such as the satisfaction incident to
quenching one’s thirst, are so simple and so little problematical that he who
quibbles about them might easily compromise himself in the eyes of men of
less delicate methodological conscience. In any case, nobody will deny that
it is preferable to derive a given set of propositions from externally or ‘ob-
jectively’ observable facts, if it can be done, than to derive the same set of
propositions from premisses established by introspection. And, as we shall
presently see, this can actually be done in the case of the utility theory of
value, at least so long as we do not ask it to do more for us than to furnish
the assumptions or ‘restrictions’ that we need within the equilibrium theory of
values and prices. This is the Leitmotiv of subsequent developments . 2

Marxists also held that, by its probings into the ‘psychology’ of value-in-use, the utility
theory contributed nothing to our understanding of economic processes. For an ex-
ample see the article ‘Grenznutzen’ by W. Lexis, in .the second edition of the Hand-
worterbuch der Staatsmssenschaften.

io6o

IV : FROM 1870 TO 1914 AND LATER

5. Cardinal Utility

However, even on this leyel and apart from mere defense and elaboration,
there was plenty to do. In order to illustrate, I shall mention three contribu-
tions of major importance. First, none of the founding fathers, not even Wal-
ras, had bestowed adequate care upon fundamentals. 3 The theory badly needed
rigorous restatement. This was accomplished, in a manner that anticipated

they experience an increase in income, normally increase their expenditure or con-
sumption but by less than the increase in income. Whether this is so or not, it is a
statement of statistically observable fact which Keynes raised to the rank of an as-
sumption. Nothing is gained, except a spurious dignity, by calling it a psychological
law. Our experience with such ‘laws of human nature/ from the seventeenth century
on, is certainly not encouraging. But even Jevons would not do without them (Theory
of Political Economy, p. 59).

1 The meaning of direct measurability is best instanced by the measurement of
length. It may be defined as the association, with every utility sensation, of .a real num-
ber, unique except for the choice of a unit which is to be interpreted as a unit sensa-
tion. Nobody held that this could be done as easily as it can in the case of length.
But some authors did hold that there was no difficulty of principle involved. The pres-
ence of a practical difficulty — that would reduce utility measurements to rough ‘esti-
mates’ — was. recognized by Bohm-Bawerk ( Kapital und Kapitalzins, 3rd ed., Appendix).

2 He guarded this carefully against circularity. The exact definition of measurability
in this sense would run as follows: it is possible to associate, with every utility sensa-
tion, a real number, unique except for the choice of a unit, which is to be interpreted
as a unit quantity of an externally observable incentive producing an externally observ
able reaction. An illustrative analogy, which is however not quite satisfactory, is pro-
vided by the method of measuring heat by means of a thermometer.

3 This may surprise readers who remember the prolix commentaries of the Aus-
trians. But then Wieser and Bohm-Bawerk were fatally handicapped by their lack of
the necessary mathematics.

EQUILIBRIUM ANALYSIS lo6l

The term Consumers’ Surplus or Rent is Marshall’s, but the essential idea — not every
detail — is Dupuit’s. The reader should, if necessary, refresh his memory from Principles,
Book nr. Chapter 6, so that this space may be reserved for comments. There, Mar-
shall does not mention Dupuit’s name, and only inadequate amends are made for this
by means of a statement occurring in another and far distant place (Book v, ch. 12,
concluding footnote), namely, that The graphic method has been applied in a manner
somewhat similar to that adopted in the present chapter by Dupuit in 1844 and, inde-
pendently, by Fleeming Jenkin in 1871.’ The idea of 'measuring’ the total utility ac-
cruing to an individual from the consumption of a given quantity of a given commodity
by the sum of money represented by the definite integral, taken from zero to the
given quantity, of his individual demand function (the consumers’ surplus is then the
difference between this integral and the price actually paid times the quantity bought)
is at first sight open to a number of objections, which were in fact raised but most of
which rest upon misunderstandings of Marshall’s meaning. Appreciation of the value
of the tool will be best conveyed by a frank recognition of the limitations to which,
at least in the original Marshallian formulation, it must be understood to be subject.
First, it was meant to be essentially a tool of partial analysis; the price of one com-
modity only is made to vary, all other prices being kept constant. Second, even within
this range, the concept of consumers’ rent embodies a method of approximation (though
it may be exact in certain cases). For it assumes that the marginal utility of income
does not change if the individual, having acquired a first unit of the commodity in
question for, say, $100, a second for, say, $99, a third one for, say, $90, goes on spend-
ing more and more money on additional units as they are offered to him at decreas-
ing prices. Strictly, this is inadmissible. But if this expenditure is but a small part of his
total expenditure — so that his other expenditures are not perceptibly affected by this one
— we may neglect, as of second order of magnitude, the variations in the marginal utility
of income that actually occur. Of course, this limits the method severely: it cannot be
applied to such things as food in general or house room or it can be applied only to
small ranges of variations in the prices of these, and Marshall knew why he used tea
as an example by which to display it. But within these limits the method is neither
incorrect nor valueless. Even the sum of all consumers’ rents enjoyed by an individual —
a concept that looked absurd to some critics — and the sum of all consumers’ rents en-
joyed by all individuals buying an individual commodity may be made to carry mean-
ing by means of further assumptions that are not worse than others we habitually
make. However, consumers’ rent had a bad reception from the first, and Professor
Pigou, who developed Marshall’s teachings so faithfully in other respects, did not
throw the weight of his authority into its scale. But of late. Professor Hicks, impressed
by its usefulness in welfare economics (see below, sec. 8), recalled it — or something

4 G. B. Antonelli, Sulla teoria matematica della economia politica (1886).

1062

IV: FROM 1870 TO 1914 AND LATER

like it — from the limbo of dead issues to what looks like another lease on life. See 1

his note to Chapter 2 of Value and Capital and his articles 'The Rehabilitation of 1

Consumers’ Surplus’ ( Review of Economic Studies, February 1941); 'Consumers’ Sur- :

plus and Index Numbers’ (ibid. Summer 1942); and ‘The Four Consumer’s Surpluses’ i|

(ibid. Winter 1943). [Cf. also R. L. Bishop, ‘Consumer’s Surplus and Cardinal Utility,’ -

Quarterly Journal of Economies, May 1943.]

6. Ordinal Utility

'show me a utility or satisfaction that is, say, three times as great as another!’

But nobody questioned people’s ability to compare satisfactions expected from
the possession of different sets of goods without measuring them, that is to
say, people’s ability to array such sets in a unique 'scale of preference.’ This
is what we mean by Ordinal Utility.

Only the briefest reference can be made to a point on which economists have not
been able to reach agreement to this day. We can, as has just been stated, array hypo-

1 A quantity or magnitude (the Greek is defined as anything that is capable

of being greater or smaller than some other thing. This property implies only transi-
tivity, asymmetry, and aliorelativity (the last term meaning that no thing can be
greater or smaller than itself). It also covers the relation of equality, which is how-
ever symmetrical and reflexive (the latter term meaning the opposite of aliorelative) .
Now, quantity in this very general sense does not imply measurability, which requires
fulfillment of two more conditions: (1) that it be possible to define a unit; (2) that it
be possible to define addition operationally, i.e. so that it can be actually carried out.

2 This is, I suppose, what Wieser meant when he said that utility had no ‘extension’
but only ‘intensity.’ If my interpretation be correct, this turn of phrase was no doubt
highly infelicitous.

EQUILIBRIUM ANALYSIS

1063

thetical sets of goods ordinally. Suppose that an individual tells us that he prefers a
set of goods (B) to a set of goods (A) and a set of goods (C) to the set of goods (B);
therefore he prefers (C) to (A) (transitivity). But can we go further and assume that
the increase in satisfaction which, on the showing of the experiment, he must experi-
ence when, having been promised (A), he is then promised (B), is capable of being
greater or less than, or equal to, the increase of satisfaction he would experience if,
having been promised (B), he is then promised (C)? This question is by no means
otiose because it has been asserted by some and denied by others that admissibility of
this assumption opens a way back to measurability ( even though, by itself, it is not
sufficient to insure it). We cannot go into this question and must content ourselves
with a reference to the three most important papers about it. They are: O. Lange, 'The
Determinateness of the Utility Function’ (Review of Economic Studies, June 1934);
P. A. Samuelson, 'The Numerical Representation of Ordered Classifications and the
Concept of Utility’ (ibid. October 1938); and especially F. Alt, 'Ober die Messbarkeit
des Nutzens’ (Z eitschrift fur Nationqlokonomie, June 1936). For readers who can
muster sufficient interest in questions of this kind, I shall however add this: the merit
of having seen the importance of this assumption is Lange’s. But he failed to see that
it was only necessary, but not sufficient, in order to prove the possibility of measure-
ment. Samuelson’s argument points this out correctly. Alt’s argument, however (which
was not known to Samuelson), is logically adequate and reduces the problem satisfac-
torily to one of empirical verification of the seven assumptions involved (which it is
true has not been attempted so far).

4 See the Appendix to his Manuel in its entirety. But the later article in the French
edition of the encyclopaedia of mathematical sciences (Encyclopedic des sciences
mathematiques pures et appliquees, 1911), contains several improvements (the earlier
article in the German ed. is of no importance).

5 W. E. Johnson, 'The Pure Theory of Utility Curves,’ Economic Journal, Decem-
ber 1913. This important paper contains several results that should secure for its au-
thor a place in any history of our science. But, having apparently been written in igno-
rance of Pareto’s work, it aroused not unnatural resentment on the part of Italian
economists because of its failure to acknowledge Pareto’s priority in most essentials.
The Russian economist and statistician Eugen Slutsky, Professor in the University of
Kharkov, published in the Giornale degli Economisti, July 1915, an article entitled
'Sulla teoria del bilancio del consumatore,’ the complete neglect of which outside of
Italy may perhaps be excused on account of the conditions prevailing in that year. It
keeps to the idea that utility is a quantity, though an unmeasurable one; posits certain
assumptions about its properties; and then develops the theory of consumers’ behavior
with which little fault can be found so long as that view of utility is accepted. Ample
amends for that neglect were made by Henry Schultz ('Interrelations of Demand, Price,
and Income,’ Journal of Political Economy, August 1935); by R. G. D. Allen ('Pro-
fessor Slutsky’s Theory of Consumers’ Choice,’ Review of Economic Studies, February
1936); and by J. R. Hicks, who in Value and Capital gave Slutsky’s name to the

1064 IV : FROM 1870 TO 19x4 AND LATER

set of commodities to another which is less acceptable to the individual, and
assumes constant values (does not change) whenever we proceed from any
given set of commodities to one which is equally acceptable to the individual —
just as the two bundles of hay were to Buridan’s ass. Such a function will rep-
resent the individual’s 'scale of preference’ mentioned above but, unlike the
function that represents cardinal utility, it will not do so in a uniquely deter-
mined way, because all it is devised to tell us is whether there is increase, de-
crease, or equality of utility. Everything else about it, any further algebraic or
numerical features it may display, is entirely arbitrary and has in fact no eco-
nomic meaning. Hence, if cp be any such function , 8 any monotonically increas-
ing function of rp, call it f(cp), will do just as well. Pareto called such a func-
tion an Index Function (funzione-indice) . They were to play the same role in
the value theory that works with ordinal utility as had been played by the
utility function in the value theory that worked with cardinal utility — in fact,
we might call them utility functions that obviate the objection against meas-
urability.

fundamental equation of the modern theory of value. Perusal of Professor Allen’s ar-
ticle, a shining example for what in this book is considered correct behavior in the
case of unexpected discovery of predecessors, will tell readers unfamiliar with Italian all
there is to know about Slutsky’s performance. No comment is, I trust, necessary on
the famous 'Reconsideration of the Theory of Value’ by Allen and Hicks (Economica,

February and May 1934), which marks substantial advance beyond Slutsky.

6 I cannot do more than indicate the most important milestones on the main road.

Many other things must go by the board. For instance, part of the development I am
trying to describe in the text was paralleled by the thought of the later Austrians,
though, owing to the inefficiency of their nonmathematical method, they did not get
very far. On these Viennese developments, see A. R. Sweezy, ‘The Interpretation of
Subjective Value Theory in the Writings of the Austrian Economists,’ Review of Eco-
nomic Studies, June 1934.

8 For technical reasons, we do, however, require certain other properties, such as
continuity and differentiability.

EQUILIBRIUM ANALYSIS

1065

had nothing to do with ordinal utility, by Edgeworth, 9 who fully accepted the
doctrine of cardinally measurable utility. Let us for a moment return to this
doctrine. Confining ourselves to the two commodity case, we can then lay off
the quantities of these commodities on two of the co-ordinates of a three-
dimensional diagram and represent by the third co-ordinate the varying
amounts of total utility enjoyed that correspond to all the possible combina-
tions of the two commodities. The result is a utility surface that rises from the
origin as the quantities of the two commodities increase, and possibly flattens
out later on, presenting a shape not unlike that of a loaf of bread (Pareto
called it la colline du plaisir). A succession of horizontal planes — that is, of
planes parallel to the plane of the two commodity co-ordinates — will cut out
from this loaf curves along which total utility is constant, the quantities of the
commodities varying in such a way that the increase of one just compensates
the individual for the corresponding decrease of the other. These curves, the
whole meaning of which seems to rest upon the assumption that utility is
measurable, are what Edgeworth called indifference curves. If we project them
on the commodity plane, we get the familiar ‘indifference map.’ Edgeworth
used it very elegantly in his theory of barter, particularly in order to delimit
the range of possible barter terms or exchange ratios. 10

But so soon as we project the indifference lines on the commodity plane, the
utility dimension vanishes from the picture so that their meaning is no longer
dependent on any hypothesis of measurability. They then tell us no more than
(1) that the individual considers certain combinations of the two commodities
as equally eligible and (2) that he prefers combinations represented by any
‘higher' indifference curve to combinations represented by any 'lower' one. The
first man to see the implications of this was Irving Fisher. 11 He had no objec-
tion to measurability. On the contrary, he tried to make it operational (see
below editor's note between sections 7 and 8). But in doing so, he encountered
certain difficulties when, in the second Part of his work, he discarded the un-
tenable assumption that the utility of each good depends on its own quantity
only (‘independent goods’). 12 At this point doubts were bound to arise not
only about the measurability but also about its very existence. Accordingly,
Fisher presented an analysis completely free from utility assumptions that
worked only with indifference maps in the modern sense. With him — as later

9 They put in appearance in his Mathematical Psychics (1881) and therefore ante-
date ordinal-utility analysis of the Pareto type by about twenty years.

io66

IV : FROM 1870 TO 1914 and LATER

on with Allen and Hicks — indifference curves were the starting points of the
analysis; they were not, as with Edgeworth, derived from a utility surface.

However, the indifference curves are part of index functions and can also be
derived from these. This is what Pareto did. But they are just as independent
of the particular index function chosen as they are of the particular form of the
cardinal utility function, being uniquely determined by the scale of preferences.
This suggests the idea of doing also without index functions, especially because
they give rise to difficulties similar to those that Professor Fisher met in the
case of utility functions. 7 * * * * * 13 But it took until 1934 to give full effect to it and to
develop a theory that is nothing but a logic of choice: the theory of Allen and
Hicks that was published in that year was, so far as I know, the first to be
completely independent of the existence of an index function and completely
free from any lingering shadows of even marginal utility, which is replaced in
their system by the marginal rate of substitution. 14 In consequence, elasticities
of substitution and complementarity are defined exclusively from the scales of
preference and likewise divorced from utility. Beyond this we cannot go. It
must suffice to mention the most important of the problems that are as yet
unsolved within the range of this theory of choice: so far, indifference curves
are satisfactorily defined for individual households only; the question remains
what meaning is to be attached to collective indifference curves — for example,
indifference curves of a country — which have been used in some of the most
brilliant theoretical work of our time. 15

7. The Consistency Postulate

13 Though we can always proceed from given index functions to indifference curves,
we cannot always proceed from given indifference curves to index functions. For the
latter to be possible, i.e. for an index function to 'exist,’ it is necessary that the dif-
ferential equation of the indifference curves be integrable. In the case of only two
variables (two commodities), there is always an integrating factor; in the case of three

or more there need not be one. This question of integrability w’as very serious for

Pareto’s approach. Later developments have deprived it of its importance.

14 It may be well to point out explicitly that this involves discarding Gossen’s law

of satiable wants.

15 See, e.g.. Professor Leontief’s paper on 'The Use of Indifference Curves in the

Analysis of Foreign Trade/ Quarterly Journal of Economics, May 1933.

• |

■I

■d

EQUILIBRIUM ANALYSIS

1067

have not helped us to results that the latter could not have reached; and no
result of the latter has been proved definitely wrong by them. Moreover, if
they 'assume less’ than does the utility analysis, they still assume more than,
for purposes of equilibrium theory, it is necessary and comfortable to assume.
And if they use nothing that is not observable in principle, they do use 'poten-
tial’ observations which so far nobody has been able to make in fact: from a
practical standpoint we are not much better off when drawing purely imaginary
indifference curves than we are when speaking of purely imaginary utility func-
tions. 1 Accordingly, it has been pointed out, as early as 1902, by Boninsegni,
and a few years later by Barone, 2 that for the purposes of writing the equa-
tions of equilibrium theory we do not need either. 3 What then do we need
for this purpose if we leave every other out of account? A little reflection shows
that even the early utility theory of value never actually used any other postu-
late than this: faced with a given set of prices and a given 'income,' every-
body chooses to buy (or sell) in a uniquely determined way. Everything else
is idle decoration and justified, if at all, by such interest as may attach to it
from the standpoint of other purposes. Barone had seen this but he had failed
both to formulate this postulate exactly and to prove its sufficiency. This has
been done by Samuelson, 4 who formulated the consistency postulate: if

% = h\P !, * • • P„, I) {i = 2, * * • n),

Z) “ 1 = °>

i = l

1 On the possibilities of ‘The Empirical Derivation of Indifference Functions/ see
the paper with this title, by W. Allen Wallis and Milton Friedman, in Lange et al.
editors. Studies in Mathematical Economics and Econometrics, 1942 (Henry Schultz
memorial volume) — though here again we must never say never; see, e.g., Professor
Wald’s important paper, ‘The Approximate Determination of Indifference Surfaces by
Means of Engel Curves,’ E conometrica, April 1940. Of course, this must not be al-
lowed to obliterate the logical difference: it does make a difference whether or not a
certain construct has, to use the phrase of Immanuel Kant, a ‘relation to possible ex-
perience’ ( Relation auf mogliche Erfahrung). Also, it can of course be shown just as
in the case of the utility analysis that indifference-variety analysis is not open to any
indictment on the score of circularity or emptiness.

2 P. Boninsegni, ‘I Fondamenti dell’ economia pura,’ Giornale degli Economisti,
February 1902; and E. Barone, ‘II Ministro della produzione,’ ibid. September and
October 1908 (see above, sec. 5).

3 They realized, of course, the necessity of restrictive assumptions about consumers’
behavior from which the properties of demand functions would follow. This distin-
guishes their views from G. Cassel’s, who simply advocated the scrapping of every-
thing behind demand functions to make these the ultimate data. See his ‘Grundriss
einer elementaren Preislehre,’ Zeitschrift fur die gesamte Staatswissenschaft (1899),
which deserves to be mentioned because it was the first uncompromisingly radical attack
upon the whole structure of the utility theory of value made by an economist trained
in mathematics. In his Theory of Social Economy, Cassel substantially repeated the
argument.

4 In his 'A Note on the Pure Theory of Consumer’s Behavior/ Economica, Feb-
ruary 1938; see also ‘The Empirical Implications of Utility Analysis/ Econometrica,

1068 iv: FROM 1870 TO 1914 AND LATER

and proved brilliantly that this gives all the restrictions we need for our

J^Pidxpi = o and ^dPidxpi < o (not all dxpi = o ). 5

i=i i=i

[Editor’s note: The plan for the remainder of this Appendix to Chapter 7 (Note
on the Theory of Utility) is not quite clear. There is no doubt that J. A. S. intended
to make his treatment of welfare economics a part of this Appendix, which is described
as a digression or note on utility (see the first paragraph of Section 5 of this chapter,
The Theory of Planning and of the Socialist Economy) and there is some evidence that
it was to be sub 8 (section 8). The section on Welfare Economics which follows was
a preliminary treatment probably written in 1946 or 1947. The first six sections of
the Note on the Theory of Utility were apparently written at the end of 1948. This
material had been typed and read by J. A. S. Sometime later he sketched out sec-
tion 7 (The Consistency Postulate) and put down notes for a section 8 (The Corpse
Shows Signs of Life). It is conceivable that welfare economics would have been dis-
cussed here. ‘The Corpse’ is so fragmentary, however, that I have simply presented it
in the next two paragraphs as part of this note and have made Welfare Economics
section 8 of the Appendix to Chapter 7.

‘8. The Corpse Shows Signs of Life. We have surveyed what in spite of backslidings
and detours looks like a very definite line of development to a goal that seems to have
been definitely reached by Samuelson. However, the picture would be incomplete if
we failed to notice a number of symptoms which seem to be at variance with that
line and to point in another direction. If these symptoms could all be interpreted as
survivals of old views, they would not be worth while mentioning. It is but natural that
a concept like utility, so deeply rooted both in century-old tradition and in the habits
of everyday thought and parlance, should not give way easily. But there is more to it
than this. It is true that it has by now been cogently proved that the concept of
utility is superfluous in the theory of equilibrium values — which is in fact not only
the strongest but the only needful argument against it. But it has not been proved —
and cannot be proved in the nature of things — that the concept can never be useful for
any other purpose. However we may feel about it, we cannot deny the heuristic service
it has rendered in the past — historically it was the discovery of the very theory which
now can do without it — and there is no saying whether its fertility is exhausted for
all time. In this connection it becomes relevant to note that some arguments against
it have no weight and others have gone too far. It is even possible that the argument
against measurability is among the latter. Of course, as far as this goes, if we ever
come to devise methods of measurement, it would not be the old psychic reality:
there is the possibility that we might wish for a potential; there is even a possibility
that we might measure without subjective reality [shorthand notes],

‘And in this connection [shorthand notes] whatever objections against them [short-
hand notes]’

[J. A. S. then jotted down the following references, which he obviously intended to
discuss.]

October 1938. Cf. N. Georgescu-Roegen, ‘The Pure Theory of Consumer’s Behavior,’
Quarterly Journal of Economics, August 1936.

5 [J. A. S. did not finish this section or fill out the mathematical symbols for the
Samuelson postulate; the mathematical formulation above was supplied by R. M. G.]

EQUILIBRIUM ANALYSIS

1069

2. Aupetit [not certain, writing illegible],

3. Irving Fisher, ‘A Statistical Method for Measuring “Marginal Utility” and Test-
ing the Justice of a Progressive Income Tax,’ in Economic Essays Contributed in Honor
of John Bates Clark (1927).

4. Ragnar Frisch, 'Sur un Probleme d’economie pure,’ Norsk Matematisk Forenings
Skriften, 1926.

5. Ragnar Frisch, New Methods of Measuring Marginal Utility (1932),

6. Paul A. Samuelson, 'A Note on Measurement of Utility,’ Review of Economic
Studies, February 1937.

... is not true [shorthand notes] welfare economics [shorthand notes] consistency
[shorthand notes] parameter, features [shorthand notes]

Potential, [shorthand notes] Engel Curves.’

8. Welfare Economics *

The reader is presumably familiar with the distinction made in current teach-
ing between 'positive’ and 'welfare’ economics. Little beyond convenience of
exposition can be adduced for this distinction so far as it means not more
than that positive economics is to explain and welfare economics is to pre-
scribe. For all propositions of welfare economics can be formulated in the in-
dicative mood just as well as any propositions of positive economics can, by
the insertion of the appropriate axiological postulates, be turned into an im-
perative. Since, however, modern welfare economics has, as a matter of fact,
acquired a distinct status of its own, it is convenient to notice its develop-
ment separately. We have also an additional motive for doing so since the
subject bears an obvious relation to the subject of interpersonal comparison
of satisfactions that has not yet been touched upon.

We know the hallowed antiquity of welfare economics: a large part of the
work of Carafa and his successors as well as of the work of the scholastic doc-
tors and their successors was welfare economics. We also know that the wel-
fare point of view was much in evidence in the eighteenth century and that,
in Italy, the phrase felicita pubblica appeared very frequently on title pages.
For Bentham and the English utilitarians generally this point of view was,
of course, an essential element of their creed. Hence, the positive spirit of
Ricardian economics notwithstanding, we find it also in the English 'classics,’
particularly in J. S. Mill. So far as this goes, modern welfare economists merely
revive the Benthamite tradition.

1070 IV: FROM 1870 TO 1914 AND LATER

genial to his propensity to preach. First, as has been mentioned above, he re-
discovered Dupuit’s consumers’ surplus or rent, and thus presented welfare
economics with an analytic tool that is, or was thought to be, particularly
adapted to application in this field. Second, he formulated several propositions
of the kind that is typical of modern welfare economics. The most famous
one is noticed in the footnote below. 1 Its importance consists not so much
in the proposition per se, but in the fact that it spelled a new departure: tire
virtues of the perfectly competitive equilibrium state — what Marshall called the
doctrine of maximum satisfaction — had indeed been questioned many times
before from a variety of standpoints; but this was the first time that this was
done within the range of the pure theory of that state, the first time that,
on the theoretical plane, the possibility was considered of turning individual
actions into channels more conducive to general welfare than those of laissez-
faire. Edgeworth’s many contributions are perhaps best exemplified by that
part of his theory of taxation which is concerned with justice. The treatment
is in the spirit of his New and Old Methods of Ethics (1877), that is, in the
spirit of hedonism or utilitarianism. The main points are the distinction be-
tween, and the rigorous definition and quantification of, the concepts of equal,
proportionate, and minimum sacrifice, the equalitarian implication of the last-
mentioned idea coming duly into view. 2 Mainly, Edgeworth’s efforts were di-
rected against popular errors of reasoning such as are implied, for instance, in
the widespread belief that decreasing marginal utility of income is all that
need be assumed in order to make progressiveness of taxation follow from the
postulate of equal sacrifice. 3

EQUILIBRIUM ANALYSIS

IO71

However, from the standpoint of those economists who are steadfast op-
ponents both of interpersonal comparison and of measurement of individual
utilities, any attempt at either is of course no better than walking on clouds.
Nevertheless, they were in no mind to give up welfare economics. It is here
that Pareto enters again to save the situation, at least in part. He and, fol-
lowing him, Barone pointed out that objection to interpersonal comparisons
(or measurability) does not invalidate those propositions of welfare economics
which refer to events that benefit or injure some members of society without
injuring or benefiting others . 8 This principle will also enable us, in a more
restricted sense, to speak of an event’s being 'socially beneficial’ when some
people are injured (lose something), but when those who are can be fully in-
demnified (so that they no longer prefer their old situation to the new one)

4 See L. Robbins, 'Interpersonal Comparison of Utility,’ Economic Journal, De-
cember 1938.

5 It is true that he wrote ( Principles , Book 1, ch. 5, p. 76): 'We cannot directly
compare the pleasures which two persons derive from smoking; nor even those which
the same person derives from it at different times.’ But the emphasis is upon the word
'directly’; and the sentence means not more than that, exactly as measurement of the
desires of a given person is always an indirect one in the sense explained above, so
interpersonal comparison must resort to indirect methods. Marshall’s reasoning in fact
repeatedly implies the possibility of interpersonal comparison.

6 See, e.g., his article on Cassel’s system, republished as Appendix 1 to the English
edition of the Lectures, vol. 1, p. 221.

7 Perhaps I should explain, as I have explained before with respect to measurability
and integrability, that this need not amount to more than saying that it may be
possible to frame hypotheses concerning the relation between the significance of a
dollar to the poor man, A, and the significance of a dollar to the rich man, B, that
yield none but reasonable results.

8 This means, of course, that such events, rearrangements, or measures can be called
'beneficial’ or 'injurious’ irrespective of any interpersonal comparison and irrespective
of the question by how much the beneficiaries or victims are benefited or injured. The
case where all individuals are benefited or injured is evidently covered by our formulation.

1072 iv: FROM 1870 TO 1914 AND LATER

at the expense of those who have been benefited and when, after this has been
done, the latter are still better off than they were before. 9

The standard work from which the new Anglo-American welfare economics
stems, Professor Pigou’s Economics of Welfare (1920; 3rd rev. ed. 1929), 10
though it does take some account of the point of view just referred to, goes
much beyond the limits drawn by the Paretian suggestion, especially as re-
gards transfers of wealth from the relatively rich to the relatively poor. But the
new Anglo-American welfare economics itself tries to respect those limits,
though trespass on forbidden ground is still frequent. That is to say, it tries
to confine itself, on principle, to propositions that can be established without
the aid of either interpersonal comparison or measurement of utility. Such self-
restraint might seem surprising in view of the fact that its main result is to
deprive of their scientific or pseudoscientific foundations many equalitarian ar-
ticles of faith to which most modern economists are emotionally attached.
But not much self-restraint is actually needed, for a device has been discovered
that enables welfare economists to elude those restrictions. It is called Social
Valuation and consists in replacing the conception of social welfare defined
as the sum of individual satisfactions by the dictate of some agent who de-
cides what relative weights are to be attached to the (unmeasurable) desires of
the members of society. 11 That this agent is nothing but the volonte generate
of the eighteenth century should be clear; so should the danger that this agent
become but a name for the interests and ideals of the analyzing individual.

Under these circumstances, the question arises once more in what way
modern welfare economics differs from that of the English 'classics.’ 12 It dif-

9 The reader will realize on reflection that this is more than what it seems to be at
first sight, viz. a very artificial definition of what is meant by making 'society’ better off.

10 Originally Wealth and Welfare (1912).

12 Since it is impossible for us to enter into the methods and results of modern wel-
fare economics, readers may welcome a few references: A. Burk (Bergson), 'A Re-
formulation of Certain Aspects of Welfare Economics,’ Quarterly Journal of Eco-
nomics, February 1938; H. Hotelling, 'The General Welfare in Relation to Problems
of Taxation and of Railway and Utility Rates,’ Econometrica, July 1938; N. Kaldor,
'Welfare Propositions in Economics and Interpersonal Comparisons of Utility,’ Eco-
nomic Journal, September 1939; J. R. Hicks, 'The Foundations of Welfare Economics,’
Economic Journal, December 1939; T. de Scitovszky, 'A Note on Welfare Proposi-
tions in Economics,’ Review of Economic Studies, November 1941; O. Lange, 'The
Foundations of Welfare Economics,’ Econometrica, July-October 1942; G. Tintner,
‘A Note on Welfare Economics,’ Econometrica, January 1946. Professor Hotelling’s
paper is of particular interest because it contains, what is perhaps the most famous

EQUILIBRIUM ANALYSIS

‘practical’ proposition of modern welfare economics, namely, that maximizing general
welfare (in a particular sense) requires that all goods and services should be produced
and consumed in quantities such as to equalize marginal costs and prices even where,
owing to the presence of decreasing average costs, this involves losses to the producing
industry — a proposition that is of great theoretical interest. Another excellent example
for 'modern welfare economics at work’ is Professor Samuelson’s 'Welfare Economics
and International Trade/ American Economic Review, June 1938, supplemented by
'Gains from International Trade,’ Canadian Journal of Economics and Political Science,
May 1939, and Foundations (1947), ch. 8.

[When originally written, the latest reference in this section was to Tintner’s article
in Econometrica, January 1946. The reference to Samuelson’s Foundations (1947) was
added later in pencil.]

CHAPTER 8

Money, Credit, and Cycles

1. Practical Problems 1074

(a) The Gold Standard 1075

(b) Bimetallism 1076

(d) Stabilization and Monetary Management 1077

2. Analytic Work 1080

(a) Walras 1082

(b) Marshall 1083

(d) The Austrians 1085

3. Fundamentals 1086

(a) Nature and Functions of Money 1086

[(b) Knapp's State Theory of Money] 1090

4. The Value of Money: Index Number Approach 1091

[(a) Early Work] 1092

[(b) The Role of the Economic Theorists] 1092

[(c) Haberler, Divisia, and Keynes] 1094

5. The Value of Money: the Equation of Exchange and the 'Quantity

Approach' 1095

[(a) The Definition of the Concepts] 1096

[(b) Distinction between the Equation of Exchange and the Quantity

Theory] 1099

[(c) Purchasing Power Parity and the Mechanism of International Pay-

ments] ' 1106

6. The Value of Money: the Cash Balance and Income Approaches 1108

(a) The Cash Balance Approach 1108

(b) The Income Approach 1109

7. Bank Credit and the ‘Creation’ of Deposits mo

8. Crises and Cycles: the Monetary Theories 1117

9. Non-Monetary Cycle Analysis 1122

(a) Juglar's Performance 1123

(b) Common Ground and Warring ‘ Theories’ 1125

1. Practical Problems

MONEY, CREDIT, AND CYCLES

10 75

few of those practical problems that induced discussions of some importance.

(a) The Gold Standard. The literary reflex of the tendency that dominated
the monetary policy of the period, the maintenance or adoption of the gold
standard, merits more careful analysis than it is possible for us to offer. There
were in all countries, among those who discussed actualities of national mone-
tary policy in a practical spirit, very many unconditional ‘pro’s.’ They in-
cluded, as does every party to every practical controversy, narrow-minded
fanatics without a trace of intelligence, but on its higher levels this was a
respectable group. I shall mention, by way of example, Bamberger, Giffen, de
Parieu, though a dozen other such trios would do just as well. 1

In view of the superficial sentence that some of us are in the habit of pass-
ing on the monetary thought of that time, it should be noticed, first, that the
opinions and recommendations of the unconditional ‘pro’s’ were incessantly
under fire — so that nothing could be farther from the truth than the idea that
the economists of that period as a body worshipped the golden calf — and, sec-
ond, that these opinions received but qualified support from those leaders of
scientific economics who actually worked in the field. As we shall see, neither
Jevons, nor Walras, nor Marshall,, nor Wicksell, nor Wieser, nor Fisher can,
without qualification, be called either theoretical or practical gold ’mono-
metallists. Later on, moreover, the depressions of the eighties and nineties
raised the question of gold’s responsibility either for falling or for cyclically
fluctuating prices. And the emergence of the gold-exchange standard raised the

1 Ludwig Bamberger (1823-99) was a typical doctrinaire liberal of the German type
— a revolutionary in 1848, a staunch enemy of socialism, protection, and even social
insurance ever after. As a member of the Reichstag he established himself as its author-
ity on money, and his great aim was to get Germany on the gold standard and to keep
her there. He was a violent anti-bimetallist (see subsec. b), disposing of the bimetal-
list argument by pointing to the silver interests behind it. But the particular task he
manfully strove to accomplish and the particular historical conditions in which this task
posited itself to him must be taken into account before we condemn his views on the
score of theoretical inadequacy. The more important of his speeches and articles (Aus-
gewdhlte Reden und Aufsatze ilber Geld- und Bankwesen) have been edited by K.
Helfferich (1900).

Sir Robert Giffen (1837-1910), an economic journalist and civil servant, belongs to
that category of meritorious or even eminent economists to whom this book cannot do
justice. His Progress of the Working Classes in the Last Half Century (1884) and his
Growth of Capital (1889) are landmarks in the history of economic statistics. Here we
have to notice his valiant defense of the gold standard (Case against Bimetallism, 1892;
Evidence before the Royal Commission on Gold and Silver, 1886-8) and his almost
ferocious hatred of Fancy (i.e. non-gold) Monetary Standards.

MONEY, CREDIT, AND CYCLES

i°75

few of those practical problems that induced discussions of some importance.

(a) The Gold Standard. The literary reflex of the tendency that dominated
the monetary policy of the period, the maintenance or adoption of the gold
standard, merits more careful analysis than it is possible for us to offer. There
were in all countries, among those who discussed actualities of national mone-
tary policy in a practical spirit, very many unconditional 'pro's/ They in-
cluded, as does every party to every practical controversy, narrow-minded
fanatics without a trace of intelligence, but on its higher levels this was a
respectable group. I shall mention, by way of example, Bamberger, Giffen, de
Parieu, though a dozen other such trios would do just as well . 1

In view of the superficial sentence that some of us are in the habit of pass-
ing on the monetary thought of that time, it should be noticed, first, that the
opinions and recommendations of the unconditional 'pro’s' were incessantly
under fire — so that nothing could be farther from the truth than the idea that
the economists of that period as a body worshipped the golden calf — and, sec-
ond, that these opinions received but qualified support from those leaders of
scientific economics who actually worked in the field. As we shall see, neither
Jevons, nor Walras, nor Marshall, nor Wicksell, nor Wieser, nor Fisher can,
without qualification, be called either theoretical or practical gold ’mono-
metallists. Later on, moreover, the depressions of the eighties and nineties
raised the question of gold’s responsibility either for falling or for cyclically
fluctuating prices. And the emergence of the gold-exchange standard raised the

1 Ludwig Bamberger (1823-99) was a typical doctrinaire liberal of the German type
— a revolutionary in 1848, a staunch enemy of socialism, protection, and even social
insurance ever after. As a member of the Reichstag he established himself as its author-
ity on money, and his great aim was to get Germany on the gold standard and to keep
her there. He was a violent anti-bimetallist (see subsec. b), disposing of the bimetal-
list argument by pointing to the silver interests behind it. But the particular task he
manfully strove to accomplish and the particular historical conditions in which this task
posited itself to him must be taken into account before we condemn his views on the
score of theoretical inadequacy. The more important of his speeches and articles (Aus-
gewdhlte Reden und Aufsdtze iiber Geld- und Bankwesen) have been edited by K.
Helfferich (1900).

IO76 IV: FROM 1870 TO 1914 AND LATER

question of the merits of actual gold circulation to which, as we know, Ricardo
had already returned a negative answer. 2

(b) Bimetallism. This was, throughout that period, the most fertile source
of 'practical' controversy. The popular and political literature of the silver men
— justice to silver; dollar of our fathers; You shall not crucify mankind upon a
cross of gold — contains many arguments that kept on a much lower level than
anything that can be found in the writings of the sponsors of gold. In particu-
lar, it is infested by products of a semi-pathological nature, for at that time
bimetallism was the chief hunting grounds of monetary monomaniacs. Never-
theless, it is the fact — a fact that these semi-pathological products and also the
victory of the gold party tend to obliterate — that, on its highest level, the bi-
metallist argument really had the better of the controversy, even apart from
the support that a number of men of scientific standing extended to the cause
of bimetallism. 3

(c) International Monetary Co-operation. The various international mone-
tary unions and conventions, such as the Latin Union, the Scandinavian Union,
the German Union (before the foundation of the empire), naturally sug-
gested more comprehensive schemes. On the initiative of France, an interna-
tional currency conference was held in Paris, 1867, that under the leadership
of de Parieu succeeded to a surprising extent in keeping clear of the bimetal-
list hornets’ nest, considered the question of a uniform world coinage of gold,
and adopted what were so far the boldest proposals ever made for a world-wide
monetary union. But at the subsequent international conferences of 1878, 1881,
and 1892, pressure by the United States diverted discussion and proposals to
bimetallism and thereby killed the original idea. 4 However, at the conference
of 1892, the German economist, Julius Wolf, proffered a new idea, namely,

2 The gold-exchange standard was essentially a practitioner’s idea. Scientific analysis
had little if anything to do with the 'discovery.’ There are, however, a number of
critical interpretations of the exchange standard by scientific economists of which it
must suffice to mention: L. von Mises, 'The Foreign -Exchange Policy of the Austro-
Hungarian Bank,’ Economic Journal, June 1909; J. M. Keynes, Indian Currency and
Finance (1913); Fritz Machlup, Die Goldkemwahrung (1925); C. A. Conant, ‘The
Gold-Exchange Standard,’ Economic Journal , June 1909; and a series of important
papers and reports by E. W. Kemmerer, see, e.g., his analysis of the case of the
Straits Settlements in Political Science Quarterly , xix and xxi (December 1904 and
December 1906).

4 On these conferences, whose reports contain many contributions of analytical merit,
see H. B. Russell, International Monetary Conferences (1898). •

MONEY, CREDIT, AND CYCLES

10 77

(d) Stabilization and Monetary Management. The chief appeal of the bi-
metallist argument, at least for people not directly interested in silver produc-
tion, was of course in the prospect it held out of rising prices. Officially, how-
ever, bimetallists preferred to speak of stabilizing the price level. But other
schemes of stabilization, unconnected with silver, were also produced, for ex-
ample, schemes that proposed to divorce circulation entirely from gold and to
use paper money. And though, during three decades of falling prices, it was
primarily the price level people thought of stabilizing (as always, there was
intentional or unintentional confusion of this aim with the aim of keeping up
individual prices, especially those of agricultural products), broader aims were
by no means absent. Even mere stabilization of prices implies — as its main
purely economic motive — concern with stabilization of a country’s economic
situation. But stabilization of employment was often mentioned explicitly.
Further, especially in connection with discussions of the gold-exchange stand-
ard, there was much talk about stabilizing money rates . 5

All this already meant monetary management of one kind or another. For
instance, bimetallism spells management whenever, in order to make it work,
it is necessary to regulate the price of silver — that is to say, to peg it by pur-
chases in order to keep silver from driving gold out of circulation— for in this
case the monetary system no longer works automatically. All schemes that

5 The 'comedy of errors’ present in almost any discussion of economic policy may be
instructively illustrated by one particular instance pertaining to that range of prob-
lems. When Austria, in the nineties, adopted the gold-exchange standard, it was urged
by politicians and in the press that one of the advantages of this arrangement would be
to secure lower interest rates than would prevail in the case of a fullfledged gold cur-
rency. Truth and error in this should be easy to disentangle. A central bank that is to
keep exchanges within gold points must, in the long run, do pretty much all that a
central bank does under the fullfledged gold standard, and refrain from doing what
such a bank must not do. Therefore, interest rates in a money market that works under
the gold-exchange standard cannot be normally lower than they would be in a money
market that works under a fullfledged gold standard. But, first, the total amount of
gold necessary in order to start a gold-exchange-standard system is smaller than the
total amount of gold that is necessary to start a system with actual gold circulation.
Hence money rates in the initial period need not be kept on so high a level for so
' long in the former case as would be necessary in the latter case. Second, with the
central bank in control of the whole of a nation’s monetary gold stock, it is easier in
the former case to avoid the necessity of varying bank rate in passing spells of diffi-
culty than it is in the latter. However, politicians and the daily press claimed that
interest rates would normally be lower with a gold-exchange standard than they would
be with a fullfledged gold standard. And in their zeal to refute this erroneous proposi-
tion, professional economists usually failed, to admit the two true ones — so that, as so
often happens in our field, both parties to the controversy were, in effect, right and
wrong at the same time.

1078 IV: FROM 1870 TO 1914 AND LATER

went further than this involved, of course, still more management. As an ex-
ample, I shall mention a proposal that commanded some support: the pro-
posal of an inconvertible paper currency to be regulated by a government de-
partment that was to buy government bonds for this currency — to increase
liquidity — whenever the price level fell, and to sell government bonds — to de-
crease liquidity — for this currency whenever the price level rose. This proposal
may be considered as one of the many precursors of the open-market opera-
tions of the Federal Reserve System. But the idea of open-market operations
was familiar in other forms also. For monetary management was not confined
to management of the currency. It extended to management of the foreign
exchanges and, more important, of bank credit. 6 Nor did it remain in the realm
of ‘plans/ It was increasingly practiced by all the great central banks. 7 And it
is not true that monetary management of this and other types knew no other
purpose than to safeguard a nation's gold stock. It was practiced for thera-
peutic purposes. These purposes differed from ours and the full-employment
purpose was not the dominating one. But it is as misleading to overstress the
importance that was then attached to playing the gold standard game for its
own sake as it is to speak of the monetary systems prior to 1914 as ‘auto-
matic/ 8 Unless this be clearly understood, it is impossible to appreciate the
doctrinal developments of that age either in themselves or in their relation to
the thought of our own time.

For the rest we must be content to notice a few of the performances, in the
field of ‘monetary reform,’ of the scientific leaders. Jevons sketched out what
seemed to him ‘An Ideally Perfect System of Currency’ 9 in which gold, while
retained as means of exchange and common denominator of values, was to
cease to be the standard for deferred payments, ‘the amounts of debts, al-
though expressed in gold, being varied inversely, as gold varies in terms of other
commodities.’ This revived the ‘tabular-standard plan’ of Lowe (see above.
Part hi, ch. 7, sec. 3) and is also the keynote of Marshall’s suggestions. 10 The

6 Thus, the issue of control of credit vs. control of money, which carries over into
more recent times, was already discussed.

7 For England, in particular, see W. T. C. King, History of the London Discount
Market (1936).

8 They looked more automatic than they were because they functioned so smoothly.
Moreover, if the Bank of England seems (statistically) to have reacted, in its discount
policy, mainly to the inflow or outflow of gold, it must not be forgotten that, in the
conditions that prevailed roughly until 1900, reacting to the inflow and outflow of
gold involved essentially the same behavior as would have reacting to the domestic
business situation, in nine cases out of ten. When this ceased to be so, central banks
increasingly resorted to ‘gold devices/ i.e. increasingly abandoned the orthodox gold
standard game.

9 Written about 1875 but first published in his important Investigations in Currency
and Finance, posthumously edited by Mrs. Jevons and Professor Foxwell in 1884. At-
tention is called to Foxwell’s Introduction.

10 In order to save space, I neglect the other features of Jevons 7 scheme, which are
in the direction of an international note issue and clearing system based upon gold.
Marshall’s exploits in the role (as he styled it) of ‘amateur currency-mediciner’ saw the

MONEY, CREDIT, AND CYCLES IO79

latter include, however, a novel idea. Adopting Ricardo’s ingot plan, he pro-
posed that these ingots should consist of both gold and silver and that silver
bars of a certain weight should be legally ‘wedded’ to gold bars of a certain
weight so that the monetary unit would constitute a claim to quantities of both
gold and silver in fixed proportion (Symmetallism). Irving Fisher's proposal , 11
the Compensated Dollar, combined adoption of the gold-exchange standard
with the device of varying the gold content of the monetary unit according to
the variations of an official price index so that a dollar should represent, in-
stead of a constant quantity of gold, a constant quantity of purchasing power.
Finally, Walras advocated a plan that linked up with actual practice in France
in a manner that was as ingenious as it was simple. Gold was to remain the
standard monetary metal and to be coined for private account without limit.
Silver was to be the material of token coins ( billon ) which, however, were
not only to provide small change ( billon divisionnaire ) but also a type of
legal-tender money that was to be used for the purpose of controlling the price
level ( billon regulateur): government was to expand its circulation when prices
were falling and to contract its issue when prices were rising. The modern
ring of this proposal needs no emphasis. Walras added another, which makes
him one of the precursors, of our own ‘100 per cent plans.’ He recognized,
though only in the case of banknotes, the fact that banks create means of
payment or, as he put it, that banks can lend to entrepreneurs without borrow-
ing the same amount from capitalists (savers). But he disapproved of it. And
he proposed that the silver surplus be used in order to coin additional silver
tokens in the amount of banknotes outstanding — minus the amount of legal-
tender cash held by the issuing banks — and to suppress the latter . 12

The merits or demerits of these plans are not in question here. They have
been mentioned for two reasons: first, because they show how utterly un-
founded is the belief that scientific leaders did not attend to problems of
monetary reform until our own day; second, because all those plans rested
upon a basis of analytic work, the fundamental importance of which must be
recognized quite independently of whether or not we like the plans themselves.

light in a paper he read at the Industrial Remuneration Conference in 1885, signifi-
cantly entitled ‘How far do remediable causes influence prejudicially (a) the continuity
of employment, (b) the rates of wages?’ (see Keynes’s biography of Marshall, Essays in
Biography, p. 204); in his evidences before the Royal Commission on the Depression
of Trade and Industry (1886), before the Gold and Silver Commission (1887-8), and
before the Indian Currency Committee (1899), published in Official Papers (1926);
and in his article ‘Remedies for Fluctuations of General Prices’ ( Contemporary Review ,
March 1887). See also F. Y. Edgeworth, ‘Thoughts on Monetary Reform,’ Economic
Journal, September 1895.

11 See Irving Fisher, assisted by Harry G. Brown, The Purchasing Power of Money
(1st ed., 1911).

12 Etudes d’economie politique appUquee, 1 and v.

IV : FROM 1870 TO 1914 AND LATER

2. Analytic Work

The story of the period’s purely analytic work — to which henceforth we
shall confine our attention almost exclusively — is a story of successful advance . 1
Though, as we have just seen, most of the leaders participated with zest in
the discussions on the practical problems of their day, their work was less de-
pendent upon this stimulus than had been the work of their predecessors:
more than before analysis forged ahead, as it were, under its own steam, and
the purely scientific filiation of ideas — r doctrinal change that is not simply re-
action to changing facts and changing political humors — is more in evidence
than it was in the preceding period. And more than in other parts of eco-
nomics new and valuable methods and results grew out of the pre-existing
stock of knowledge: in 'general theory’ it is possible, if we so choose, to speak
of revolution; in monetary theory there was only vigorous evolution. No break
occurred with the work that J. S. Mill had thrown into an imperfectly system-
atic form. Yet most of the ground on which the structure of monetary analysis
stands today was actually conquered.

The general picture I am about to present suffers from the impossibility of giving
an account, except on rare occasions, of the factual work of that period which is at
least as important for our own as are the 'theories.’ But all that can be done in a
sketch like this is to mention types and give one or two examples of each. There are,
first, some really excellent official reports: besides the English ones, which as usual hold
first place, I will again refer to those of the international monetary conferences and
of the U.S. National Monetary Commission (1911-12). Second, there are the his-
tories of currencies and of banking — such as W. A. Shaw’s History of Currency, 1252-
1894 (1895) or W. G. Sumner’s classic, A History of American Currency (1874). Third,
the period produced repertoires of materials that are still of value — Adolf Soetbeer’s
(1814-92) Materialien zur Erlauterung und Beurteilung der wirtschaftlichen Edelmetall-
verhaltnisse (1885; English trans. from 2nd ed., 1887, the seventh part of which con-
tains his famous Table of Prices) is the outstanding performance of this genus. A fourth
type is exemplified by Sir R. H. Inglis Palgrave’s statistical work on central banks,
especially the Bank of England (most of it summed up in his Bank Rate and the
Money Market, 1903, which is a masterpiece of the art of making figures speak): it is
very difficult to formulate particular results but he who peruses this book page by page 1
suddenly discovers that he understands its subject. Fifth, we should note the infiltra-
tion of modern statistical methods into the field — the earliest example known to me
being J. P. Norton’s Statistical Studies in the New York Money Market (1902).

MONEY, CREDIT, AND CYCLES

lo8l

Why is it, then, that the work of that period is sometimes referred to so
slightingly and that many of us construct an entirely unrealistic cleavage be-
tween it and our own? One answer is precisely that the evolutionary quality
of those new methods and results make them look like mere reformulations
of old stuff. But there is another answer, one that is highly interesting for the
student of the mechanisms of scientific 'progress.’ That period failed to de-
velop and systematize its conquests in a form readily accessible to all econo-
mists, with all implications and applications nicely worked out and displayed
on a silver platter. These conquests therefore did not penetrate into the com-
mon run of literature, especially into the textbooks, so that derogatory criti-
cism, while it arouses just indignation in scholars like Professor Marget, is at
the same time in a position to justify itself by quotations from the common
run — even from such well-known, successful, and (in their way) meritorious
books as Karl Helfferich’s Das Geld (1903), or J. L. Laughlin’s Principles of
Money (1903), or Horace White’s popular Money and Banking (1st ed., 1895;
5th ed., 1914), or David Kinley’s Money (1904), or Alfred de Foville's La Mon-
naie (1907). Even Adolf Wagner’s Sozialokonomische Theorie des Geldes
(1909), which takes a higher flight and contains several original points, is not in
much better case, and Karl Knies’s Geld und Credit (1873-9), important
though it is in other respects, added but little to the topics covered by its title.

In conscience, we must, however, mention at least a few more of those textbooks
that stand out from the rest for one reason or another: Jevons’ Money and the Mech-
anism of Exchange (1875), which ran into many editions — a charming book in which
rather trite elements are sometimes glorified by original sparks; J. Shield Nicholson’s
Treatise on Money and Essays on Monetary Problems (1888) — a work that has never
got its due; F. A. Walker’s famous textbook. Money (1878), perhaps the best means
to familiarize oneself with the current doctrine of those times at its best; Tullio Mar-
tello’s La Moneta (1883), the value of which is but slightly impaired by some liberal-
ist vagaries on free coinage; A. Messedaglia’s La Moneta . . . (1882-3), one of the best
performances of the scientific literature on money that preceded the Walras-Marshall-
Wicksell-Fisher achievements. In addition, the parts, books, or chapters on money of
the general treatises — such as Pierson’s, or Divisia’s, or Colson’s — ought to be men-
tioned. 2 But we must confine ourselves to the Third Book of G. Cassel’s Theoretische
Sozialokonomie (1918, 4th ed. rev. 1927; English trans., 1923, new ed., 1932). This
work deserves to be singled out because it presents, with a clearness that does not admit
of doubt, an instance of the view that the fundamental logic of the economic process
is entirely independent of the monetary phenomenon, the theory of which fundamen-
tally consists merely in the theory of the price level — by which relative, prices (exchange
ratios) are turned into absolute money prices on quantity-theory lines — and therefore
really and not only apparently stands outside the body of general economic theory. In
this respect, Cassel entirely missed the import of Walras’ message, which in other re-
spects he followed so closely. But if we take his treatment as an outstanding instance
of what is indeed a completely antiquated view of the matter, we must add that he
represents this view extremely effectively and that his treatment therefore retains impor-
tance. Nor is this importance merely historical. We may well use Cassel whenever we
wish to find out what our own advance really amounts to.

2 On Pierson, Divisia, and Colson, see above, ch. 5.

io 82

IV: FROM 1870 TO 1914 AND LATER

A brief description of the nature and fate of the chief analytic performances
of the period will explain this paradoxical state of things.

(a) Walras. First, by far the greatest of those performances was that of
Walras. 3 In the same sense in which it is true to say that he created economic
statics, the modern theory of economic equilibrium, it is also true to say that
he created the modern theory of money. In fact, his theory of money and
credit is simply part of this general theory of economic equilibrium. He there-
fore substantially fulfilled the great desideratum which has been so much
stressed during the last twenty years, namely, the desideratum that the analysis
of money should be built into the system of general theory instead of being
developed independently and then plastered upon it. And, so far as monetary
statics is concerned , all propositions developed about money and monetary
processes are either contained in his system or may be derived from it by intro-
ducing additional assumptions. Thus, as has been shown by Lange, 4 the
Keynesian analysis of the General Theory (not of the Treatise of 1930) is but
a special case of the genuinely general theory of Walras. But, as we have seen,
Walras did not come into his own until the twenties. Such influence as he
exerted during the period under discussion was mainly through Wicksell and
Pantaleoni. And even these two did not fully appreciate the importance of his
work on money. His immediate successor, Pareto, was altogether blind to it
and slid back rather than advanced in this particular field. Two excellent fol-
lowers Walras did find. But they remained almost completely unknown,
Aupetit and Schlesinger. 5

Another body of original work on money, related to that of Walras, may
be conveniently mentioned here, namely, Irving Fisher’s. Most of it came too
late to exert influence within the period. And when it did appear, professional
attention was too much concentrated on one book. The Purchasing Power of

4 See O. Lange, ‘The Rate of Interest and the Optimum Propensity to Consume,’
E conomica, February 1938.

5 A. Aupetit, Essai sur Id theorie generale de la monnaie (1901); Karl Schlesinger,
Theorie der Geld- und Kreditwirtschaft (1914). These two books, especially the latter,
are striking instances of the fact that in our field first-class performance is neither a
necessary nor a sufficient condition for success.

MONEY, CREDIT, AND CYCLES IOO3

Money (1911), the success of which obscured the fact that it presented only
one aspect — and not the most important one — of its author*! monetary theory
as this phrase is understood now. Ever since the publication of this book
Fisher has been classed as a sponsor of a particularly rigid form of quantity
theory (see below, sec. 5) and all his other contributions to monetary analysis
of the economic process as a whole — monetary analysis in the sense in which
Keynes’s General Theory is monetary analysis — have been neglected. This was
and is because he did not call them monetary or income analysis but chose
other titles, such as Theory of Interest or Booms and Depressions. In conse-
quence, his readers never got a full view of his work on money and in particu-
lar never noticed the Walrasian streak in it. 7

(b) Marshall. The second great performance of the last three decades of the
nineteenth century was Marshall’s. 8 Like Walras, though less explicitly, he saw
the monetary problem as part of the general analysis of the economic process
and as one of the doors to the theory of employment. More clearly than Wal-
ras, though less emphatically than Wicksell, he taught the importance of the
distinction between the 'real’ and the 'monetary’ rate of interest and of attend-
ing to the details of the mechanism by which changes in the amount of money
act on the economic system. And there were many hints that suggest future
developments though only a few of them will be mentioned in this chapter.
He held all the elements required for a decisive step forward though he did
not himself take this step. Unlike Walras he was indeed in a position of ef-
fective leadership. From 1885 on, the whole world’s population of economists
would have listened had he addressed it. But only glimpses of his views on

1084 IV : FROM 1870 TO 1914 AND LATER

monetary problems were vouchsafed to it until the publication, in his extreme
old age, of his Money, Credit, and Commerce (1923), when nothing in it
seemed novel any more. His Cambridge pupils and other followers of his did
listen. As a matter of historical justice, it should be emphasized that, in devel-
oping the English monetary theories of our own time, Hawtrey, Lavington,
Keynes, Pigou, and Robertson developed Marshallian teaching — though on
lines of their own.

It is unnecessary to comment upon works that are in every student's hands. All that
is necessary to point out here are the links with Marshall. Professor R. G. Hawtrey
should perhaps not be called a pupil in the same sense in which this term applies to
the others. But most of the propositions that individuate his teaching — which, as the
reader knows, is mainly geared to the problems of business cycles — may be traced to
Marshall (and some to Wicksell). The best way of putting it is perhaps to say that
Hawtrey’s analysis is an original development, in a certain direction, of Marshall’s
analysis. Of his numerous works, it will suffice to mention here Good and Bad Trade
(1913), Currency and Credit (1st ed., 1919), The Art of Central Banking (1932), Cap-
ital and Employment (1937). Frederick Lavington’s works are not so well known as
they deserve to be: The English Capital Market (1921) and The Trade Cycle . . .
(1922). They are unconditionally Marshallian. So is Professor Pigou’s article, 'The Value
of Money,’ in the Quarterly Journal of Economics, November 1917, his chief contribu-
tion to monetary theory per se. Other contributions are to be found in his Industrial
Fluctuations (1927). Of all the rest, I will mention only his monetary analysis of the
economic process. Employment and Equilibrium (1941). The theoretical skeleton of
Lord Keynes’s first book, Indian Currency and Finance (1913), was also Marshallian,
and in his Tract on Monetary Reform (1923) he wrote that his 'exposition [of mone-
tary theory] follows the general lines of Prof. Pigou and Dr. Marshall’ (p. 85n.),
though notes of his own are sounded at critical points. His most ambitious book,
A Treatise on Money (1930), may be described as a development of (though also away
from) Marshallian and Wicksellian lines — the Wicksellian elements were rediscovered,
however, not taken from Wicksell. It was only in The General Theory of Employ-
ment, Interest, and Money (1936) that allegiance to Marshall was formally renounced.
This makes it all the more important to note that it was not so much theoretical dif-
ferences which produced this posthumous break with Marshall as the difference in
social vision — in the diagnoses Marshall and Keynes formed about the economic situa-
tion of their times. As far as points of theory and not factual assumptions or practical
recommendations are concerned, there was one important difference only — : about the
mechanism of saving and investment — but even this one could have been reduced to a
matter of shift of emphasis, had it not been essential for Keynes to divorce himself from
what he styled the 'classic theory.’ Professor D. H. Robertson’s strikingly original Bank-
ing Policy and the Price Level (1926) went really further beyond Marshall thain any
of the works mentioned in this paragraph. If it stood alone, it would not be appro-
priate to pigeonhole Robertson with the Marshallians. Nor can he be so pigeonholed on
the strength of his theory of business cycles. But the rest of his publications on money
(including his well-known elementary textbook), the most important of which have
been republished in his Essays in Monetary Theory (1940) may be said to have grown
from Marshallian roots.

But this success of Marshall’s teaching on money was to come later, so late
that he lost part of the credit for it. Up to 1914, monetary theory outside of
Cambridge was practically untouched by Marshallian influence.

MONEY, CREDIT, AND CYCLES

1085

Again it is hardly necessary to mention such well-known names as Myrdal, Ohlin,

Lindahl, Lundberg. Gunnar Myrdal’s Monetary Equilibrium (Swedish, 1931; German,

1933; English, 1939), Bertil Ohlin’s Swedish essay on the theory of expansion, ‘Penning- ;

politik, offentliga arbeten, subventioner och tullar som medel mot arbetsloshet’ pub-
lished in a report on Monetary Policy to the Swedish Unemployment Commission,

1934), and Erik Lindahl’s English summary of his contributions ( Studies in the Theory
of Money and Capital, 1939). Erik Lundberg’s Studies in the Theory of Economic
Expansion (1937) will represent the post-Wicksellian development. It is an interesting i

fact to note in a history of economic analysis that, until about ten years ago, this de-
velopment paralleled and in some important points anticipated, the English (Keynesian)
one without becoming known to English economists. Some mild protests naturally re-
sulted from this state of things and also some discussions about the differences between, j

and the relative merits of, the two bodies of thought. See Ohlin’s ‘Some Notes on the
Stockholm Theory of Savings and Investment,’ Economic Journal, March and June !

1937, and the subsequent discussions in the same Journal (see below, Part v, ch. 5).

Professor D. Davidson, the contemporary and helpful critic of Wicksell, should not

go unmentioned. The reader finds all he ought to know about, JDavidson’s monetary

doctrines in the excellent article, ‘The Monetary Doctrines of Professor Davidson,’ by

Mr. Brinley Thomas ( Economic Journal, March 1935). In the latter’s Monetary Policy

and Crises (1936) there is a brief but useful sketch of Swedish monetary theory since j

Wicksell.

(d) The Austrians. In the fourth place, there were the contributions of the
Austrian group. They all started from Menger , 10 who did not, however, strike

out on a line for himself: his theory, though a masterly performance so far as I

9 Wicksell’s chief contributions are in his Geldzins und Giiterpreise (1898). R. F.

Kahn’s trans., Interest and Prices, with an introduction on the evolution of Wicksell’s |

thought by Professor Ohlin, appeared in 1936, but some of the essential ideas, espe-
cially the famous Wicksellian ‘cumulative process’ were presented to the English pub-
lic in the article on ‘The Influence of the Rate of Interest on Prices,’ Economic
Journal, June 1907, and in vol. 11 of his Lectures on Political Economy (Swedish orig- j

inal, 1906; English trans., 1934). Very important, because emphasizing certain points \

that do not stand out so strongly in those two books is also his (Swedish) article on the
obscure point in the theory of money, ‘Den dunkla punkten i penningteorien,’

Ekonomisk Tidskrift, December 1903. As in the case of Marshall, it should be ob-
served that Wicksell started from Mill and that his monetary theory developed from a
criticism of the latter and the English authors behind him, Tooke in particular. j

10 See Collected Works (4 vols., London School Reprints, 1933-6). Menger’s chief

pieces on money were the chapter on the theory of money in his Grundsdtze and the j

article ‘Geld’ in the 3rd ed. of the Handworterbuch (1909).

io86

►

IV: FROM 1870 TO I9I4 AND LATER

it went, was simply a descendant from Davanzati’s. It was Wieser who at-
tempted a new departure. 11 In trying to do justice to it we meet with the same
difficulty that confronted us when we were trying to define his place in the
history of general theory. Wieser’s spacious vision of the monetary phenome-
non is not adequately rendered "by calling him a sponsor of the 'income-
approach’ 12 or a sponsor of the consumption standard. It comprised much
more than that, in particular the conception of a monetary theory of the eco-
nomic process as a whole. But he was so deficient in technique and so little
able to coin his metal that nothing of this came out as it should have. And so
his influence touched only a few individuals. The author of the group’s stand-
ard work on money, von Mises, 13 who was also its foremost teacher in the field
— in fact the founder of a school of his own — was no doubt one of them. But
he was only partly in sympathy with Wieser’s views.

3. Fundamentals

(a) Nature and Functions of Money. Discussions on the nature and func-
tions of money and hence on the question of definition were carried on
throughout the period. But, with the exception to be noticed under (b), they
did not excite much interest and, without any exception, they did not pro-
duce very interesting results. I believe that a majority of writers accepted, or
would have been willing to accept, Rosclier’s definition. 1 Menger and his fol-
lowers did so with particular emphasis — without any intention to commit them-
selves thereby to all its implications. Others, Americans especially, accepted
Walker’s neat phrase — ‘Money is that Money does’ — in an equally non-com-

11 Wieser’s ideas on money, like those of Walras, developed when his original work
on general theory had been done. His first publication in the field was his inaugural
lecture delivered on his appointment to Menger’s chair in Vienna (‘Der Geldwert und
seine geschichtlichen Veranderungen/ Z eitschrift fur Volkswirtschaft, Sozialpolitik
und Verwaltung, 1904). An improved version was presented in an address to the Verein
fur Sozialpolitik at its Vienna meeting in 1909 and published in the Verein’s Schriften,
vol. 132, and another in the article ‘Geld’ (Allgemeine Theorie des Geldes) in the 4th
ed. of the Handworterbuch , 1927.

12 On Wieser as a sponsor of the income approach, see below sec. 6b.

13 Ludwig von Mises, Theorie des Geldes und der Umlaufsmittel (1st ed., 1912,
2nd ed., 1924, English trans. under the title. Theory of Money and Credit, 1934).

1 'The false definitions of money divide up into two main groups: those that con-
sider it to be something more, and those that consider it to be something less, than
the most salable commodity’ (Roscher, Grundlagen, Book 11, ch. 3, §116 [trans. by
J. A. S.]). As an example of the contrary opinion, I quote Richard (son of the more
important Bruno) Hildebrand, Theorie des Geldes (1883), where we learn that money,
far from being a commodity is ‘the very opposite of a commodity.’ In Interest and
Prices Wicksell quoted both these authors. And his comments upon the issue illus-
trate well how little such general pronouncements really mean to the serious worker.
But the contradictions between them help to discredit economics in the eyes of all
those laymen and historians who take them too literally and believe that everything
else follows from them.

First, the practice continued to prevail of developing the theory of money
from its old four functions: medium of exchange, measure of value, store of
value, standard of deferred payments — many authors insisting both on the sep-
arability of these functions and on the practical reasons why we actually find
them combined. Walras, anticipated of course by all those authors who — like
A. Smith and Malthus — had used labor as a standard of value, introduced the
useful fashion of keeping distinct the numeraire— a commodity whose unit is
used in order to express prices and values but whose own value remains un-
affected by this role — and monnaie — the commodity that actually serves as
means of exchange and whose value is consequently affected because its mone-
tary’ role absorbs part of its supply.

Second, many writers went out of their way to emphasize the store-of-value
function of money. This is important because it raises the question how far the
economists of that period were aware of the phenomenon that is called Liquid-
ity Preference in the Keynesian economics of our own day. Marshall spoke of
a law of hoarding according to which people’s demand for gold hoards in-
creases as its value rises (see Official Papers, p. 6). Occasionally he seems to
have given thought to the fact that people sometimes fail to spend though
they have the power to do so. 4 Von Mises noticed in passing that money is
sometimes held as an asset (Vermogensanlage) . Going further, Kemmerer
averred ( Money and Credit Instruments, p. 20) that 'large sums of money are
continually being hoarded’ and that 'the proportion of the circulating, medium
which is hoarded from time to time . . . varies with all the influences which
affect . . . business confidence.’ Moreover, Marshall and others, especially
Fisher, were aware of the role that hoarding, in the sense of unwillingness to

2 See, e.g., Laughlin, op. cit. or Mises, op. cit. In our own time no less an author-
ity than Professor Rist (op. cit.) may he cited in support of the opinion that neglect
of that distinction has been the source of many errors, theoretical and practical. But
the errors can be avoided even if we include 'credit’ with money, and committed if we
do not.

3 Pareto, evidently disgusted by Italian currency troubles, went even so far as to
call paper money ‘false money’ ( moneta falsa). Other Italians also, such as Pantaleoni,
considered it as a pathological case. Equally strong metallism, though differently mo-
tivated, we can find only in Marx.

4 So already in Economics of Industry, see J. M. Keynes, General Theory, p. 19m

io88

IV : FROM 1870 TO 1914 AND RATER

spend, plays in the mechanism of depressions. But only outsiders, such as Hob-
son, attached ‘critical importance’ to it as a cause of disturbance in general
and of unemployment in particular. 5 Since it is this feature that constitutes
the theory of Liquidity Preference, we must, I think, credit — or debit — the
introduction of the theory to Lord Keynes (see, however, below, sec. 6).

Third, the theory of money of that period was not monetary analysis either
in the sense of Becher and Quesnay 6 or in the modern sense; that is to say,
it was not the general theory of a monetary economy. We have indeed seen
that Walras’ theory of money is fully integrated with his general theory of
value and distribution. We have noticed and shall notice again other advances
in that direction, in particular the one associated with Wicksell’s name. On
the whole, however, monetary theory remained in one separate compartment
and the ‘theory of value and distribution' in another. Prices (including rates
of income) remained primarily exchange ratios, which money reduces to abso-
lute figures without affecting them in anything except for clothing them with
a monetary garb. Or, in other words, the model of the economic process was
in all essentials a barter model, the working of which inflations and deflations
might disturb but which is logically complete and autonomous. Practically all
the most valuable work of the period — so far as it was not concerned with
specifically monetary problems — was Real Analysis, even where it expressed its
concepts in terms of money. 7

This situation found expression in the creation of an interesting concept
that emerged and vanished with it. If, on the one hand, the facts of value
and distribution are logically so independent of money that they can be set
forth with only a passing reference to it, but if, on the other hand, it is recog-
nized that money may act as a disturber, then the problem arises of defining
how money would have to behave in order to leave the real processes of the
barter model uninfluenced. Wicksell was the first to see the problem clearly
and to coin the appropriate concept. Neutral Money. In itself, this concept
expresses nothing but the established belief in the possibility of pure ‘real’
analysis. But it also suggests recognition of the fact that money need not be
neutral. So its creation induced a hunt for the conditions in which money is
neutral. And this point eventually led to the discovery that no such conditions
can be formulated, that is, that there is no such thing as neutral money or
money that is a mere veil spread over the phenomena that really matter — an

5 J. A. Hobson, Physiology of Industry , p. 102, approvingly quoted by Keynes; see
preceding footnote.

6 On Becher and Quesnay in this connection, see above. Part 11, ch. 6.

7 This statement may cause some difficulties for the beginner which an example
will remove. Bohm-Bawerk’s Fund of Subsistence is a real concept denoting all sorts
of consumable goods. Nevertheless, he speaks of it in terms of money. But this does
not mean either that he adopts a monetary concept of capital or that he attributes
to money any influence on the process he describes. His money— like Ricardo’s so far
as the general theory of the Principles is concerned — is nothing but a homogeneous
expression for a medley of quantities of physical goods.

MONEY, CREDIT, AND CYCLES 1089

interesting case of a concept’s rendering valuable service by proving un-
workable. 8

Fourth, so long and so far as the theory of money actually did dwell in a
separate compartment, its central — and practically only — problem was the ex-
change value or purchasing power of money. In the analytic work of the period
this stands out much' more clearly than it did before. Hence the popularity of
the book title. Money and Prices, which persisted into postwar times. 9 No
doubt influenced by the progress of the index-number method, most authors,
especially in the United States, did not hesitate to define the value of pur-
chasing power of money as the reciprocal ot the price level. The Austrians dis-
trusted index numbers, 10 and felt more theoretical qualms concerning the na-
ture of the value of money.

A brief comment on these qualms seems justified. From the first, the Aus-
trians entertained a wish, not unnatural from their standpoint, to apply their
marginal utility theory to the case of money — which both the enemies of this
theory and some of its foremost sponsors, Wicksell for instance, declared to
be impossible. Now it was easy to apply the marginal utility theory to the
significance that individuals attach to their monetary income. Daniel Bernoulli
(see above, Part n, ch. 6, sec. 3b) had already done this. But this significance
for the individual of a unit of his money income — its subjective exchange value
as Menger called it — does not help us at all when we wish to explain the pur-
chasing power or exchange value of money — Menger’ s objective exchange value
of money. For the latter must be known to the individual— the individual must
know what his money will buy — before he can put any subjective value upon
his money. On the face of it, it is therefore impossible to do in the case of

8 See J. G. Koopmans, ‘Zum Problem des “neutralen” Geldes’ in Beitrage zur Geld-
theorie (1933). The problem in question must, of course, not be confused with such
problems as stability of price level or stability of employment and the like. As soon
as we hold that a monetary system or policy insures such stability, we admit precisely
that it exerts an influence and hence that it is not neutral. The outstanding example,
next to Wicksell’s, of an economist’s development from belief in the barter model
and the possibility of a neutral money toward the belief that nothing can be averred
about economic processes without specific reference to some given behavior of money,
is afforded by the series of Professor Pigou’s works. The turning point is to be found,
I think, in his Theory of Unemployment (1933).

9 A few examples in addition to others mentioned elsewhere: Antonio De Viti de
Marco, Moneta e prezzi (1885); L. L. Price, Money and its Relations to Prices (1896);
Richmond Mayo-Smith, ‘Money and Prices,’ Political Science Quarterly (June 1900);
E. W. Kemmerer, Money and Credit Instruments in Their Relation to General Prices
(1907) — a brilliant performance that had the misfortune of being overshadowed by
the greater one of Fisher; J. L. Laughlin, Money and Prices (1919) and A New Exposi-
tion of Money, Credit, and Prices (1931); Albert Aftalion, Monnaie, prix et change
(1927).

1090 iv: FROM 1870 TO 1914 AND LATER

Most economists agreed — or would have agreed if asked — that marginal util-
ity analysis does not apply to the case of the exchange value of money. But
the question whether the supply and demand apparatus applies to it was an-
swered affirmatively by most. This was the natural position to take for those
who were prepared to treat money like any other commodity, as were the Aus-
trians and E. Cannan. But it is curious that many of those who, by adopting a
special formula for money such as the equation of exchange or the cash-balance
formula (see below, secs. 5 and 6), testified to their belief that money cannot
be so treated, should also have taken that position. In fact, both friends and
foes of the 'quantity theory’ agreed in describing it as an application of the
demand and supply apparatus to the case of money. 12

[(b) Knapp's State Theory of Money.] In Germany what may be described
as a tempest in a teapot was raised by Knapp’s State Theory of Money.™ This
book presented a theory of money that turns upon the adage: Money is the
Creature of Law. Had Knapp merely asserted that the state may declare an
object or warrant or ticket or token (bearing a sign) to be lawful money and
that a proclamation to this effect or even a proclamation to the effect that a
certain pay-token or ticket will be accepted in discharge of taxes must go a
long way toward imparting some value to that pay-token or ticket, he would
have asserted a truth but a platitudinous one. Had he asserted that such ac-
tion of the state will determine the value of that pay-token or ticket, he would
have asserted an interesting but false proposition. But he did neither. He ex-
plicitly denied that he was interested in the value of money. His theory was
simply a theory of the 'nature’ of money considered as the legally valid means
of payment. Taken in this sense it was as true and as false as it is to say, for
example, that the institution of marriage is a creature of law.

11 See von Mises, Theorie des Geldes (2nd ed., p. 100); B. M. Anderson, The Value
of Money (1917).

12 This idea was actually carried out by Professor Pigou in his paper on the The Ex-
change Value of Legal-Tender Money’ (see Essays in Applied Economics, 1923).

18 This is the title of the English (abridged) translation (1924) by H. M. Lucas and
J. Bonar of G. F. Knapp’s Die Staatliche Theorie des Geldes (1905). I shall not go
into the copious Knapp literature, about which the reader finds more than enough in
Professor Ellis’ German Monetary Theory, 1905-1933 (see above, sec. 2). There he
also finds a more generous appraisal of Knapp’s performance than I feel able to present.

MONEY, CREDIT, AND CYCLES 1091

If this be so, however, how are we to account for the success of the book
which, though substantially confined to Germany, was spectacular? An attempt
to answer this question might make an interesting study in the social psychol-
ogy of economic analysis. First, Knapp’s exposition was extremely effective.
His forceful dogmatism and his original conceptualization of his theory 14 im-
pressed laymen and those economists who were laymen in economic theory.
Second, many people and especially politicians at that time welcomed a theory
that seemed to offer a basis for the growing popularity of state-managed money
— during the First World War it was in fact widely used to 'prove’ that the
inflation of the currency had nothing to do with soaring prices. Third, in al-
most complete ignorance of both the literature and the logic of the subject,
Knapp believed that his theory offered not only an alternative to theoretical
metallism — his pet aversion — but the only possible one and that it alone was
capable of explaining why such a thing as paper money can exist at all. And
this absurd claim was widely accepted, although Knapp entirely failed to work
out a non-metallist theory of the value of money. 15 Fourth, leaders such as
Wieser and Hawtrey, who were themselves advancing toward such a theory,
felt some sympathy for the work that bore a superficial resemblance to their
own. He who is interested in the question 'what it is that succeeds and how
and why’ and who believes that the answer to this question is more revealing
than anything else can be of the conditions prevailing in a field of human
endeavor will do well to ponder this.

4. The Value of Money: Index Number Approach

Much more important than the theoretical discussion on the purchasing
power of money was its statistical complement: the vigorous developments in
the field of price index numbers during that period constitute indeed one of
the most significant facts in the entire history of economics and one of the
most significant strides toward an economic theory that is to be not only
quantitative but also numerical. Index numbers of production followed with
a considerable lag upon those of prices but the foundations for their . postwar
developments were also laid. And there was a beginning in the construction of
wage and employment indices. But precisely because the subject expanded to
vast dimensions, no attempt can be made here to survey its growth. I shall
merely mention the outstanding efforts at systematization of what was becom-
ing a semi-independent specialty or science, and then offer a few comments

14 He was a master in the art of coining new concepts and naming them felicitously.
It should be observed that the Greek words borrowed for the purpose served very well:
the German economists of that time were not as a rule good theorists, but most of
them had had a classical education and knew Greek.

15 To some extent this was done by one of his critics who deserves to be mentioned:
Friedrich Bendixen, W esen des Geldes (4th ed., 1926) and numerous other publi-
cations.

1092 IV: FROM 1870 TO 1914 AND LATER

that may help the reader to link up the subject with the rest of economic
analysis and to see its more general bearings. 1

[(a) Early Work.] Index numbers having attracted the attention of the Brit-
ish Association for the Advancement of Science, Edgeworth, acting as secre-
tary of the committee that was appointed for the study of the subject, wrote
his- two famous reports (1887 and 1889), 2 remarkable not so much on account
of the recommendations proffered as regards practical methods of index mak-
ing as on account of the comprehensive analysis of meanings and purposes —
labor standard, consumption standard, question of all-purpose index, and so
on. In 1901, C. M. Walsh published his Measurement of General Exchange
Value, which also based discussion of statistical technique upon a compre-
hensive economic theory of index numbers elaborated in his important book,
The Fundamental Problem in Monetary Science (1903). Next must be men-
tioned Professor W. C. Mitchell’s monograph on wholesale price index num-
bers, Index Numbers of Wholesale Prices in the United States and Foreign
Countries (Bulletin 173 of U.S. Bureau of Labor Statistics, 1915, to be used in
its revised edition. Bulletin 284, 1921). But the American century in index
numbers was to be ushered in by Professor Irving Fisher’s monumental work
on The Making of Index Numbers (1922), 3 the fountainhead of almost all
the best later work. But all that can be noticed here of the wealth of its results
is this: Fisher analyzed, classified, and 'rectified’ existing and possible index
number methods by means of certain previously established 'tests’; that is to
say, he formulated certain conditions which index numbers ought to satisfy;
and ever since most of the theory of index numbers has really been the theory
of these tests. This is much more important than is the search for an 'ideal
index number’ per se, though of course the tests were devised in order to
rationalize this search.

1 The reader will find what he needs in the way of background in C. M. Walsh’s
article on 'Index Numbers’ in the Encyclopaedia of the Social Sciences. On produc-
tion indices, see A. F. Bums, 'The Measurement of the Physical Volume of Produc-
tion,’ Quarterly Journal of Economics, February 1930. The best reference on wage and
employment indices is to the outstanding work of A. L. Bowley, especially Statistics
of Wages in the United Kingdom during the Last Hundred Years, fourteen articles
in the Journal of the Royal Statistical Society, 1898-1906 (partly with G. H. Wood,
whose work on 'Real Wages and the Standard of Comfort since 1850/ ibid. March
1909, complements this investigation) and 'Measurement of Employment,’ ibid. July
1912.

2 They are most easily accessible in his Papers Relating to Political Economy (vol. x,
sec. m), where they have been reprinted under the title 'Measurement of Change in
Value of Money.’

numbers pertain to the province of the statistical technician and their theory
should accordingly be part of the theory of statistics, just as is, for example,
the theory of sampling. A great part of the work on index numbers was in
fact done by statisticians or by economists who cared little for 'economic
theory/ For instance, the formula that of all displayed the most indestructible
vitality is due to a man who cannot without qualification be called an econo-
mist at all, Laspeyres. 4 But almost all the decisive impulses and ideas came
from economic theorists as they had in the eighteenth century and in the first
half of the nineteenth. In order to establish this point it is enough to mention
the names Jevons, Edgeworth, and Fisher, to which should be added that of
A. A. Young. 5 But these were not isolated cases. An ever-increasing number of
economists whom everyone would class primarily as theorists took an interest
either in developing the method or in elucidating, critically and constructively,
the meaning and purposes of index numbers. Marshall suggested the chain
system. 6 Lexis, Walras, Wicksell, Wieser, Pigou, to mention but a few leaders,
contributed substantially to the theoretical foundations. 7 Their work was con-
tinued, on an enlarged scale, during the twenties and thirties. Unfortunately,
we shall not be able to notice in any detail the developments since 1920. But
three performances of this period will, nevertheless, be mentioned in what
follows — those of Divisia, Haberler, and Keynes.

Before going on let me restate the reason why I thought it necessary to in-
sist on the share of economic theorists in developing the index number

4 E. Laspeyres published the formula — (prices weighted by quantities in the base

year), which secured him immortality — a student can no more go through any com-
plete training in economics without hearing of Laspeyres than he can without hearing
of A. Smith — in the Jahrbilcher fiir Nationalokonomie und Statistik, 1864; also 1871.

5 Jevons' two papers that gave indeed a decisive impulse but do not justify Fisher’s
statement that he ‘may perhaps be considered the father of index numbers’ or the
concurring statement of Keynes, are: ‘A Serious Fall in the Value of Gold . . .’ (1863)
and ‘The Variation of Prices and the Value of the Currency since 1782’ (1865), both
included in Investigations in Currency and Finance. Splendid work of seminal impor-
tance but, for a theorist, surprisingly unmindful of the theoretical questions involved.
Edgeworth’s work, which partly remedied this shortcoming, and Fisher’s have already
been mentioned. Allyn A. Young’s work in the field is in less danger than is the rest
of his work of being entirely forgotten because some of it is embodied in his contribu-
tion to H. L. Rietz’s well-known Handbook of Mathematical Statistics (1924).

6 In the article on ‘Remedies for Fluctuations of General Prices,’ Contemporary
Review, 1887.

7 W. Lexis was, of course, not primarily an economic theorist. But his paper ‘Ober
gewisse Wertgesamtheiten . . .’ in Zeitschrift fur die gesamte Staatswissenschaft (1886)
was a piece of theoretical reasoning of great importance, though it attracted little no-
tice. Walras’ contribution (1874, 1885) has been included in his Etudes d’economie
politique appliquee (ed. definitive, 193 6, pp. 20 et seq.); Wicksell’s is in Interest and
Prices, ch. 2; Wieser’s — ‘Ober die Messung der Veranderungen des Geldwerts’ — in
Schriften des Vereins fur Sozialpolitik (vol. 132, 1910); Pigou’s in Economics of Wel-
fare (1920; and earlier in Wealth and Welfare, 1912).

1094 IV: 1870 TO 1914 AND LATER

method. Some statisticians and some economists of anti-theoretic bent seem to
think that this piece of ‘realistic’ analysis is something to set against the flimsy
structures of theory, something that has been created, in the true scientific
spirit, for the purpose of replacing mere speculation. It seemed important to
correct this opinion. The subject of index numbers affords a good example of
the manner in which theoretical research and statistical research are really re-
lated and in particular how statistical methods may grow out of the theorist’s
work. •• *

[(c) Haberler, Diyisia, and Keynes.] With the exception of Wieser, most of
the leading Austrians took a critical, not to say hostile, attitude toward the idea
of ‘measuring’ variations in the purchasing power of money (reciprocal of price
level) by index numbers. They were inclined to refuse citizenship to the con-
cept of price level and, in any case, to deny its measurability on principle . 8
In view of the fact that so many economists placed and place an uncritical
trust in index figures without troubling themselves about their meaning , 9 this
attitude provided a much needed antidote. And not only that. The criticism,
at first merely negative, eventually turned constructive in Professor von Haber-
ler’s book on the meaning of index numbers . 10

The core of his analysis is an interpretation of price index numbers that
turns upon the following proposition: for a given individual of unchanging
tastes, the price level has fallen (risen) between the points of time t 0 and t x if,
his money income remaining the same, the individual is able to buy at t x a
collection of goods which he prefers to the collection he was able to buy at
f 0 (is unable to buy at t x a collection of goods which he prefers to the collec-
tion he bought at t 0 ). This interpretation connects index numbers with welfare
economics. But its chief importance is in the fact that it bases them upon the
theory of choice and thus makes them come to anchor in the very center of
modern value theory . 11

8 This attitude found its strongest expression in Professor von Mises’ Theory of
Money and Credit.

10 G. von Haberler, Der Sinn der Indexzahlen (1927).

11 Pareto’s suggestion in a similar direction {Corns, vol. 1, pp. 264 et seq.) and a
number of related ones (of which one is contained in Edgeworth’s reports mentioned
above) were much less convincing. We cannot stay, however.

12 If expenditure upon all goods and services, E, changes by a (positive or negative)
increment AE, then it is evidently possible, in a purely formal way that does not imply

MONEY, CREDIT, AND CYCLES

10 95

It stands to reason that the idea of an over-all price level, even if admissible,
is for many purposes much less useful than is the idea of sectional price levels,
for example, of a price level of consumers’ goods (Consumption Standard) and
services as distinguished from a price level of producers’ (or else investment)
goods, or of a price level of finished products as distinguished from a price
level of productive services and so on. The over-all price level in particular
hides the relative movements as against each, other of these sectional levels, and
these relative movements are of pivotal importance for certain cycle theories,
especially for that of Professor von Hayek. They are also of pivotal importance
for the monetary dynamics’ of Keynes’s Treatise, Book n of which, entirely
devoted to this subject, is the chief reference for this type of analysis. [This
section was left unfinished.]

5. The Value of Money: the Equation of Exchange and the 'Quantity

Approach’

anything about causation, to divide up AE into three parts: one that is 'due’ to the
changes in prices that have occurred — this part is equal to the quantities previously
bought each multiplied by the changes in the respective prices or, symbolically, to 2 qAp,
another part is 'due’ to the changes in the quantities bought and is equal to the
prices previously obtaining each multiplied by the changes in the respective quantities
or, symbolically, to 'EpAq; and the third part is 'due’ to the fact that the increments of
the quantities have also been bought at the changed prices and is therefore equal to
those increments of the quantities each multiplied by the increments in the respective
prices or, symbolically, to 2 AqAp. Now, if the changes in prices and quantities (the
Aq’s and Ap’s) are small fractions of the quantities and prices themselves (the q’s and
p’s ) — which can be the case only if we consider a very short period of time — then their
product will be still smaller, so small that we may neglect it for practical purposes. But
then we are left with two terms only, the one expressing that 'effect’ upon expenditure
that we should observe if prices had remained unchanged and therefore free from the 'ef-
fects’ of any changes in prices; the other expressing that 'effect’ upon expenditure that we
should observe if quantities had remained unchanged and therefore free from the 'effects’
of any changes in quantities. And the latter figure ( 2 q A p), expressed as a percentage
of the original expenditure (E = pq), then serves to define the change that has oc-
curred in the price level or monetary index — which thereby acquires an unambiguous
and analytically important meaning. This theory, which had been partly anticipated
by Lexis (op. cit.), was published by Professor Francois Divisia in several numbers of
the Revue d’economie politique, 1925-6, under the title ‘L’Indice monetaire et la
theorie de la monnaie,’ and again in his Economique rationelle (1928), ch. xiv.

1096 IV: FROM 1870 TO 1914 AND LATER

into a few big aggregates and to consider these as the ‘causes’ that determine
the one to be explained. The so-called Equation of Exchange is certainly the
simplest possible system of such aggregates that contain the value of money
or the price level at all. And if the latter be the thing to be explained, the
others drop naturally (though illogically) into the role of its ‘causes’ — and the
Equation of Exchange, in itself nothing but the statement of a formal relation
without any causal connotation, then turns or may turn into the Quantity
Theory. This is why during that period both the equation of exchange and the
quantity theory enjoyed another lease on life and why so "much of the discus-
sion on the theory of money took the form of arguments for and against the
quantity theory. We must therefore try to find out what the quantity theory
of these writers really amounted to. To accomplish this in the way most useful
to the reader, we shall concentrate on the outstanding achievement in this
line. Professor Fisher’s theory, of the purchasing power of money. 1

ticular form: P = f(M, V, T) = — — or MV = PT. Again, this equation is not

1 In doing so, we take quantity theory analysis at its highest. On the whole, the
cost we incur thereby in terms of information about numerous other formulations is
not great. But it must be stated that, though overshadowed by Fisher’s performance,
Kemmerer’s (Money and Credit Instruments in Their Relation to General Prices, 1907)
would serve our purpose nearly as well. Fisher gave generous credit to Simon New-
comb’s treatment of Societary Circulation ( Principles , 1885; see above, ch. 5, sec. 7a)
which is in fact an important contribution. But we cannot go into the merits peculiar
to it.

MONEY, CREDIT, AND CYCLES 10 97

himself, although in his introductory considerations he defined T as the
amount of 'goods’ bought by money, adopted a wider concept — that included
securities — in his statistical work. But attention must be called to some prob-
lems concerning the definition of M.

Most writers on money displayed reluctance to calling checking deposits
money — at least to doing so without qualification. As we have seen, they usu-
ally stressed the difference between money and ‘credit’ (see below, sec. 6) or
'primary’ and 'fiduciary’ money. But when it came to working the equation
of exchange, the majority — especially the Americans, who did by far the great-
est part of the statistical work— included the quantitatively most important
type of 'credit instruments,’ checking deposits, as a matter of course, often
going so far as to call them 'deposit currency.’ The M of their equation of
exchange, then, meant substantially coin, government fiat, banknotes, demand
deposits. Since this means including practically 'everything that buys,’ it might
seem that they should have, on the one hand, taken account of barter (and
also of the fact that part of the social product is consumed directly by its pro-
ducers) and, on the other hand, excluded non-circulating money (the cash re-
serves of banks and hoards). The first difficulty was, so far as I can see, not
taken very seriously; as regards the second I shall simply quote Kemmerer’s
opinion (op. cit. p. 23): ‘it makes no difference to the truth of the quantity
theory whether new money is offered for commodities all at once, slowly, or
not at all,’ because money that does not circulate has simply the velocity zero.

In Europe, especially on the continent of Europe, this conceptual scheme
was much less popular, in part, because most Europeans did not face up to
the statistical task. To give a front-rank example for an alternative scheme:
Wicksell (as Rodbertus before him) confined M to metallic money (and, I
suppose, fiat paper money that does not carry any title to redemption in
metal), and interpreted banknotes and deposits as devices for increasing the
velocity of ‘money’ — so that bank reserves instead of having the velocity zero,
would have a very high one (Fisher’s 'virtual velocity’). The reader should ob-
serve that there is no intrinsic merit or demerit in either arrangement: con-
venience alone is the criterion for choosing between them. This criterion, of
course, tells heavily for the ‘American alternative.’ But there is another point
to attend to. Fisher introduced the checking deposits (M.) with. a . distinct ve-
locity (V') separately into his equation so as to make it read: MV + M'V' =
PT. But he introduced two additional hypotheses. First, he assumed that there
exists a very stable relation between the primary money (the hand-to-hand
cash) people carry in their pockets or keep in their chests or vaults and the
amounts of liquid means they keep on checking account. Second, he assumed

see ‘A New Index of the General Price Level from 1875,’ Journal of the American
Statistical Association, June 1924) and bf replacing it by several sectional price levels
(consumers’ goods, investment goods, and so on) was not, so far as I know, discussed
during that period except that it was implied in the Austrian group’s hostility to the
price-level concept. The trend of opinion in favor of the idea of multiple price levels
eventually triumphed conspicuously in Lord Keynes’s Treatise of 1930, Book 11.

IO98 TV: FROM 1870 TO X914 AND LATER

that, in equilibrium, and for periods that are not too long, there exists a very
stable relation between the reserves of the banking system and the sum total
of checking, deposits. Let us consider what this means. By virtue of these
two hypotheses Fisher’s position lies somewhere between the position of those
who simply include in M demand deposits along with ‘currency outside of
banks’ without making any distinction between these two categories (so far
as purchasing-power problems are concerned) and the position of those who,
like Wicksell, include only coin and irredeemable paper. For that part of the
quantity of money which Fisher called ‘primary’ and which, envisaging Anglo-
American conditions of 1911, he identified with gold acquires a position not
shared by the checking deposits. These remain indeed ‘deposit currency,’ but
the idea is suggested that the variation in the amount of this currency is gov-
erned by the variation in the quantity of the ‘primary currency’ or, under those
conditions, of gold. The reader will see how well this links up with the com-
pensated-dollar plan, which aims at controlling the price level by appropriate
variations of the gold content of the monetary unit.

3 On the fortunes of the concept of velocity of goods, see Marget, op. cit. passim.
Kemmerer introduced it into his equation of exchange.

4 A. C. Pigou, Industrial Fluctuations (1st ed., 1927), Part 1, ch. 15. Prior to this
work, there is not much besides Wicksell’s contribution ( Interest and Prices, ch. 6).

5 See above, sec. 3a.

6 Pierre des Essars in ‘La Vitesse de la circulation de la monnaie,’ Journal de la so-
ciete de statistique de Paris, April 1895; David Kinley, Doc. No. 399 in Reports of
National Monetary Commission, ‘The Use of Credit Instruments in Payments in the
United States,’ and also two papers in Journal of Political Economy, ‘Credit Instru-
ments in Retail Trade,’ March 1895, and ‘Credit Instruments in Business Transactions,’
March 1897; Kemmerer, op. cit.; Irving Fisher, op. cit., but originally in ‘A Practical
Method of Estimating the Velocity of Circulation of Money,’ Journal of the Royal
Statistical Society, September 1909. Having derived his figures for velocity, Fisher

MONEY, CREDIT, AND CYCLES

i°99

[(b) Distinction between the Equation of Exchange and the Quantity
Theory.] The second set of questions turns upon our distinction between equa-
tion of exchange and quantity theory. How far did the writers of that period
actually go beyond the statement of the formal equilibrium relation MV = PT?
The task of answering this question is rendered more difficult by the fact that
those writers themselves did not make that distinction but often described
themselves as adherents of the quantity theory when all they meant was that
they saw some advantage in the use of the equation of exchange or its equiva-
lents. However, so far as the majority of first-flight authors are concerned, we
may well take as typical the opinion that Pigou was to express a little later
(‘The Value of Money,' Quarterly Journal of Economics, November 1917): 7
‘The “Quantity Theory” is often defended and opposed as though it were a
definite set of propositions that must be either true or false. But in fact the
formulae employed in the exposition of that theory are merely devices for en-
abling us to bring together in an orderly way the principal causes by which
the value of money is determined.' This statement, in which the words Quan-
tity Theory should be replaced by Equation of Exchange, certainly holds true
for Marshall himself and all Marshallians: they did not go at all beyond using
their variant of the equation of exchange. The same applies to the Wicksellian
treatment of the influence upon, price levels of autonomous variations in the
quantity of money: Wicksell put so much emphasis upon the role of the rate
of interest as to leave little room for direct influences of autonomous varia-
tions in the quantity of money. Of course, from the standpoint of those ex-
tremist opponents of the quantity theory, presently to be noticed, who denied
that autonomous variations in the quantity of money have any influence upon
its value, he— -and Marshall — would have to be classed as quantity theorists. 8
The case of Walras was different, at least on the surface.

7 See also Essays in Applied Economics (1923; ‘The Exchange Value of Legal-Tender
Money’).

IlOO IV: FROM 1870 TO 1914 AND LATER

Walras' position is extremely difficult to understand. His purely analytic
work upon the problem (see his treatment in the Elements and in the 'Note
sur la ‘'Theorie de la Quantite” ’ in the Etudes d’economie politique appliquee,
pp. 153 et seq.) presents first of all a most interesting feature: he did not
simply posit that the value of money is inversely proportional to its quantity,
but he tried to deduce it rationally from the marginal utility principle, going
so far as to say that one would have to reject the latter in order to have a
right to reject the former. Another interesting feature is that he lets the quanti-
ties of fixed and circulating capitals be determined beforehand as a function
of a given rate of interest. But, proved under these restrictions, the theorem
in question, while of course true, is extremely weak and fully open to the
objection we so often meet, that the quantity theory is true only under as-
sumptions that render it trivial and quite valueless. For Walras’ theorem really
amounts to not more than that, all other things being strictissime equal, a
given amount of transactions could be effected as well by means of a smaller
amount of monetary units if all prices were reduced in the same proportion.
However, not only did Walras call this the theorie de la quantite — which in
itself would entitle us to class him with its opponents for, if this is really its
formule exacte, then there is certainly nothing to it — but he also seems to have
been a victim of the delusion that this theorem was all the analytic basis
needed for his plan of currency reform, that is, he identified this theorem with
the proposition that practical control of the price level can be achieved by
controlling the quantity of money, a proposition which, right or wrong, has
certainly little to do with the theorem proved.

Kemmerer’s proposition that the amount of the circulating medium that is.
being hoarded varies widely in the short run amounts to renunciation of the
quantity theory in the strictest sense and reduces so much of it as we may
impute to him to the statement that P is determined by the three variables
M, V, and T, whereas we cannot say just as well that M is governed by P, V,
and T, or V by P, M, T, or T by P, M, V. Fisher expressed this by saying
(Purchasing Power, p. 172) that 'the price level is normally the one absolutely
passive element in the equation of exchange.' 9 But he went further than this.
He also held, not indeed as a matter of general theory but as a matter of sta-
tistical fact, that in practically all cases of substantial fluctuations' of price
levels it was M only, and neither V nor T, which varied sufficiently to be con-
sidered as the explaining variable, in other words, that M was normally the
most important 'active’ variable as P was normally the passive one. This seems

9 The reader will realize that the words 'just as well' in the first formulation and the
word 'normally' in the second are quite essential. To repeat a comment made on this*
point in Part in, ch. 7, nobody ever has denied or can deny that a rise (fall) of the
price level will induce a fall (rise) in gold production and an outflow (inflow) of gold
so that, in the case of a free gold currency, the price level cannot be 'absolutely passive.'
Moreover, Fisher’s assertion applies only for states in the neighborhood of equilibrium,
not to states of disequilibrium ('transitional periods’) as we shall presently see — a fact
which, and the implications of which, the unwary reader is practically certain to over-
look.

MONEY, CREDIT, AND CYCLES

HOI

to come as near to teaching quantity theory in its boldest acceptance as any
front-rank economist’s teaching ever did. 10 If in addition we remember the
rigid assumptions that Fisher made concerning the relation between total
checking deposits and gold, by virtue of which the total quantity of the circu-
lating medium is (under the Anglo-American conditions of 1911) governed by
gold production and gold exports or imports, we seem to get not only a quan-
f. tity theory of the value of money but (for those particular conditions) a gold-

| quantity theory of it.

All the more important is it to realize that those critics were wrong who
| classed Fisher as a sponsor of the most rigid and most mechanical type of
quantity theory and who on the strength of this see a well-nigh unbridgeable
gulf between the monetary theory of the period under survey, as represented
by Fisher, and the monetary theory of the twenties and thirties. They are
wrong for two reasons: (1) the monetary theory of the twenties and thirties is
much more under quantity theory influence than is generally realized; 11 (2)

1 - with such energy, that this proves nothing whatever concerning the effect which a

change in M, introduced in a real economy, would exert — adopting at this point the
|; view usually held by opponents of the quantity theory. But then, having stated that

nothing can be said a priori about the effects of actual changes of M in real life and
q that we must simply look at the facts, he finds for 1850-1910 (and, with less confi-

dence also for the first half of the nineteenth century) that the quantity theory holds
f after all, not as a theory but as a statistical fact. Boldly generalizing from this, he then

| puts forth his famous ‘Law of 3 per cent’: the Sauerbeck index number having been

| approximately equal in 1850 and 1910 and the world’s gold stock having approxi-

mately increased during that period at the rate of 2.8 per cent per annum, the T must
| have a tendency to increase at approximately that rate — and price level will hence in-

crease or decrease according to whether gold production increases the world’s gold stock
I by more or less than this per year. This is indeed unconventional theory. But it is in-

teresting not only in itself but also on account of its methodology. The reader should
§ observe that a physicist would have much less objection to the latter than most econo-

mists had. On the facts, see e.g. J. T. Phinney, ‘Gold Production and the Price
I Level . . .’ Quarterly Journal of Economics, August 1933.

11 This most important fact unfortunately cannot be fully displayed here. I shall

| give a mere pointer toward the bridge between the old quantity theory analysis and

more modern works. All those, especially American, writers on money who, e.g., in con-
§ nection with the open-market operations of the Federal Reserve System, reasoned in

f. a manner involving belief in the possibility of controlling (‘stabilizing’) business by con-

| trolling the quantity of the circulating medium were quantity theorists with a venge-

ance, a fact partly obscured because, faced by a different institutional set-up, they nat-
urally expressed themselves in ways different from the authors of the Currency School.
Particularly interesting in this connection is the theory that banks are normally ‘loaned
up,’ that is to say, that banks will normally extend .their loans as far as regulative legis-
lation will permit them to go. The theoretical importance of this proposition is that it

1102

IV: FROM 1870 TO 1914 AND LATER

it should be clear, not only from all the other writings of Fisher but especially
from his Theory . of Interest, that he cannot be classed with quantity theorists
except in a special sense.

First, he stopped short of the quantity theorem in its fullest possible sense
by admitting the influence of T on both V and M ( Purchasing Power .. . ,
eh. 8, 6) — this weakens the theorem considerably, at least as a long-run

proposition, because it introduces a relation between the 'independent vari-
ables' that interferes with the direct effects of variations in T on P. Second,
since the quantity theorem holds only in a state of equilibrium, it is of course
neither a qualification nor an objection to say that it does not hold in what
Fisher calls 'transition periods/ But actually, since the economic system is
practically always in a state of transition or disequilibrium, phenomena that
seem incompatible with the quantity theorem and have in fact furnished many
of their arguments to its opponents are almost always in evidence. By paying
careful attention to them — especially to one type of them, namely, the tend-
ency of the interest rate to adjust itself to both rising and falling prices with
a lag (see below, sec. 8) 12 — Fisher entirely changed this situation. In strict
logic, of course, he thereby merely supplemented the information that the
quantity theorem conveys. But for practical purposes and, especially, if we
place ourselves on the standpoint of naive friends and foes of the quantity
theorem, we might say with almost equal justice that, in a large and particu-
larly valuable part of his work, he shelved it. Third, Fisher untiringly empha-
sized that M, V, T were only the ' proximate causes' of P. Behind them there
are almost a dozen indirect influences on purchasing power (op. cit. chs. 5 and
6) which act on price levels through M, V, T. All quantity theorists of all
times would have accepted this, at least under critical fire. But there is a
point beyond which emphasis upon those indirect influences begins to impair
the status of the proximate causes, which then easily degenerate into inter-
mediate causes and finally into mere names for what we are then led to label
'real' causes. And this point Fisher seems to have reached: particularly in
dynamic analysis (his analysis of 'transitional periods’), which is really the
thing that matters, those indirect causes become much more interesting than

makes the quantity of 'money' (deposits) strictly dependent upon the action of 'mone-
tary authorities’ — i.e. that, from the standpoint of the economic process,' M becomes
a datum or a strictly independent variable. For a characteristic example of this type of
neo-quantity theory, see L. Currie, The Supply and Control of Money in the United
States (1934). But even the Keynesian group, which more than any other emphasizes
antagonism to the quantity theory, is not free from its influence. Lord Keynes himself
at first professed to accept it. (See Tract on Monetary Reform, p. 81.) But, like Pigou,
he actually only accepted the equation of exchange. In the General Theory he pro-
fessed to renounce it. But he did not succeed entirely in freeing himself from its shackles.
Whoever treats M as an independent variable inevitably pays some tribute to it.

12 Reference must be made in passing to one of Fisher’s most original contributions,
viz., his work on the problem of Lag Distribution. See his papers in the Journal of the
American Statistical Association, ‘The Business Cycle Largely a ‘'Dance of the Dollar,” ’
December 1923, and ‘Our Unstable Dollar and the So-Called Business Cycle/ June

1925.

MONEY, CREDIT, AND CYCLES IIO3

the question whether or not they can be forced into the straitjackets of M,
V, T.

But why should that great economist have insisted on adopting what on
closer scrutiny turns out to be a particularly narrow and inadequate, if not
actually misleading, form of his own thought? I will hazard a hypothetical
answer: he had conceived .a scheme— the compensated-dollar plan — which he
believed to be of great and immediate practical utility; for the success of a
practical scheme simplicity is essential; 13 hence it was the simplest aspect of
Fisher’s analysis, the quantity theory aspect, which presented itself to his
mind and dominated his exposition. The theory in the Purchasing Power of
Money is conceived as a scaffolding for statistical work that in turn was to
serve a piece of social engineering. This is what pushed aside all other con-
siderations. But they were there and by virtue of their presence his quantity
theory, if quantity theory it must be, is something quite different from other
quantity theories.

As the argument above amply shows, it is not easy to draw a convincing
boundary line between economists who adhered to, and economists who re-
jected, the quantity theorem. But there were all the time many professed ene-
mies of it — in Germany 14 and in France they were in the majority — who held
that that theorem was untenable or else completely valueless. Compared with
Fisher’s performance and indeed with the performances of any of those leaders
who may be credited (or debited) with having used the quantity theorem in
some sense or other, the arguments of those professed enemies do not show
up very well. This is due to the fact that, so far as those top-flight quantity
theorists are concerned, opponents were really fighting windmills: as is so
often the case in economics they were trying to knock down a creation of
their own fancy; they were trying to refute what had never been held — for ex-
ample, that the amount of money in circulation is the sole regulator of its
value — or to urge what, unknown to them, was fully taken into account by
any of the better expositions of the obnoxious theorem. They thus often
raised objections that asserted nothing but what was factually and theoretically
correct but were nevertheless incorrect qua objections. Vice versa, where their
arguments would have constituted valid objections — for example, the argu-
ment that quantity of money has nothing at all to do with its value — they
were often patently wrong. Finally, they sometimes made points that were

13 That simplicity was a major consideration may be inferred from two facts: first
that he stowed away all the most important things into the compartments labeled
'transitional periods,’ a label that suggests the desire to focus the reader’s attention
upon the simple equilibrium proposition; second, that he expressed the latter in an '
equation instead of expressing it much more satisfactorily in a system of equations which
could have been easily 'dynamized’ so that the equilibrium proposition would have
naturally taken its true place as a special case. In another author, the failure to adopt
the latter course would be easily understandable. In the case of an expert mathemati-
cian like Fisher, only the intention to simplify can account for it.

14 See S. P. Altmann, 'Zur deutschen Geldlehre des 19 Jahrhundert’ in Festgabe fur
Schmoller, 1908, 1.

1104 iv : FROM 1870 TO 1914 AND LATER

15 B. M. Anderson, Value of Money (1917). A sample of his criticism may be use-
ful. Suppose that the wages of domestic servants be increased (without any servant be-
ing dismissed) and that these servants use their additional income exactly as their em-
ployers had used the same sum before. Therefore nothing has changed except that the
price of directly consumed services that should be included in the price-level index has
gone up: M and.T have remained constant, yet P has risen. In his review of Ander-
son’s book in the Economic Journal, March 1918, Edgeworth replied to this by point-
ing out that though M and T have remained constant, V has been increased. But, ob-
viously, an increase in V which occurs, automatically in certain cases of price changes
cannot be set against Anderson’s objection. Hence he was right. But while his objec-
tion stands, it would not tell heavily against any quantity theory that does not pre-
tend to be more than a broad approximation.

16 The following small sample from this literature may be welcome to some readers:
H. P. Willis, ‘History and Present Application of the Quantity Theory,’ Journal of Po-
litical Economy, September 1896; Alfred de Foville, ‘La Theorie quantitative et les
prix,’ L’Economiste Frangais, April and May 1896; D. Berardi, La Moneta nei suoi
rapporti quantitativi (1912); J. L. Laughlin, ‘A Theory of Prices,’ Publications of the
American Economic Association, 3rd series (February 1905); W. C. Mitchell, Gold
Prices and Wages under the Greenback Standard (1908) and ‘Quantity Theory of the
Value of Money,’ Journal of Political Economy, March 1896; J. Lescure, ‘Hausses et
baisses gendrales des prix,’ Revue d’economie politique, July 1912; B. Nogaro, ‘Contri-
butions & une thdorie r^aliste de la monnaie,’ ibid. October 1906; E. Dolleans, La
Monnaie et les prix (1905). For Germany, I will mention two of the period's best men
bn money and monetary policy, though they do not present themselves favorably in
their arguments against the quantity theorem — which were in part developed for the
particular purpose of showing that the fall in prices, 1873-98, had nothing. to do with
gold production or with the extension of the area of the gold standard: Erwin Nasse
(‘Das Sinken der Warenpreise . . .’ Jahrbiicher fur Nationalokonomie, July and Au-
gust 1888) and W. Lexis (the famous statistician), numerous papers, see, e.g., his criti-
cism of Walras’ plan in his review article, ‘Neuere Schriften fiber Geld- und Edel-
metalle’ (ibid. July 1888); see, however, Rist (op. cit. p. 253m) for quotations to the
effect that Lexis accepted the quantity theory in principle. Their inability to handle
properly what after all was not a very complicated argument is astounding. So is K.
Marx’s failure to see that the cost of producing money (however defined) must act on
commodity prices through its effect upon the supply of money: he denies any in-
fluence of quantity of money upon prices, Capital (English trans., Kerr ed., vol. 1,
p.136).

17 Another attempt that corroborates Fisher's result is conspicuous for excellence of
workmanship: Oskar Anderson, ‘ 1 st die Quantitatstheorie statistisch nachweisbar?’ in
Z eitschrift fur Nationalokonomie (March 1931). One of the reasons why both verifica-

MONEY, CREDIT, AND CYCLES 1 105

did not yield. And they were justified in refusing to do so. For they had a
case.

A simple example will elucidate this apparently paradoxical situation. Con-
sider a case of war inflation that runs its course like this: disturbance of do-
mestic production and of export and import trade first raises most prices, the
government's war demand being financed by means that would without the
war have been spent by private individuals; this rise in prices together with an
increase, at an increasing rate, in war demand in physical terms then enforces
resort to the manufacture of ‘money' (or credit instruments that do not have,
in this case, the properties of the ordinary credit instruments of commerce);
and finally there develops an increasing demand for loans by producers — a
credit expansion in the commercial sense but incessantly fed by ever-increasing
prices. Now, historians, politicians, businessmen will certainly describe such a
process in terms of the war itself and of the disturbance on the one hand and
the excess demand on the other which the war entails. They will be surprised
to learn that, instead of war and war disturbance and war demand, it is just
M, V, and T that ‘cause' inflation and that it is only M and V that really
matter. And if they are told that these are the ‘proximate causes' whereas war,
war disturbance, war demand are ‘indirect' ones — the quantity theorist will
always have to admit the ‘direct' role of variations in T — which are operative
but only at one, remove, they will not be content. If anything, they will be
annoyed, especially, if they suspect that more is at stake than a mere theo-
retical argument. In this they were right, of course : in the nineteenth century
as well as in the twenties and thirties of the twentieth a rigid quantity theory,
one that attributed to M an altogether unjustifiable role in economic therapy,
had a way of suddenly emerging from more careful formulations. Especially in
the United States, the sound-money men— and all those economists who felt
quite rightly that currency troubles are but the reflex of deeper things— had
plenty of reason for distrusting the possible practical implications of the quan-
tity theorem, a distrust that then extended, however unfairly,, to the quantity
theory analysis itself. But they could have urged purely scientific reasons also:
What I have described as straitjackets may be useful for certain restricted
purposes exactly as are all such oversimplified set-ups, for example, the
Keynesian system. Outside of the range of- these purposes, they become in-
convenient and impediments to more fundamental analysis. If, moreover, we
admit cyclical variability of V and stress the importance of such ‘indirect'
causes as the rate of interest, the rate of change of P (vs. P itself), and so on,
they become in. addition useless. And it. is hardly an exaggeration to say that

tions and refutations from statistical material failed to convince should be noted in
passing: to a large extent, the decision to accept, or to refuse to accept, given statistical
evidence, is a highly subjective matter. Since no material can ever bear out the quantity
theory with a 100 per cent accuracy and no material that covers, say, at least ten years
can ever fail to show some relation between P, T, and M, there must in most cases
be room for fair difference of opinion as to what given statistical findings really mean.
It is the merit of more refined methods, such as those of O. Anderson, that they offer
criteria -that are more reliable than is simple ‘impression.-

no6

iv: FROM 1870 TO 1914 AND LATER

[(c) Purchasing Power Parity and the Mechanism of International Pay-
ments.] Before going on, let us touch upon two other matters. In that period,
more definitely than before, we find in the neighborhood of the quantity
theorem its old ally, the purchasing-power-parity theory of foreign exchange,
that is, the proposition that, if left to itself, the price of a country’s monetary
unit in terms of foreign currencies tends to be inversely proportional to the re-
lations between the respective price levels. It was repeatedly stated, for example,
by Marshall and Schlesinger, but when, in the discussion on the exchange
troubles that arose during and after the First World War, Cassel pressed it
energetically into service, it struck most people like a new discovery. 18 As I
have stated it, the proposition does not seem very exciting. Both Marshall and
Schlesinger noticed it as they went along, without putting much emphasis
upon it. And we may discern, in the torrent of publications which 'purchas-
ing power parity’ was to produce, a quiet little inlet of discussions about the
merits of that proposition as a tool of analysis. 19 The excitement sprang from
the fact that Cassel linked it up with a strict quantity theory and, in appli-
cation, with the problems of war inflation. In consequence of this, the purchas-
ing-power-parity theory turned into the so-called 'inflation theory’ of foreign
exchange, which reads: increase in M raises the price level; the rise in a coun-
try’s price level decreases the value of its monetary unit in terms of non-inflated
foreign currencies. Opposing arguments were marshalled under the flag of a
'balance-of-payment’ theory, which often, though not always, went so far as
to make the causal nexus ran from exchange rate to price level instead of
from price level to exchange rate. We cannot go into this controversy in
which opponents never met each other’s arguments on the same plane of fact
and of abstraction and which, though better things were not lacking, on the

18 Cassel’s many publications on the subject started in 1916. The references that are
likely to be most useful to the reader are to Cassel’ s Theory of Social Economy (ch. 12)
and to Professor H. Ellis’ .work on German Monetary Theory (Part in), which goes
far beyond the German discussion and will prove helpful to those readers who wish to
enter more fully into a subject to which I can only draw attention.

19 This inlet was mainly fed from English sources. See especially A. C. Pigou, ‘The
Foreign Exchanges,’ Quarterly Journal of Economics, November 1922, and J. M.
Keynes, Tract on Monetary Reform (ch. 3, glorified by an excellent treatment of for-
ward trading in exchange). The discussion had the merit of raising several worth-while
questions, but ended in the anaemic result that the purchasing-power-parity theorem,
when properly qualified, was of hardly any value at all. As a matter of fact, this is not
true, and Lord Keynes might have arrived at a better definition of the equilibrium rate
of exchange than he produced when preparing his Clearing Union and Bretton Woods
plans, if he had not disposed so lightly of what is a quite valuable, starting point.

MONEY, CREDIT, AND CYCLES IIO7

whole presents a sad example of the futility — largely due to inadequate ana-
lytic power of the participants — of so many economic controversies.

I take this opportunity of noticing another controversy (or set of contro-
versies) that proved more fruitful: the controversy on the mechanism of inter-
national payments. It ran its course and produced its results in the twenties
and thirties, but its sources are in the work of the nineteenth century and
some of the most important participants drew inspiration from the contest
between Thornton and Ricardo (see above, Part in, ch. 7, sec. 3). 20 We have
before us what is indeed a typical case of normal scientific development. The
older authors had, more or less explicitly, noticed all the essential elements of
the problem. But when J. S. Mill summed up their work, it was nevertheless
an incomplete and one-sided picture that emerged, namely, the schema of the
mechanism of unilateral international payments (tributes, or loans, or repay-
ment of loans), according to which the paying country first transfers gold,
thereby increasing the price level of the receiving country and reducing its own
so as to acquire an export surplus, which then takes care of the subsequent
payments. The glaring inadequacy of this account, which not only puts the
whole burden of adjustment on the price level but also neglects the phe-
nomena inevitably associated with such an adjustment, was indeed felt and
noticed by Bastable ('On Some Applications of the Theory of International
Trade,' Quarterly Journal of Economics, October 1889) and others, but the
theory proved a hardy plant and survived in current teaching right into the
twenties, in spite of protests (e.g., Wicksell’s in 'International Freights and
Prices,' Quarterly Journal of Economics, February 1918). When the problem
of German reparations drew everybody’s attention to these questions of mech-
anism, relatively rapid progress was made in building up an organon of analysis
that was new as such though none of its elements were. Ohlin’s performance
( Interregional and International Trade, 1933) supplies a convenient landmark
in this as it does in other respects. The role of Taussig’s teaching should be
particularly noticed. He started from Mill’s schema and, in spite of a number
of improvements he added, personally never abandoned it. But by virtue of the
criticism he elicited and of the work of his pupils, whom his leadership in-
spired, he helped the new analysis into existence almost as effectively as if he
had created it himself. On the one hand, much of the most significant theo-
retical work developed from his teaching, Viner’s especially. On the other
hand, he started off an important sequence of factual researches. 21

20 The following brief and inadequate comments that cannot do more than indicate
another 'bridge’ between our own work and the past may be supplemented by J. Vi'ner’s
treatment of the subject in Studies in the Theory of International Trade (chs. vi and
vii). It is a pleasant duty to criticize the author for having impaired his picture by
stressing inadequately the importance of his own contribution in Canada’s Balance of
International Indebtedness (1924). Relying once more on this reference, I shall in what
follows mention contributions with great brevity.

21 In general, that period’s factual research on international capital movements is
among its major titles to our gratitude. C. K. Hobson’s The Export of Capital (1914)
will serve as an example.

MONEY, CREDIT, AND CYCLES

IIO9

This is the so-called Cambridge equation, which is to embody the Cash
Balance Approach. It assumes and asserts exactly what the Newcomb-Fisher
equation assumes and asserts. In particular, it is not more and not less of an
identity. The feature that at first sight may seem to constitute a substantive
difference, namely, the absence of velocity, is not very important: for all the
problems that, in the Newcomb-Fisher equation, are treated under the head-
ing Velocity turn up in much the same form when we try to work with the
Cambridge equation. But there is nevertheless something about it which de-
serves notice because it sheds light on an important aspect of the Filiation of
Scientific Ideas. In expressing the Cambridge equation in words, it is natural
to say — and all Cambridge economists did say- — that ‘the public choose’ or
‘elect’ to keep p(k + rk') in cash and balances, and this manner of speaking
constitutes a psychological bridge to later, especially Keynesian, opinions: for
it points toward the individual decisions that are behind the public’s behavior
in the matter of holding liquid assets and suggests analysis of the motives that
prompt them. Especially, if we express the matter by saying that there is such
a thing as a ‘balance of advantage’ as between holding money and holding
other forms of wealth, we cannot help seeing the signpost that points toward
the Liquidity Preference Theory of Keynesian fame. But once more we have to
add that this does not amount to the liquidity preference theory. It is clear;
especially in the case of Walras’ encaisse desiree, that we need additional as-
sumptions concerning people’s attitude toward holding cash to carry us from
the one to the other.

3 This holds for A. Aftalion ( L’Or et sa distribution mondiale, 1932), or for R. Lief-
mann (Geld und Gold, 1916), who said categorically: incomes determine prices, and
also for Tooke’s follower, Adolf Wagner, but not for the most eminent of the spon-
sors of the income approach, R. G. Hawtrey (Currency and Credit, 3rd ed., 1928),
who starts from Consumers’ Outlay, which is ‘proportional jointly to the unspent mar-
gin [equivalent to encaisse desiree , J. A. S.] and the circuit velocity of money.' He calls
this ‘a form of the quantity theory’ (p. 60). Several German writers, however, refused
to see this and had to be taught by Hans Neisser, Tauschwert des Geldes (1928) that
there is no contradiction between the income and the quantity theory.

4 See his Social Economics or his article ‘Geld’ . in the Handworterbuch (4th ed.,
1927).

IV: FROM 1870 TO 1914 and LATER

proach, it points to individual behavior; more than the cash balance ap-
proach, it removes mere quantity of money from the position of a proximate
'cause of the price level’ and substitutes for it one that is still nearer to prices —
income, or even consumers’ expenditure ; 5 finally it relieves the theory of
money prices from such questions as what is to be considered as money. The
effect of an increase of money upon prices is indeterminate so long as we do
not know who gets the additional money, what he does with it, and what the
state of the economic organism is on which the new money impinges. The
income formula does not in itself take account of all these questions but it
directs our attention toward them and thus helps monetary analysis to step
out of its separate compartment. This advantage is particularly obvious in ana-
lyzing an inflationary process. Though there is really not much more sense in
quarreling over the question whether it is the increased quantity of money or
the increased pay roll that 'causes’ inflation than there would be in quarreling
over the question whether it is the bullet or the murderer’s intention that
'causes’ the death of the victim, there is still something to be said for concen-
trating on the mechanisms by which the increased quantity of money becomes
operative — not to speak of the additional advantage which counts for so much
in economics, namely, that the income-expenditure formula does not meet
with some of the prejudices that the equation of exchange encounters.

7. Bank Credit and the 'Creation’ of Deposits

The important developments that occurred during that period in the bank-
ing systems of all commercialized countries and in the functions and policies
of central banks were, of course, noticed, described, discussed. We cannot sur-
vey the vast literature which performed this task and of which reports of offi-
cial commissions and the articles of the best financial journals, the London
Economist in particular, formed perhaps the most valuable part. It was written
by businessmen, financial writers, business economists of all types who knew
all about the facts, the techniques, and the current practical problems of bank-
ing but who cared little about 'principles’ — except that they never failed to
refer to established slogans — and cannot be said to have had any very clear
ideas about the meaning of the institutional trends they beheld. Considered
from the standpoint of scientific analysis, these works were, therefore, raw
material rather than finished products. And since the 'scientific analysts’ of
money and credit largely failed to do their part, namely, to work up this ma-
terial and to fashion their analytic structures to its image, we might almost —
though not quite — characterize the situation by saying that that literature on
banking and finance was as much of a separate compartment within the litera-

1111

MONEY, CREDIT, AND CYCLES

ture on money and credit as the latter was a separate compartment within the
literature on general economics.

There are a number of books for England, in particular, such as W. T. C. King’s
History of the London Discount Market (1936) and the various histories of the Bank
of England (e.g., the recent one -by Sir John Clapham, The Bank of England, 1944),
which will supply part of the information that cannot be given here. For other refer-
ences, see the little bibliography attached to the article on ‘Banking, Commercial’ in
the Encyclopaedia of the Social Sciences (especially the books of the following authors:
C. A. Conant, A. W. Kerr, A. Courtois, E. Kaufmann, A. Huart, J. Riesser, O. Jeidels,
C. Supino, C. Eisfeld, H. P. Willis). This bibliography contains two items which,
owing to their high quality, should be particularly mentioned: C. F. Dunbar’s Theory
and History of Banking (5th ed., 1929, but essentially a work of the nineteenth cen-
tury) and F. Somary’s Bankpolitik (1st ed. 1915; 2nd ed. 1930). Perusal of A History
of Banking Theory by L. W. Mints (1945) will show the reader how far the de-
scriptive literature ‘spilled over’ into the books on monetary and banking theory, though
the author’s presentation of his huge material is somewhat impaired by undue empha-
sis on the shortcomings of a particularly narrowly defined commercial theory of bank-
ing (the ‘real-bills doctrine’).

The situation described above by the separate-compartment simile accounts for the
emergence of a special type of book which was written not only for the general reading
public but also for economists in order to enlighten them on the facts and problems
of banking or finance. The success of these books proves, better than anything else
could, how far the separation of those departments, between which they sought to es-
tablish connection, had actually gone. Two famous instances call for notice. The one is
W. Bagehot’s Lombard Street: A Description of the Money Market (1873), one of
the most frequently and most admiringly quoted books in the whole economic litera-
ture of the period. No doubt it is brilliantly written. But whoever now turns to that
book with its fame in mind will nevertheless experience some disappointment. Barring
a plea for the reorganization of the management of the Bank of England and for a
reform of English practice concerning gold reserves, it does not contain anything that
should have been new to any student of economics. Obviously, however, it did teach
many economists things they did not know and were glad to learn. Our other instance
is the not less brilliant book by Hartley Withers, The Meaning of Money (2nd ed.,
1909), whose chief merit consists, as we shall presently see, in having boldly spoken of
the ‘manufacture’ of money by banks. But this should not have surprised anyone. Yet
it was considered as a novel and somewhat heretical doctrine.

1112

IV: FROM 1870 TO 1914 AND LATER

As regards central banking, economists enlarged indeed their conception of
the functions of central banks, especially the controlling and regulating func-
tion of the ‘lender of last resort.’ But most of them were surprisingly slow in
recognizing to the full the implications of Monetary Management, which as
we have seen was developing under their eyes. Adherence to the commercial
theory was, of course, partly responsible for this. Because of it, control contin-
ued to mean — not wholly but primarily — control by ‘discount policy.’ The
economics profession was not even sure whether it was in the power of central
banks to regulate market rates or whether bank rate was merely ‘declaratory .’ 1
Votaries of both opinions then discussed the effects of bank rate in terms of
the two classic modi operandi: on the one hand, pressure on prices by restric-
tion of credit ( almost equivalent to amount of commercial bills presented for
discount); on the other hand, attraction from abroad of foreign funds or recall
from abroad of domestic funds.

As regards banking in general, it is quite true that strict adherence to the
commercial theory caused economists to overlook or misconceive some of the
most important banking developments of that time. Nevertheless, the deroga-
tory criticism leveled at it in our own day is not entirely justified. To begin
with, it was not so unrealistic for England, and English prestige in matters of
banking tended to make English practice the standard case. But, quite apart
from this, it should be emphasized that acceptance of the commercial theory
does not necessarily involve uncritical optimism about the working of the
discounting mechanism. Economists stressed the ‘elasticity’ of the system that
turns on financing commodity trade. But they had grown out, or were grow-
ing out, of the opinion that if banks simply finance the ‘needs of trade,’ then
money and production will necessarily move in step and no disturbance will
arise — which is the really objectionable thesis. On the one hand, most of them
realized, as Ricardo and Tooke had done before them, that there is no such
thing as a quantitatively definite need for loans or discounts and that the
actual amount of borrowers’ demand is as much a question of the banks’ pro-
pensity to lend and of the rates they charge as it is a question of borrowers’
demand for credit. On the other hand, they realized more and more that the
practice of financing nothing but current trade — discounting good commercial
paper — does not guarantee stability of prices or of business situations in gen-
eral or, in depression, the liquidity of banks . 2 And it was Wicksell’s achieve-

2 In other words- — putting the matter from the standpoint of the policy of credit
control — it was being increasingly realized that attention to the purpose to be financed
( current commodity transaction) arid to the quality of the credit instruments involved
(good commercial /paper) did not enable central banks to dispense with attention to

MONEY, CREDIT, AND CYCLES 1 1 1 3

ment to introduce both facts into the general theory of money by means of
his famous model of the Cumulative Process (see below, sec. 8).

Finally, there is another point, quite independent of all this, that must, be
noticed: the curious narrowness and lack of realism in that period’s conception
of the nature of bank credit. In order to make this point stand out clearly, let
us restate how a typical economist, writing around 1900, would have explained
the subject of credit, keeping in mind, however, all the limitations and dan-
gers inherent in speaking of typical views. He would have said something like
this. In the (logical) beginning is money — every textbook on money, credit,
and banking begins with that. For brevity’s sake, let us think of gold coin only.
Now the holders of this money, so far as they neither hoard it nor spend it
on consumption, 'invest’ it or, as we may also say, they 'lend’ their 'savings’
or they 'supply capital’ either to themselves or to somebody else. And this is
the fundamental fact about credit. 3 Essentially, therefore, credit is quite inde-
pendent of the existence or non-existence of banks and can be understood
without any reference to them. If, as a further step in analysis, we do intro-
duce them into the picture, the nature of the phenomenon remains unchanged.
The public is still the true lender. Bankers are nothing but its agents, middle-
men who do the actual lending on behalf of the public and whose existence
is a mere matter of division of labor. This theory is satisfactory enough in
cases of actual 'lending on account of others’ 4 and of savings deposits. But
it was also applied to checking deposits (demand deposits, the English current
accounts). These, too, were made to arise from people’s depositing with banks
funds that they owned (our gold coins). The depositors become and remain
lenders both in the sense that they lend ('entrust’) their money to the banks
and in the sense that they are the ultimate lenders in case the banks lend out
part of this money. In spite of certain technical differences, the credit sup-
plied by deposit banking — the bulk of commercial credit in capitalist society —
can therefore be construed on the pattern of a credit operation between two
private individuals. As the depositors remain lenders, so bankers remain middle-
men who collect 'liquid capital’ from innumerable small pools in order to
make it available to trade. They add nothing to the existing mass of liquid
means, though they make it do more work. As Professor Cannan put it in an
article in Economica ('The Meaning of Bank Deposits’) which appeared as late
as January 1921 : ‘If cloak-room attendants managed to lend out exactly three-
quarters of the bags entrusted to them ... we should certainly not accuse
the cloak-room attendants of having “created” the number of bags indicated by

the quantity of credit outstanding: this is implied, though perhaps not adequately, in
the theory of the bank rate.

4 By this is meant a contractual arrangement by which an owner of large funds
which he does not immediately need, e.g. an industrial corporation that has just re-
ceived the proceeds of a bond issue, employs the services of a bank to lend out these
temporarily idle funds in the money market, to stock brokers or bill brokers.

1114 lv: FROM 1870 TO 1914 AND LATER

the excess of bags on deposit over bags in the cloak rooms.’ Such were the
views of 99 out of 100 economists.

But if the owners of those bags wish to use them, they have to recover them
from the borrowers who must then go without them. This is not so with our
depositors and their gold coins. They lend nothing in the sense of giving up
the use of their money. They continue to spend, paying by check instead of
by coin. And while they go on spending just as if they had kept their coins,
the borrowers likewise spend ‘the same money at the same time.’ Evidently this
phenomenon is peculiar to money and has no analogue in the world of com-
modities. No claim to sheep increases the number of sheep. But a deposit,
though legally only a claim to legal-tender money, serves within very wide
limits the same purposes that this money itself would serve. Banks do not, of
course, ‘create’ legal-tender money and still less do they ‘create’ machines.
They do, however, something — it is perhaps easier to see this in the case of
the issue of banknotes — which, in its economic effects, comes pretty near to
creating legal-tender money and which may lead to the creation of ‘real capi-
tal’ that could not have been created without this practice. But this alters the
analytic situation profoundly and makes it highly inadvisable to construe bank
credit on the model of existing funds’ being withdrawn from previous uses by
an entirely imaginary act of saving and then lent out by their owners. It is
much more realistic to say that the banks ‘create credit,’ that is, that they
create deposits in their act of lending, than to say that they lend the deposits
that have been entrusted to them. And the reason for insisting on this is that
depositors should not be invested with the insignia of a role which they do
not play. The theory to which economists clung so tenaciously makes them
out to be savers when they neither save nor intend to do so; it attributes to
them an influence on the ‘supply of credit’ which they do not have. The
theory of ‘credit creation’ not only recognizes patent facts without obscuring
them by artificial constructions; it also brings out the peculiar mechanism of
saving and investment that is characteristic of fullfledged capitalist society and
the true role of banks in capitalist evolution. With less qualification than has
to be added in most cases, this theory therefore constitutes definite advance
in analysis.

5 Treatise on Money, ch. 2. It is, moreover, highly significant that, as late as June
1927, there was room for the article of F. W. Crick, ‘The Genesis of Bank Deposits’
(E conomica), which explains how bank loans create deposits and repayment to banks
annihilates them — in a manner that should have been indeed, but evidently was not
even then, ‘time-honored theory.’ There is, however, a sequel to Lord Keynes’s treat-
ment of the subject of credit creation in the Treatise of 1930 of which it is necessary
to take notice in passing. The deposit-creating bank loan and its role in the financing

For the facts of credit creation — at least of credit creation in the form of
banknotes — must all along have been familiar to every economist. Moreover,
especially in America, people were freely using the term Check Currency and
talking about banks’ 'coining money’ and thereby trespassing upon the rights
of Congress. Newcomb in 1885 gave an elementary description of the process
by which deposits are created through lending. Toward the end of the period
(1911) Fisher did likewise. He also emphasized the obvious truth that deposits
and banknotes are fundamentally the same thing. And Hartley Withers
espoused the notion that bankers were not middlemen but 'manufacturers’
of money. Moreover, many economists of the seventeenth and eighteenth cen-
turies had had clear, if sometimes exaggerated, ideas about credit creation and
its importance for industrial development. And these ideas had not entirely
vanished. Nevertheless, the first — though not wholly successful — attempt at
working out a systematic theory that fits the facts of bank credit adequately,
which was made by Macleod, 7 attracted little attention, still less favorable at-
tention. Next came Wicksell, whose analysis of the effects upon prices of the
rates charged by banks naturally led him to recognize certain aspects of 'credit
creation,’ in particular the phenomenon of Forced Saving. 8 Later on, there

of investment without any previous saving up of the sums thus lent have practically
disappeared in the analytic schema of the General Theory, where it is again the saving
public that holds the scene. Orthodox Keynesianism has in fact reverted to the old
view according to which the central facts about the money market are analytically ren-
dered by means of the public’s propensity to save coupled with its liquidity preference.
I cannot do more than advert to this fact. Whether this spells progress or retrogression,
every economist must decide for himself.

7 Henry Dunning Macleod (1821-1902) was an economist of many merits who some-
how failed to achieve recognition, or even to be taken quite, seriously, owing to his
inability to put his many good ideas in a professionally acceptable form. Nothing can
be done in this book to make amends to him, beyond mentioning the three publica-
tions by which he laid the foundations of the modern theory of the subject under dis-
cussion, though what he really succeeded in doing was to discredit this theory for quite
a time: Theory and Practice of Banking (1st ed., 1855-6; Italian trans. 1879); Lectures
on Credit and Banking (1882); The Theory of Credit (1889-91).

8 In itself the idea was not new, see F. A. von Hayek, 'Note on the Development
of the Doctrine of “Forced Saving,” ’ Quarterly Journal of Economics, November 1932,
republ. in Profits, Interest and Investment (1939). But it now appeared in a larger con-

Ill6 IV: FROM 1870 TO 1914 and later

The reasons why progress should have been so slow are not far to seek:
First, the doctrine was unpopular and, in the eyes of some, almost tinged
with immorality — a fact that is not difficult to understand when we remember
that among the ancestors of the doctrine is John Law. 12 Second, the doctrine
ran up against set habits of thought, fostered as these were by the legal con-
struction of ‘deposits’: the distinction between money and credit seemed to
be so obvious and at the same time, for a number of issues, so important that

9 Davenport’s contribution merely consisted in hints which he threw out in his 'Value
and Distribution (1908) without making much of them: he emphasized, e.g., that it is
not correct to say that banks ‘lend their deposits/ W. G. L. Taylor, in a book which
(like Davenport’s) never received the recognition it deserved, went much further (T he
Credit System, 1913). A great stride was made by C. A. Phillips (Bank Credit, 1920),
who not only did much to clear up the theoretical questions involved but in addition
pointed out the difference between the expansion of loans and investments that is pos-
sible for an individual bank which competes with others and the expansion that can
be performed by a system of competing banks, considered as a whole.

10 Albert Hahn, Volkswirtschaftliche Theorie des Bankkredits (3rd ed., 1930). One
reason why this book left so many economists unconvinced was, however, the fact that
the theory of bank credit there presented was wedded to certain highly optimistic views
about the possibility of achieving permanent prosperity, which prejudiced some econo-
mists against its essential achievement.

11 D. H. Robertson, Banking Policy and the Price Level (1926). Forced saving fig-
ures there under the name of Imposed Lacking. A. C. Pigou, Industricd Fluctuations
(1927), Part 1, chs. 13 and 14.

MONEY, CREDIT, AND CYCLES 1117

a theory vyhich tended to obscure it was bound to be voted not only useless
but wrong in point of fact— indeed guilty of the elementary error of con-
fusing legal-tender money with the bookkeeping items that reflect contractual
relations concerning this legal-tender money. And it is quite true that those
issues must not be obscured . 13 That the theory of credit creation does not
necessarily do this seemed small comfort to those who feared its misuse.

8. Crises and Cycles: the Monetary Theories

We have seen on the one hand that, broadly speaking, the monetary anal-
ysis of that period centered in the problems of Value of Money (or price level)
but on the other hand that some leading economists were working their way
toward monetary analysis of the economic process as a whole in which mere
price-level problems fall into secondary place. This tendency has been illus-
trated by the implications of the cash balance and income approaches but it
asserted itself also in many other ways. It is significant, for instance, that Mar-
shall originally intended the volume that appeared as Money, Credit , and
Commerce to carry the title Money, Credit, and Employment: and there are
in fact many things in it that come within the range of recent Income and
Employment Analysis. Much more significant was it that Wicksell, in his
somewhat hesitating way that is so engaging, eventually made up his mind to
the effect that we need a concept of monetary demand for output as a whole ; 1
This revived the Malthusian idea and anticipated, though in an incompletely
articulate manner, the consumption function of Keynes's General Theory .

13 One of them is the old issue: control of 'money’ vs. control of 'credit.’ Consid-
erations of the kind alluded to explain the aversion of many French authorities to the.
credit-creation idea. For instance, one of the leading purposes of Professor Rist’s History
of Monetary and Credit Theories is to combat the 'confusion’ of money and credit.

1 The reference that will be most useful to the reader is to Myrdal’s Monetary Equi-
librium (Swedish ed. 1931, English trans. 1939; see above, sec. 2c). Once more, the
point to grasp is this: demand schedules are defined for a single commodity. Accord-
ing to 'classical’ theory (Say’s law), there would be no sense in speaking of a demand
schedule for all goods and services (or all consumers’ goods and services) taken to-
gether. If we do so, nevertheless, we are for a special purpose doing something that
is not covered by the ordinary theory of demand and are taking therefore a step be-
yond it. This special purpose may or may not be meaningful. It may or may not be
well served by the aggregate-demand technique. But in any case, it should be recog-
nized as a thing sui generis that carries its own particular problems. Wicksell’s adop-
tion of it spelled renunciation of Say’s law. He is, therefore, the patron saint of all
those economists who renounce Say’s law at present.

in8

IV: FROM 1870 TO 1914 AND LATER

interest as a purely monetary phenomenon meet with any success. 2 Through-
out the period, the rate of interest remained, for practically all economists, a
rate of return — however explained — to physical capital and the money rate a
mere derivative of the real rate. 3 It had long been recognized, of course, that
the two may diverge from one another: Ricardo’s explanation of how new
money inserts itself into circulation implies recognition of this fact, and
writers on banking must always have been aware of it. But nobody attached
much importance to it until Wicksell made it the center of his theory of the
value of money and the subject of an elaborate analysis that produced the
Wicksellian Cumulative Process: he pointed out that, if banks keep their loan
rate below the real rate — which as we know he explained on the lines of
Bohm-Bawerk’s theory — they will put a premium on expansion of production
and especially on investment in durable plant and equipment; prices will even-
tually rise; and if banks refuse to raise their loan rate even then, prices will
go on rising cumulatively without any assignable limit even though all other
cost items rise proportionally. 4

3 This meaning of real or ‘natural’ rate must not be confused with the wholly dif-
ferent meaning in which Marshall used the phrase ( Principles , Book vi, ch. 6, conclud-
ing note), namely, the meaning of money rate (or ‘nominal’ rate) corrected for price-
level changes. The two are related but not identical and Marshall has, so far as I can
see, no share in the Wicksellian idea I am about to discuss. His own merit in empha-
sizing what may be termed the distinction between nominal and actual rate is shared
by Irving Fisher ( Appreciation and Interest, 1896).

4 Bolim-Bawerk’s comment on this argument was: ‘Wicksell must have been dream-
ing when he wrote that.’

5 The following paraphrase of the paragraph above may prove helpful. Into the
Walrasian system enters just one rate of interest, which is a rate of net return on
physical ‘capitals.’ Strictly, this implies that the money rate of interest is not only
equal to this rate of net return in equilibrium but identical with it, in the sense that
the money rate is merely the monetary expression of the rate of net return on physical
‘capitals.’ If we want to recognize explicitly that instead of being identical with this
rate of net return (equivalent to saying that it is ‘fundamentally the same thing’) the
money rate has some measure of independence, we must introduce it as another vari-
able and posit equality with the ‘real rate’ as an additional equilibrium condition. This

MONEY, CREDIT, AND CYCLES

1119

And so soon as we recognize this, they will drift further and further apart and
we shall drift further and further away, from the position that the net return
to physical goods of one kind or another is the fundamental fact about the
interest rate of the loan market— the position which we have traced to Barbon
and which Lord Keynes was to condemn on the ground that it involved ‘con-
fusion’ between rate of interest and the marginal efficiency of (physical) capi-
tal . 6 Other factors, such as the loan policy of banks, will then seem to us to
be just as fundamental, and the road opens toward the purely monetary theo-
ries of interest that emerged later and of which the Keynesian was to attract
more attention than any other. Let us, however, keep in mind three things.
First, we have been sketching a most interesting line of doctrinal develop-
ment, which starts with Barbon and runs a course that, for the moment, ends
with Keynes. But it is not suggested that the individuals who made them-
selves responsible for the newer monetary theories of interest consciously ar-
rived at their conclusions by working out the implications of the situation
created by the Wicksell analysis: this may have been the case with his Swed-
ish disciples — though I do not wish to question anyone’s subjective originality
— but it was certainly not so with the others. Second, it is not suggested that,
by retracing Barbon’s steps, the economists of our epoch have simply returned
to the monetary theories of pre-Barbonian times: though similar to them in
important respects — and especially to those of the scholastics — theirs are un-
questionably novel in others. Third, by defining the new variable of our eco-
nomic system, money interest, as a thing that is monetary in nature and not
only in form, we do not eliminate from the problem of the loan rate the
‘real’ factors as completely as some modern economists seem to think: the
rate of net return to physical investment remains, at the very least, a factor in
the demand for loans and therefore cannot vanish from any complete theory
of the money rate . 7

6 Wicksell’s real or natural rate of interest is the marginal productivity of (physical)
capital (more precisely, the marginal productivity of Bohm-Bawerk’s roundabout proc-
ess). It is, therefore, not identical with Keynes’s marginal efficiency, which is the same
as Fisher’s marginal rate of return over cost ( Theory of Interest , p. 169) and means
marginal productivity of current investment. But the two concepts stand in a unique
relation to one another so that, for the purpose in hand, they* may nevertheless be used
interchangeably. Lord Keynes may hence be said to have condemned the 'confusion’
between money and real rate of interest or, better, the habit of nineteenth-century econo-
mists to link them together too closely. It then appears that Wicksell was the first to
undermine this habit.

7 This fact is important precisely because it is so often denied and because Keynes’s
exposition in the General Theory tended to obscure it, although it is not less essential
for his monetary theory of interest than it is for any other. It comes in by way of the
condition that the equilibrium amount of current investment is the amount for which
‘marginal efficiency’ is equal to the money rate. The statement that interest is the

1120 IV: FROM 187O TO 1914 AND LATER

Wicksell’s position in the development of modern monetary cycle theories
is quite similar to his position in the development of modern monetary inter-
est theories. He himself no more held a monetary cycle theory than he held
a monetary interest theory. But he opened the road for the former as he
opened it for the latter. In fact, the Cumulative Process itself need only be
adjusted in order to yield a theory of the cycle. Suppose that banks emerge
from a period of recovery or quiescence in a liquid state. Their interest will
prompt them to expand their loans. In order to do so they will, in general,
have to stimulate demand for loans by lowering their rates until these are
below the Wicksellian real rate, which, as we know, is Bohm-Bawerk's real
rate. In consequence, firms will invest- — especially in durable equipment with
respect to which rate of interest counts heavily 8 — beyond the point at which
they would have to stop with the higher money rate that is equal to the real
rate. Thus, on the one hand, a process of cumulative inflation sets in and, on
the other hand, the time structure of production is distorted. This process can-
not go on indefinitely, however — there are several possible reasons for this,
the simplest being that banks run up against the limits set to their lending by
their reserves — and when it stops and the money rate catches up with the
real rate, we have an untenable situation in which the investment undertaken
on the stimulus of an ‘artificially’ low rate proves a source of losses: booms
end in liquidation that spell depression.

This theory has been sketched out by Professor von Mises , 9 who, while ex-
tending critical recognition to Wicksell, described it as a development of
currency school views. It was further developed by Professor von Hayek into a
much more elaborate analytic structure of his own , 19 which, on being pre-
sented to the Anglo-American community of economists, met with a sweeping
success that has never been equaled by any strictly theoretical book that failed
to make amends for its rigors by including plans and policy recommendations
or to make contact in other ways with its readers’ loves or hates. A strong criti-
cal reaction followed that, at first, but served to underline the success, and
then the profession turned away to other leaders' and other interests . 11 The
social psychology of this is interesting matter for study.

factor that limits investment is as true as to say that the price of motor cars is the
factor that limits the demand for them, and is equally incomplete.

9 Theorie des Geldes . . . 1924, Third Part, ch. 5, secs. 4, 5. This reference is to
the 2nd ed., in which the line of reasoning above is presented as an essentially com-
plete explanation of cycles. The fundamental ideas, however, are already contained in
the original edition of 1912.

10 Geldtheorie und Konjunkturtheorie (1929); Prices and Production (1931). A new
version that altered the argument in several important respects appeared in 1939:
Profits , Interest, and Investment ; and a further installment that covered much new
ground, in 1941: The Pure Theory of Capital.

11 Other successes of ‘theoretical’ books, in our time, for example, the success of
Professor E. H. Chamberlin’s Monopolistic Competition and Hicks’s Value and Capital,

1121

MONEY, CREDIT, AND CYCLES

Hawtrey’s 12 analysis makes business cycles, as he himself put it, a purely
monetary phenomenon in a sense in which the Mises-Hayek cycle is not. Haw-
trey makes no use of the element of disturbance (or maladjustment) in the
time structure of plant dnd equipment; fluctuations in the flow of money in-
come, themselves caused by exclusively monetary factors, are the only cause of
general cyclical fluctuations in trade and employment. But he does use the
Cumulative Process and traces it like Mises to the inherent instability of the
modem credit system. Banks, then, are again supposed to start abnormal activ-
ity by easy conditions for loans. Only the main link of this with general boom-
ing conditions is not increase in orders for new plant or equipment but in-
crease in the stocks held by the wholesale trade that also react to small changes
in loan rates. Expansion leads to further expansion, hence to increased money
incomes and to loss of hand-to-hand cash by the banks, whose inability to go
on expanding loans indefinitely then leads to a rise in rates which reverses
the process — which is why the central bank rate plays so great a role in this
analysis. Thus, similarities are sufficiently pronounced to entitle us to speak of
a single monetary theory, the votaries of which disagree on one issue only:
whether bank-loan rates act primarily on ‘durable capital’ or via the stocks of
wholesalers. Throughout the twenties, Hawtrey’s theory enjoyed a consider-
able vogue. In the United States, especially, it was the outstanding rationaliza-
tion of the uncritical belief in the unlimited efficacy of the open-market opera-
tions of the Federal Reserve System that prevailed then.

Nor is the fundamental unanimity of the votaries of the monetary theory of
cycles 13 seriously disturbed by those economists who place responsibility for
the phenomenon with the vagaries of gold. This idea commanded more assent
when it was used to ‘explain’ those longer spans of prevalent prosperity or
prevalent depression that are in fact associated (more or less) with significant
changes in the rate of gold production, such as, roughly, 1849-72 or 1872-91.
But it has also been used to ‘explain’ business cycles proper. In this case, since
an accession of gold acts on bank reserves and hence makes banks more will-

were more enduring and therefore greater in the end. But they lacked the spectacular
quality of Hayek’s. The much greater success of Keynes’s General Theory is not com-
parable because, whatever its merit as a piece of analysis may be, there cannot be any
doubt that it owed its victorious career primarily to the fact that its argument imple-
mented some of the strongest political preferences of a large number of modern econo-
mists (see below Part v, ch. 5). Politically, Hayek’s swam against the stream.

12 R. G. Hawtrey, Good and Bad Trade (1913), and many later works. Perusal of
Capital and Employment (1 937) will show the extent to which Mr. Hawtrey modified
his earlier views.

13 When we speak of monetary theories of cycles, a double meaning of the word
theory (see Part i) leaps to mind. A monetary theory of cycles is an explanatory hy-
pothesis of cycles that runs in terms of money and lending. But nobody denies that
any explanation of the phenomenon must take account of its monetary features. We
may, therefore, use the word monetary , theory also for the sum total of propositions
about the ways in which money and credit behave in the cycle. And, considered as
contributions to monetary cycle theory in this sense, many arguments, such as Haw-
trey’s, retain importance even for those who do not accept them as adequate in the
role of explanatory hypothesis.

1122

IV : FROM 1870 TO 1914 AND LATER

ing and able to lend, we have a particular reason for expecting expansion in-
stead of the more general reason formulated by Mises and Hawtrey but, for
the rest, the argument will be much the same: again credit inflation owing to
low money rates, again the point at which interest' catches up with prices,
and reversal of the process. The most eminent sponsor of this type of mone-
tary theory, Professor Irving Fisher, at first stated it in this unsophisticated
manner in his Purchasing Power of Money, 1911 (ch. 4). 14 But, though he
continued to emphasize the monetary aspects of the phenomenon, he so
broadened the basis of his analysis as to end up with the Debt-Deflation
Theory, which, contrary to his unduly restricted claim, applies to all recorded
business cycles and is in essence not monetary at all. Ostensibly, the burden
is chiefly laid upon the fact that in the atmosphere of prosperity debts are
accumulated, the inevitable liquidation of which, with the attendant breaks in
the price structure, constitutes the core of depression. Behind this surface
mechanism there are the really operative factors — new technological and com-
mercial possibilities chiefly — which Fisher does not fail to see but which he
banishes to the apparently secondary place of 'debt starters’ (E conometrica,
October 1933, p. 348), so that, exactly as in the case of his general mone-
tary analysis (see above, sec. 2), the true dimensions of what is really a great
performance are so completely hidden from the reader’s view that they have
to be dug out laboriously and in fact never impressed the profession as they
should have done.

9. Non-Monet ary Cycle Analysis

It will be convenient to go on in order to glance briefly at some analyses
of cyclical phenomena other than Hayek’s that are non-monetary in the sense
defined , 1 although we shall have to cross the frontiers of this chapter’s subject
in doing so. But we shall go no further than is necessary in order to establish
one important proposition, namely, that all the essential facts and ideas about

14 The version presented in Purchasing Power had been published before, in sum-
mary, in Moody’s Magazine under the title ‘Gold Depreciation and Interest Rates,’
February 1909. The main stepping stones to the Debt-Deflation Theory are the ar-
ticles: ‘The Business Cycle Largely a “Dance of the Dollar," ’ Journal of the American
Statistical Association, December 1923, and ‘Our Unstable Dollar and the So-Called
Business Cycle’ (ibid. June 1925), both of which concentrate on fluctuations of prices
and interest rates that are traced to purely monetary conditions, and the book Booms
and Depressions (1932) partly summarized and partly complemented in ‘The Debt-
Deflation Theory of Great Depressions,’ Econometrica, October 1933, to which refer-
ence is made in the text.

MONEY, CREDIT, AND CYCLES

II23

business-cycle analysis had emerged by 1914: the subsequent thirty years
brought forth, indeed, a flood of statistical and historical material, and many
new statistical and theoretical techniques; by clarification and elaboration they
may be said to have expanded the subject into a recognized branch of eco-
nomics; but they added no principle or fact that had not been known before. 2

2 This statement and my failure to make the (impossible) attempt to survey the
achievements of this later literature on cycles must not be interpreted in a derogatory
sense. On the contrary, I believe the work embodied in this literature to be as valu-
able as any ever done by economists. This much at least will be evident from what I
shall say about it in Part v. It is nevertheless essential to realize the extent to which
this work rests upon bases laid before 1914. Attention is called to Professor R. A.
Gordon’s ‘Selected Bibliography of the Literature on Economic Fluctuations, 1930-36/
Review of Economic Statistics, February 1937, and to the list of books about Business
Cycles published by the Bureau of Business Research, University of Illinois, College of
Commerce and Business Administration, 1928. Professor von Haberler’s masterly pres-
entation of the modem material ( Prosperity and Depression, 1937; 3rd enlarged ed.,
1941) is recommended as an introduction to the subject: reliance on ..the fact that
few if any students of economics fail to consult this work is my main excuse for keep-
ing my own comments upon it as brief as possible. The reader will understand, how-
ever, that my admiration for it does not involve agreement in every point. Work prior
to 1895 is fairly well covered by a history that appeared in that year: E. von Bergmann,
Geschichte der nationalokonomischen Krisentheorieen. From a lengthy list of other
historical and critical publications, I will mention only: Alvin H. Hansen, Business-
Cycle Theory (1927); then, once more, F. Lutz, D as Konjunkturproblem in der Na-
tionalbkonomie (1932); and W. C. Mitchell’s Business Cycles . . . (1927), espe-
cially ch. i.,

1124 IV: FROM 1870 TO 1914 AND LATER

upon three facts. To begin with, he was the first to use time-series material
(mainly prices, interest rates, and central bank balances) systematically and
with the clear purpose in mind of analyzing a definite phenomenon. Since this
is the fundamental method of modern business-cycle analysis, he can be justly
called its ancestor. Second, having discovered the cycle of roughly ten years'
duration that was most obvious in his material — it was he who discovered the
continent; islands near it several writers had discovered before — -he proceeded
to develop a morphology of it in terms of -'phases’ (upgrade, ‘explosion,’ liqui-
dation). Though Tooke and Overstone had done the same thing, the modern
morphology of cycles dates from Juglar. And so does, in the same sense, ‘peri-
odicity.’ This morphology of a ‘periodic’ process is what he meant when he
proudly claimed to have discovered the ‘law of crises’ without any precon-
ceived theory or hypothesis . 4 Third, he went on to try his hand at explanation.
The grand feature about this is the almost ideal way in which ‘facts' and
‘theory’ are made to intertwine. In themselves, most of his suggestions concern-
ing the factors that bring about the downturn (loss of cash by banks, failure
of new buying) do not amount to a great deal. But all-important was his diag-
nosis of the nature of depression, which he expressed with epigrammatic force
in the famous sentence: ‘the only cause of depression is prosperity.’ This means
that depressions are nothing but adaptations of the economic system to the
situations created by the preceding prosperities and that, in consequence, the
basic problem of cycle analysis reduces to the question what is it that causes
prosperities- — to which he failed, however, to give any satisfactory answer.

Economists were at first slow to follow up Juglar’s lead. Later on, however,
most of them, even those who were more inclined than he was to commit
themselves to particular hypotheses concerning ‘causes/ adopted his general
approach — so much so that today Juglar’s work reads like an old story very
primitively told. And at the end of the period stands a work that, on the one
hand, was entirely conceived in his spirit and, on the other hand, ushered in a
most important part of the cycle analysis of our own time: Wesley C. Mitch-
ell’s Business Cycles . 6

Angleterre et aux Ptats Unis (‘crowned’ by the Academie des Sciences Morales et Poli-
tiques in i860, publ. as a book in 1862, 2nd ed. 1889, English trans. by W. Thom,
from 3rd ed., 1916). There is a Notice of his life and work by Professor Paul Beaure-
gard, in the Comptes rendus of the Academie des Sciences Morales et Politiques (1909).

4 Juglar seems not to have considered the implications of the fact that his 9-10 year
cycle could not be expected to be the only wavelike movement in his, material. Later
workers naturally discovered others. At least the names of N. D. Kondratieff (1922)
and Joseph Kitchin (1923) should be mentioned (on these and predecessors, see Mitch-
ell, op. cit. pp. 227 and 380). But we can do no more than advert to this line of ad-
vance. Juglar’s merit is hardly diminished by these developments — in fact, they only
serve to enhance his historical position.

5 Business Cycles (1913); entirely re-written version, Business Cycles: the Problem
and Its Setting (1927); Measuring Business Cycles by A. F. Bums and W. C. Mitchell
(1946). I do not mean to suggest, however, that Professor Mitchell derived his ap-
proach from Juglar, any more than I would suggest that the inventors of the ‘Harvard

MONEY, CREDIT, AND CYCLES

112,5

(b) Common Ground and Warring ‘Theories’ That period, then, estab-
lished a method, .at least the fundamental principle of a method, on which,
by the end of the period, a majority of business-cycle analysts agreed arid
which was to serve the bulk of the work of our own time. Agreement went
further than this however. By the end of the period the lists of the features or
symptoms that characterize cyclical phases — which different economists did
draw up or would have drawn up — looked much alike. And not only that: by
the end of the period most workers agreed — or tacitly took for granted — that
the fundamental fact about cyclical fluctuations was the characteristic fluctua-
tion in the production of plant and equipment. Now, how is this? We seem
to be discovering a lot of common ground that should have assured much
parallelism of effort and much agreement in results. Yet this is not at all what
a survey of that literature reveals. On the contrary, we seem to behold noth-
ing but disagreement and antagonistic effort — disagreement and antagonism
that went so far as to be discreditable to the science and even ludicrous. The
contradiction is only apparent however. Agreement on the list of features, even
if it had been complete , 6 does not spell agreement as to their relations with
one another, and it is the interpretation of these relations and not the list
per se which individuates an analytic scheme or business-cycle 'theory/ Even
. agreement to the effect that it is the activity in the plant-and-equipment ('capi-
tal goods’) industries which is the outstanding feature in cyclical fluctuations
does not go far toward ensuring agreement in results since it leaves the. de-
cisive question of interpretation wide open. And, in order to avoid misunder-
standing, we must emphasize at once that the outstanding feature of cyclical
phases, whatever it is, need not contain within itself the 'cause’ that explains
why cyclical fluctuations exist: this 'cause’ may still lie somewhere else, for
example, in the sphere of consumption. But in spite of all this, it remains
both true and important that agreement went further than the troubled sur-
face suggests and that most of the analysts of the business-cycle phenomenon
who produced theories, which look so different, really started from a common
basis.

1. The fact that the 'relatively large amplitude of the movements in con-
structional, as compared with consumption, industries’ is one of the most ob-
vious 'general characteristics of industrial fluctuations’ 7 can hardly fail to ob-

Barometer’ were subjectively dependent on him. All I want to point out is the ob-
jective contour line of the development of that method — Filiation of Scientific Ideas is
an objective process which may, but need not, involve any subjective relation. Similarly,
Menger had not heard of Gossen until long after he had developed his version of
the marginal utility analysis. Yet Menger’ s work stands in an objective sequence in
which Gossen stands, in time, above him.

7 Pigou, Industrial Fluctuations (1927), Part 1, ch. 2.

1126

iv: FROM 1870 TO 1914 and LATER

trude itself upon anyone 8 who has learned to look at a cycle as a whole,
though it may escape attention so long as one looks merely at the depression
phase. Nevertheless, it took time for it to be recognized consciously and with
full awareness of its pivotal importance. Speaking very roughly, we may asso-
ciate this achievement— or a decisive share in this achievement — with the
work of Tugan-Baranowsky. 9 It is, however, only the emphasis upon the pivotal
importance of that fact which constitutes the historical merit of the work. His
own interpretation of it — that is, his distinctive theory — which runs in terms
of alternating accumulation and release of liquid saving, is valuable only as an
example of how short the way is from a promising starting point into a blind
alley, even for an able and serious worker.

11. The outstanding work in the line under discussion is Arthur SpiethofFs. 10
His analytic schema first lists a number of possible starters of a process of ex-
pansion of plant and equipment, which process then accounts without diffi-
culty for all the other observed phenomena of booms, great care being taken to
account for the individual peculiarities of every historical instance. This em-

8 Walras, it is interesting to note, treated as common knowledge the fact that the
production des capitaux neufs goes on in alternating high tides and low tides — charac-
terized by respectively high and low rates of discount and of prices — rand identified it
(in 1884) with what we call business cycles of about 10 years’ duration. He does not
quote Juglar but Jevons. ( Etudes d’ economic appliquee, 1936, p. 31.)

But neither his Theoretische Grundlagen des Marxismus (1905) nor his Soziale Theorie
der Verteilung (1913) made any mark. This was but natural in view of the deficiency
in rigorous thinking both displayed, which is as deplorable as it is curious in a man
of his ability. More important were his work on the history of industrial capitalism
in Russia (1st Russian ed., 1898; German trans. 1900) and Modern Socialism in Its
Historical Development (1906; English trans. 1910). The only other item that need
be mentioned out of what no doubt was an imposing total is the most important of
all, for this did make a mark and did exert influence far and wide, viz., his history of
commercial crises in England (first in Russian, 1894; German version, 1901; French,

1913). Again, the first and theoretical chapter is a distinctly poor performance. The
rest stands in the history of our science.

10 On Spiethoff, see above, ch. 4, sec. 2d. The main reason why his work developed ||
so slowly was his heroic resolve to carry out a vast program of minute factual research
single-handed — practically without any research assistance at all. Though he began to
publish fragmentary results in 1902 (in Schmoller’s Jahrbuch), a provisional presenta-
tion of the whole — really a preview only — was not published before 1925 in vol. vi of
the 4th ed. of the Handworterbuch der Staatswissenschaften, article ‘Krisen.’ I un-
derstand that preparations are being made for the publication of a fuller version in
English.

MONEY, CREDIT, AND CYCLES 11 27

phasis upon the expansion of plant and equipment is reflected in the choice,
for the role of fundamental index, of iron consumption (production plus im-
ports minus exports). The problem that remains, namely why this expansion
eventually runs into a general condition of production at a loss ('overproduc-
tion’), is then solved by means of several factors, such as shortage of working
capital and temporary saturation of demand in particular directions. This
schema, which at every step leaves plenty of room for alternatives, is admirably
suited for absorbing, into their proper places and without exaggerating their
importance, many other factors that are worked up into unique motors of the
cyclical movement by other theories, such as 'psychological’ factors, monetary
factors, acceleration, undersaving. SpiethofFs analysis, therefore, comes nearest
to an organic synthesis of relevant elements and to full utilization of the co-
ordinating power of that starting point. And it has still another virtue: with
the possible exception of Marx, Spiethoff was the first to recognize explicitly
that cycles are not merely a non-essential concomitant of capitalist evolution
but that they are the essential form of capitalist life. Also he was one of the
first to observe that there are long periods during which prosperity phases of
cycles are accentuated by favorable conditions (‘spans of prosperity’) and other
long periods during which depression phases are accentuated (‘spans of depres-
sion’). He refused, however, to combine these drawn-out spells of predomi-
nant prosperity and depression into ‘long cycles’ and he reserved judgment as
to their causation.

It would be extremely interesting to compare SpiethofFs work on cycles
with the work of Robertson, which though independent of SpiethofFs, displays
affinity in important respects . 11 There is no similarity in method. Spiethoff

11 Professor D. H. Robertson’s publications start in January 1914 with an important
but all but unknown article (‘Some Material for a Study of Trade Fluctuations’) in the
Journal of the Royal Statistical Society that presented historical material in support of
the promising idea — which Robertson failed to exploit but which never vanished com-
pletely from his horizon — that cycles have something to do with the impact upon the
economic process of new industries, some booms being connected, e.g. with railroad
building, others with inventions in steel production, electricity, the explosion motor,
and so on. Next came his Study of Industrial Fluctuation (1915), which drew a pic-
ture closely similar to SpiethofFs. The monetary complement (saving, forced saving,
credit creation, and so on) was added in his famous Banking Policy and the Price Level
(1926; 3rd ed., 1932) and elaborated in various papers most of which are reprinted in
Essays in Monetary Theory (1940). A passage in Banking Policy . . . (p. 5) is so im-
portant for the histoire intime of the monetary analysis of our day that quotation is
imperative: ‘I have had so many discussions with Mr. J. M. Keynes on the subject-
matter of Chapters v and vi [containing the monetary analysis], and have re-written
them so drastically at his suggestion, that I think neither of us now knows how much
of the ideas therein contained is his and how much is mine.’ This, of course, was J. M.
Keynes of the Treatise and not of the General Theory, but there were in. Robertson’s
book some pointers also toward the latter. In view of the later disagreements between
these two eminent men, it is desirable to notice that, whatever their immediate cause,
there was always this fundamental difference: Keynes concentrated on monetary as-
pects and monetary policy from the first, whereas Robertson emphasized ‘real factors’ —

112

8 IV: FROM 1870 TO 1914 AND LATER

in. A few examples will suffice to display the fact that most theories of
cycles are nothing but different branches of that common trunk, 'plant and
equipment/

First, the reader will realize without difficulty that even the purely monetary
theories of cycles may be included among the 'investment theories/ For al-
though they locate the causes of the cyclical movement in the monetary
sphere, effects upon the plant-and-equipment industries are bound to play
some role. If, in particular, explanation pivots on the money rate of interest,
disturbance, in the structure of 'physical capital’ must always be a factor in
cyclical situations though, especially from a short-run point of view like, for
example, Hawtrey’s, it need not be made the decisive one. If we do make it
the decisive one, we get the non-monetary or semi-monetary theory of Hayek —
increased production of durable plant and equipment ('lengthening of the
period of production’) through a fall of the money rate of interest below the
marginal rate of profit.

Third, whatever it is that gives the prosperity impulse, we may derive a dis-

13 Of the interesting papers by Minnie Throop England, we note especially 'Promo-
tion as the Cause of Crises/ Quarterly Journal of Economics, August 1915, and 'An
Analysis of the Crisis Cycle/ Journal of Political Economy, October 1913.

KMi

MONEY, CREDIT, AND CYCLES

1129

tinctive theory, by emphasizing the indubitable fact that the plant and equip-
ment, construction of which is undertaken in reaction to such an impulse,
takes time to get into existence and working order — time during which there
is nothing to blunt the edge of that impulse. Consequently, when later on
the stream of additional products impinges upon consumers’ goods markets,
something like ‘general overproduction,’ that is, a price fall that turns expected
profits into actual losses, may result. If we trust this explanation sufficiently,
we can speak of a ‘lag theory’ of the cycle. We get another version if we put
the main emphasis, instead of on the fall in the prices of consumers’ goods,
on the rise in the price of cost items. The former version may be exemplified
by the works of Bouniatian and Aftalion, the latter by that of Lescure, though
there is much in all three of them to relieve the pressure on the factor pri-
marily stressed . 14 Incidentally, we may infer from this that he who says that
business cycles are primarily cycles in prices may mean exactly the same thing
as he who says that they are primarily cycles in investment.

14 Mentor Bouniatian, W irtschaftskrisen und Ueberkapitalisation (1908), enlarged as
Les Crises economiques (Russian original, 1915; French trans. 1922); A. Aftalion,
Les Crises periodiques de surproduction (1913); J. Lescure, Des Crises generates et
periodiques de surproduction (1906; 3rd ed., 1923). All three of these authors, but
especially the two last, are particularly notable for strict adherence to Juglar’s methodo-
logical principles.

II30 IV: FROM 1870 TO 1914 AND LATER

theories may be strong so long as they aver that saving is an ultimate and in-
dependent ‘cause’ of disturbance, it should never be denied, on the one hand,
that there are plenty of hitches in the saving-investment mechanism and,
on the other hand, that saving, in a depression that has already set in for
reasons other than saving, may make things worse on balance than they
otherwise need be, especially if saving takes the form of hoarding as it is
likely to do in a depression. But the leaders of prevailing opinion, though they
had occasional glimpses of all this , 16 completely failed to go into the matter
properly — a fact that explains much in the recent history of economics. They
evidently attached but little importance to these possibilities of disturbance.
They did not even emphasize the role in the cycle of that saving which is be-
ing used for the repayment of bank loans. Thus a considerable tract of open
country was left unguarded in which, to the backward glance of the economist
of today, there seems to stand, in something that to many looks very like a
halo of glory, the figure of J. A. Hobson. Actually, his was not a solitary figure.
Nor did he come very near to having anticipated the. doctrines of present-day
Keynesianism. But we shall confine ourselves to him . 17

In most cases, there is no sharp dividing line between underconsumption
theories and others. Some, though not all of them, might just as well be
couched in terms of overproduction or overinvestment, monetary or ‘real’ —
whereupon it becomes easy to see that they are but another branch of the
plant-and-equipment tree. This is particularly clear in the case of the type of
oversaving argument that was espoused by Hobson. Today most writers who
see saving in the role of villain of the piece aver that the mischief arises from
savers’ not spending at all, either on current consumption or on ‘investment
goods’: the problem then is to show why, having saved, people refuse to in-
vest, thereby creating unemployment and pools of idle money . 18 But though
Hobson notices this aspect of the matter he based, not quite logically, his ex-
planation of cyclical fluctuations and of the incident unemployment upon an
entirely different argument. With him saving produces alternating prosperities
and depressions precisely because savers do invest promptly and thereby in-
crease the productive powers of the economic engine beyond the possibility
of sale at cost-covering prices. This line of reasoning may be labeled Overpro-
duction-through-Saving and is certainly not Keynesian. But Hobson, -like Tugan-
Baranowsky before him, went on to point out that most saving is done by the
relatively rich, and he used this fact to arrive at the proposition that the ulti-
mate cause of cyclical disturbance and of the incident unemployment is the

16 For such a glimpse, in the case of Marshall, see Keynes’s General Theory , p. 19m

17 See above, ch. 5, sec. 2a. The two books that bear most directly on the sub-
ject of this section are: The Industrial System (1909) and Economics of Unemploy-
ment (1922).

MONEY, CREDIT, AND CYCLES 1131

inequality of incomes. Therefore, we shall understand why economists who are
interested in nothing but politically relevant results will hail Hobson as a fore-
runner of Keynes . 19

Both followers and enemies have experienced difficulty in attributing to
Marx any clear-cut theory of cycles. The obvious reason for this difficulty is
that Marx did not live to systematize his ideas on the subject: his theory re-
mained the great ‘unwritten chapter' of his work. But there is another and
more fundamental reason. His topic was capitalist evolution. Everything he
ever wrote, even his scheme of a stationary society, was written to elucidate
this topic. Capitalist evolution was to end in the breakdown of the system.
But he early adopted the idea — it is already in the Communist Manifesto —
that the current crises were previews of this breakdown, that is to say, the
same kind of phenomenon that need only intensify itself in order to bring
about definitive breakdown (the economic complement of the Revolution ). 20
Therefore, all the elements of capitalist reality were, directly or indirectly, rele-
vant also to his vision of the cyclical phenomenon. The ‘unwritten chapter’
would have had to sum up the whole of his analysis of capitalism. And the
whole of this analysis in turn centered in (1) the production of ‘real capital’
and (2) in the factors that change its composition (relative increase of constant
compared with variable capital 21 ) . These are the unifying conceptions to
which must be referred what otherwise may easily appear to be disjointed and
even contradictory hints. There are, of course, many of these, such as: capi-
talists’ ineluctable craving for accumulation (regardless of return) that is to
motivate bursts of investment activity — the weakest point, though buttressed
by various suggestions about more substantial factors; the ever-present impulse
that produces manias and crashes (vividly but superficially described by

19 As Lord Keynes himself has pointed out (General Theory, ch. 23, vx), Gesell’s
claims to that honor are. much stronger.

20 This is why it was essential for Marx to assume, and if possible to prove, that
crises would increase in intensity as time went on, a thesis that was abandoned by
Hilferding (1910) and eventually also by Kautsky, who had put up the most elaborate
defense of it in 1902. Most other cycle analysts of that period either did not pro-
nounce upon the subject — which means, I take it, that they did not see any reason
why depressions should grow either more or less severe — or were inclined to take the
opposite view. It is important to bear in mind that this opposite view may mean two
different things: first that the fundamental movement would decrease in amplitudes or,
second, that people would learn to handle surface phenomena and effects (speculation,
swindling, bank failures, shrinkage of expenditure owing to unemployment) so that the
observed amplitudes would grow smaller though the underlying process remains the
same. No such distinction was explicitly made, however, so far as I know, in any of
the more influential writings.

21 Constant capital is, of course, not the same as plant and equipment, but the rela-
tive increase in the latter is the salient point about that process.

1132 iv: FROM 1870 TO 1914 and LATER

Engels); the tendency of the rate of profit to fall (whether or not satisfactorily
motivated); overproduction and anarchy (uncertainty) of capitalist decision;
recurring periods of reinvestment (renewal of the physical apparatus of produc-
tion) with periods of reduced activity to follow. There were others, among
them a clear pointer toward underconsumption by the laboring masses as the
'last cause of all real crises’ ( Capital , vol. in, p. 568) and toward the conse-
quent inability of capitalists to 'realize’ the surplus value that 'exists’ in the
commodities that have been produced. Conflicting evidence makes it impos-
sible, however, to impute to Marx an underconsumption, theory of cycles
though it remains possible to attribute to underconsumption a role in condi-
tioning an ultimate state of stagnation. 22

But none of these hints, taken by itself, nor their sum total amounts to a
theory of cycles. So far as Marx himself is concerned, the historian of analysis,
after having noticed the basic conception and also perhaps the particularly un-
satisfactory handling of money and credit, must leave it at that. All the same,
there are a number of Marxist cycle theories. But they should be attributed
not to Marx but to their authors — Marxists who, either selecting hints that
appealed to them more than others or trying to develop, from the Marxist
basis, ideas of their own, provided substitutes for the 'unwritten chapter’ rather
than reconstruction of it — fully believing, no doubt, that they were interpret-
ing Marx and always keeping in mind the cherished relation between the
crises of experience and the ultimate catastrophe of capitalism. It is not pos-
sible to survey them in a sketch like this. 23

22 The conflicting evidence is widely scattered. But see, e.g., Capital, vol. n, p. 476,
where Marx avers that the share of the working class in the consumable product in-
creases in the period preceding a crisis. The weight of this passage is enhanced not so
much by the fact that Marx, a few lines before, declared the proposition that crises
were caused ‘by the scarcity of solvent consumers’ to be ‘purely a tautology,’ as by
the fact that the proposition follows logically from his own scheme.

23 P. M. Sweezy's work, though in this matter somewhat impaired by an evident
desire to turn Marx into a Keynesian, will again prove extremely useful as a help for
further study. I will merely repeat names already mentioned: O. Bauer, Bukharin,
Grossmann, Hilferding, Kautsky, Luxemburg, and Sternberg. The best analysis of Marx’s
own views that I know of is that by H. Smith, ‘Marx and the Trade Cycle/ Review
of Economic Studies, June 1937.

analysis, it is natural to locate the ‘causes’ of observed disturbances either out-
side of the economic system 24 or in the fact that the economic engine, like
any engine, never works with precision. And this attitude toward observed
fluctuations was the common root — or common characteristic — of another
group of theories that also seem at first sight to have nothing to do with
one another . 25 We shall notice three examples.

First, the most exogenous of all factors that influence economic life is varia-
tion of harvest in so far as due to weather, a factor pressed into service for
the purpose of explaining business fluctuations by W. S. Jevons, H. S. Jevons
(his son), and H. L. Moore . 26

Second, the fact that the economic engine is likely to stall may be exploited
for the purposes of business-cycle analysis in various ways. The most direct one
is to attribute responsibility to uncertainty in general, which will result in ‘er-
roneous’ decisions. But since this uncertainty is, in many respects, due to the
fundamental properties of the private enterprise economy, we may also di-
rectly accuse the latter’s institutions . 27 And since individual errors cannot con-

25 Another group of theories that would overlap with ours also may be related to the
unduly great confidence that the best theorists of the period placed in the equilibrium
analysis. This group may be called the Disproportionality Theories and comprises theo-
ries that locate the source of cyclical troubles, in ‘maladjustments’ as between different
groups of prices and quantities. This idea comes naturally to anyone who accepts Say’s
law as a starting point of his analysis of cycles (not necessarily his general theory of the
economic process) and is moreover easy to substantiate from observation of certain very
obvious facts. A large number of economists could be quoted — though principally econ-
omists who were not specialists of business-cycle analysis — who were, content to accept
it. But I have not chosen this point of view for discussion, because Disproportionality
remains an empty phrase so long as it is riot linked with definite factors that are to
account for it and because, so soon as it is so linked, those factors and not dispropor-
tionality per se will individuate an author’s theory. As an example of an analysis that
stresses certain types of disproportionalities — that are mainly due to lags — E. Lederer’s
Konjunktur und Krisen (in Grundriss der Sozialokonomik, Part iv, xi, 1925) may,
however, be mentioned.

26 W. S. Jevons’ papers were reprinted in Investigations in Currency and Finance
(1884); H. S. Jevons, The Sun's Heat and Trade Activity (1910); H. L. Moore, Eco-
nomic Cycles: Their Law and Cause (1914).

27 The reader will realize that this ‘explanation’ may easily degenerate into generali-

II34 IV: FROM 1870 TO I914 AND LATER

vincingly be held to produce big disturbances, unless they are overwhelmingly
one way, we may put our trust in ‘waves of optimism and pessimism,’ a version
that was quite common and later on was to appeal to such authorities as Pigou
and Harrod. 28 There are many other variations of this theme, none of which
is entirely void of a modest element of truth and all of which are unequal to
the burden put upon them.

Third, so long as we do not see much ground for believing that the eco-
nomic system produces general fluctuations by virtue of its own logic, we may
easily conclude that these fluctuations arise simply whenever something of suf-
ficient importance goes wrong, no matter for what reason. Roscher had al-
ready delivered himself to this effect, and no lesser man than Bohm-Bawerk
once expressed the opinion 29 that there was no general explanation of either
cycles or crises: they belong in a ‘last chapter’ of an economic treatise where
all their possible causes should be listed. There is more in this opinion — I am
inclined to believe that Marshall would have agreed with it — than appears at
first sight, though Juglar’s achievement suffices to show up its inadequacy. It
takes account of, though it overstresses, the fact which is so often neglected
by ardent ‘theorists,’ namely, that every cycle is a historical individual to some
extent and that unique combinations of circumstances must enter largely into
every analysis of a particular case. Moreover, it bars effectively all those single-
factor explanations that rest on nothing but their author’s pet aversions — such
as saving or exploitation. Finally, it invites detailed study of individual mech-
anisms, which carries us a long way, though not the whole way. The bulk of
what has been done on this line belongs, however, to the postwar period: the
necessary analytic techniques were slow to develop. 30 [On these postwar de-
velopments, see below Part v, ch. 4, Dynamics and Business Cycle Research.]

ties that are as indubitable as they are empty. A classical example of this is the state-
ment that ‘the “cause” ... of business cycles ... is to he found in the habits and
customs [institutions] of men which make up the money economy. . .’ (L. K. Frank,
‘A Theory of Business Cycles,’ Quarterly Journal of Economics , August 1923).

28 See Pigou’s Industrial Fluctuations (1927) and Harrod’s Trade Cycle (1936). In
justice to both authors it must, however, he added that their important contributions
to our understanding of cyclical phenomena are entirely independent of, and but little
impaired by, their partiality to that theory. In England, Professor Robertson is its most
eminent opponent.

29 I am sure of this but am unable to provide the reference. If my memory serves me,
he said it in a review. [Professor Haberler, who read this work in manuscript, suggests
that J. A. S. is referring to Bohm-Bawerk’s review of E. von Bergmann's Geschichte
der nationalokonomischen Krisentheorieen (1895), Zeitschrift fur Volkswirtschaft, So-
zialpolitik und Verwaltung (vol. vii, 1898).]

30 Several authors of the period under survey made, however, use of the ‘principle of
acceleration’ (see Haberler, op. cit. pp. 85' et seq.). And there were several contribu-
tions that, though they passed unnoticed, foreshadow later developments. The ‘hog
cycle,’ e.g., was discovered by S. Benner as early as 1876 ( Benner’s Prophecies of Fu-
ture Ups and Downs in Prices ).

MONEY, CREDIT, AND CYCLES

“35

technique, date from before 1914 — an instance of continuity in development
or of filiation of ideas that is all the more interesting because conscious ef-
fort was all the other way. Fairly satisfactory synthesis that would have left
no major fact unaccounted for and would have constituted an excellent basis
for further research was ‘objectively’ possible by then. Why was it not at-
tempted? The answer seems to be that objective possibility is one thing and
its realization quite another thing: no more than any other history can the
history of research afford to neglect the personal element. Entangled in con-
troversy that was often petty, enamoured of their own ideas and particular
emphasis, economists plodded along successfully enough. But nobody rose to
what would indeed have been a most difficult feat of leadership. 31

In view of an entirely unfounded criticism that many of us are in the habit
of directing against the work of that time, it should be added that economists
did not fail to offer explanations of unemployment that were certainly not
obviously inadequate. By going once more over the contributions that have
been mentioned and scrutinizing them for their implications concerning un-
employment, the reader can easily satisfy himself of this. Sectional and gen-
eral, technological and ‘monetary,’ temporary and ‘permanent,’ types of un-
employment were all in the picture that would have resulted from an effort
at balanced synthesis — even our own mistakes were there. The indictment that
the economists of that time disposed of all unemployment as merely frictional
is true only if we adopt so wide a definition of friction as to render the indict-
ment tautological. 82

But another indictment stands against the vast majority of the economists
of that period if it be indeed proper, considering the analytic situation in which
they worked, to call it an indictment: with few exceptions, of which Marx was
the most influential one, they treated cycles as a phenomenon that is super-
imposed upon the normal course of capitalist life and mostly as a pathological
one; it never occurred to the majority to look to business cycles for material
with which to build the fundamental theory of capitalist reality. 33

31 In the postwar period, Pigou (op. cit.) came perhaps nearest to accomplishing
that feat.

32 The indictment may he made more tenable by reformulating it to the effect that,

. without denying persistence of unemployment as a fact, the analysts of that period, and

Marshall in particular, treated full employment as the ‘norm’ toward which the system
incessantly ‘tended.’ If by the term ‘norm’ we mean a property of the logical schema
of perfect equilibrium under perfect competition, the indictment fails, because it can
be proved that within this logical schema there would in fact exist no involuntary un-
employment. If by the term ‘norm’ we mean a property of reality, namely, a tendency
of the capitalist system, as it actually works, to approach full employment and to stay
there until something occurs to drive it off the full-employment state, then it becomes
true to say that the economists of the Walras-Marshallian type were inadequately
aware of the qualifications subject to which existence of such a tendency may be as-
serted. At the same time, the indictment does not amount to more than this.

33 [This, of course, is what J. A. S., himself, attempted in his monumental Business
Cycles: a Theoretical, Historical, and Statistical Analysis of the Capitalist Process (2
vols., 1939) and much earlier in his Theorie der wirtschaftlicheri Entwicklung (1912;
2nd rev. ed. 1926; English trans.. Theory of Economic Development, 1934).

Part V

CONCLUSION

A Sketch of Modern Developments

CHAPTER 1

[Introduction and Plan]

i. Plan of the Part ‘ 1139

2: The Progress op Theoretical Economics during the Last Twenty-Five
Years 1 140

(a) Introductory Lecture-on the Scope of the Course 1140

(b) The Marshall-Wicksell System and Its Development 1142

(d) Income Analysis ' 1143

(e) Summary of the Course 1144

[3. Background and Patterns] 1145

1. Plan of the Part

Once more we change our rules of procedure. The surveys presented in the
three preceding Parts were indeed far from complete. But though incomplete,
they aimed at conveying fairly comprehensive pictures. So far as scientific eco-
nomics in the usual sense is concerned, no significant man or work or move-
ment was left out — not intentionally, at least — and I have done what I could
do within this volume .to ;touch upon the more important framework and
frontier questions. In this Part, we shall not go on with this plan. In a sense,
our inquiry ends, at the foothills of the Marshall-Wicksellian mountain range,
with the last glance at the classical situation around 1900. If we go on at all,
it is with a different and much more restricted purpose. It seemed desirable,
first, to show how the work of that period fared in our own time; 1 second, to
point out some roads that are leading away from and beyond it; and, third,
to attempt diagnosis and prognosis of contemporaneous efforts. This will at
best give us a bird’s-eye view of just a few great contours with all The details
and all the frontier districts left out. More than that, this , view will have to be
highly selective. ... -

I cannot even list all that I am going to leave out. But I will illustrate it by
mentioning two men: Gotti and Spann. The widely different messages of these
men, as is indeed obvious from the considerable body of literature produced
by their followers, have shaped many a mind. In this sense, they are possibly

1 .[To a considerable extent, J. A. S. bad already done this in Part iv. It will be re-
called that, when outlining the plan of the book in Part .1, he wrote: ‘Part iv will pre-
sent an account of the fortunes of analytic or scientific economics from the end of the
“classic” period to the First World War though the history of some topics will (for the
sake of convenience) be carried to the present time. . . . Part V is merely a sketch of
modern developments, relieved of some of its cargo by the anticipations in Part iv
that have just been mentioned, and aims at nothing more ambitious than helping the
reader to understand how modem work links up with the work of the past.’]

1139

H40 V: A SKETCH OF MODERN DEVELOPMENTS

more important than any two high-powered technicians of economic theory.
But they are not important for us. We are concerned with the technicians.
He who writes a history of, say, agricultural technology does not thereby prove
that he thinks it more important than the history of religion. Only so far as
those authors — or any other of the same type — actually attempted analytic
work in the sense adopted for the purposes of this book, does our failure to
deal with them carry implications to which they or their adherents could ob-
ject. Is this quite understood?

[J. A. S. never finished this introduction to the Conclusion nor did he cover some of
the topics he planned to include. In place of the introduction he would have written,
there is presented in the next section a summary of five lectures, which were outlined
at the same time that he was planning Part v and the last two or three chapters of
Part iv and which presumably summarize what J. A. S. considered to be the main lines
of advance in the recent period.

What he actually intended to cover in the Conclusion (in addition to chs. 2, 3, 4,
and 5 below) can only be guessed at from two pages of abbreviated notes (mostly in
that maddening shorthand), which are reproduced in the Appendix. Among the 'things
still entirely lacking in (Part) v’ he listed:

(1) Morgenstem and von Neumann, Theory of Games and Economic Behavior
(i944)

(2) Leontief’s Linear Programming

(3) Income Analysis — Social Accounting

(4) . . . Chenery (Engineering Production Functions) . . . Frisch

(5) (Several lines of shorthand notes)

From the second paragraph of section 3 (this chapter), it is obvious that J. A. S. also
intended to comment on the 'unprecedented wealth of statistical facts’ and on Econo-
metrics, ‘the new relation between economic theory and statistical methods.’]

2. The Progress of Theoretical Economics during the Last Twenty-

Five Years 1

(a) Introductory Lecture on the Scope of the Course. The First World War caused
a complete change in the economic policies of all nations which has persisted ever since.
This was due, first, to the fact that all nations have had to face new problems arising
out of political and economic situations in which they had never found themselves be-
fore. But, second, this change in policies was due also to the fact that the war had
thoroughly upset the previous distribution of political weights. Thus, we observe not
only new problems and new situations but also new attitudes toward them.

1 [J. A. S. delivered a course of five lectures in January 1948 at the School of Eco-
nomics, University of Mexico, on this subject, which coincides roughly with what was
intended for Part v (partly anticipated in Part iv). What follows is a brief summary
of those lectures, written in advance for translation into Spanish and presented here in
place of the Introduction and Plan, which were never completed. The summary is
printed in full despite certain repetitions; references in square brackets show where the
subjects are treated in the History. These lectures were, of course, planned for a mixed
audience and were of necessity rather general and elementary.]

INTRODUCTION AND PLAN

j Economics and Political Economy. Economists moved with the times and a signifi-
cant change occurred in their views about practical questions. The sum total of these
views together with the schema of social values that underlies these views we shall call
Political Economy. Accordingly, we say that a new Political Economy arose after 1918.
But, however interesting it would be to describe this new Political Economy and to in-
quire into its sociological roots, this is not our task in this course. The new views on
economic policy will be considered only so far as they are relevant to the development
of scientific economics.

By Scientific or Analytic Economics, in contrast to Political Economy, we shall mean
the stock of facts and methods that economists collect with the purpose of explaining
the phenomena of economic life. The difference between this analytic economics and
political economy can be illustrated by analogy with the difference between the subjects
that are taught at a faculty of medicine. Such a faculty has professors of surgery, in-
ternal medicine, and so on who teach the practical art of treating patients. But there
are also professors of chemistry, physiology, biology who teach the scientific founda-
tions of that art but not that art itself. It is with the analogues of the latter that we
are concerned.

Economics and Economic Theory . We shall restrict our subject still further. Perhaps
the most important progress that has occurred in scientific economics is the vast in-
crease in our command over facts. All types of information about facts have increased
beyond the boldest dreams of past generations but our epoch has been particularly char-
acterized by an increase of statistical information which was so great as to open up
quite new possibilities for scientific research. In step with this increase of statistical
material, there has been an equally important development of statistical methods. But
we shall disregard all this and concentrate our attention on the developments in that
restricted field which is called Economic Theory.

So many misunderstandings still prevail about the nature, use, and limitations of
Economic Theory that it is necessary to explain our conception of it. There was a time
when Economic Theory meant precisely what we have called Political Economy above:
there was a 'liberal' or 'socialist' or 'mercantilist' theory, and all those theories more
or less meant political doctrines or at least practical recommendations. This is not the
modern view. The modem economist considers theory simply as an instrument of re-
search. This instrumental character of economic theory will be illustrated by examples
which will also explain the relation that nevertheless exists between economic theory
and economic policy.

Precisely because economic theory is only an instrument of research, it cannot pro-
duce concrete results without the facts that are supplied by statistics or non-statistical
description. This had been realized already by the Spanish economists of the sixteenth
and seventeenth centuries. But the alliance between statistics and theoretical economics
was not complete until the emergence of modem Econometrics.

The Main Lines of Advance within Economic Theory. The most obvious way in
which sciences advance is by new departures, that is, by the discovery of new facts, or
new aspects of old facts, or new relations between facts. Examples will be given from
the history of physics and of economics. But there is another way. When we use the
concepts and theorems that we have inherited from our predecessors, these concepts
and theorems — which we call the analytic apparatus of a science — change in our hands.
We add here and correct there and so this apparatus slowly develops into a different
one. It will be our first task to describe how, approximately between 1890 and 1914,
a system of economic theory consolidated itself and how this system formed the basis
of later work, which started in the early 19 20’s and transformed it without intending

V: A SKETCH OF MODEK.N DEVELOPMENTS

II42

to do so [Part v, ch. 2 of this History], Then we shall see how a new analytic ap-
paratus developed which is known as economic dynamics [Part v, ch. 4 of this History ].
Another new departure, mainly associated with the name of Lord Keynes will be con-
sidered next [Part v, ch. 5]. And, finally, we shall sum up what has been accomplished
and what might be expected for the near future."'

(b) The Marshall-Wicksell System and Its Development. Scientific economics found
its systematic form in the eighteenth century (Beccaria, A. Smith, Turgot) and, after
various ‘revolutions/ in the Principles of Political Economy of J. S. v Mill. This system
was in turn revolutionized by the introduction :of the marginal utility principle (Jevons,
Menger, Walras). But another process of consolidation took place between 1890 , and
1914, and a theoretical system of apparatus emerged which is embodied in the standard
works of A. Marshall and K. Wicksell. A few minutes will be devoted to describing the
salient characteristics of this system and the extent to which it was accepted by the
professional theorists of all countries [Part iv of the History]. We shall then proceed to
discuss the main lines of advance that started from this system.

The Theory of the Individual Firm and Monopolistic Competition. Neither Marshall
nor Wicksell had neglected the task of analyzing the behavior of individual firms. But
their theorems, except in the case of monopoly, referred mostly to a whole group of
firms (industry) or even to the whole organism of the social economy. They hardly
realized the necessity of investigating more closely the behavior of the individual units
that combine to produce the phenomena which we associate with an industry or the
social economy. In analyzing this behavior theorists soon discovered that the case of
perfect or pure competition was a rare exception rather than the rule, and that the
economic organism, especially in cases of decreasing average cost, does not function
as it would under perfect or pure competition. From this a new body of theorems
arose, the theory of Imperfect (Robinson) or Monopolistic (Chamberlin) Competition,
the main features of which will be briefly characterized [Part v, ch. 2 of the History].

Indifference Varieties. In spite of the protests of Pareto and others, the theorists of
the Marshall- Wicksell generation used uncritically the concept of marginal utility. Dur-
ing the 1920’s and 1930’s this concept was rapidly discarded in favor of the ‘indiffer-
ence-curve’ approach. The reasons for this and the advantages of the indifference-curve
approach will be discussed briefly (See Hicks, Value and Capital , 2nd ed., 1946) [Part
iv, ch. 7, sec. 8 and App. and Part v, ch. 2] . The consequences of the passing of the
old marginal-utility theory for Welfare Economics can only be touched perfunctorily
[Part iv, ch. 7, Appendix: Note on the Theory of Utility]. .

Other Improvements of the Marshall-Wicksell Apparatus. With increasing scientific
rigor and especially with the increasing use of mathematics in economic theory, the
theorists have in the last twenty-five years been able to develop many of the doctrines
taught by Marshall and Wicksell and to correct others. An example of these develop-
ments is the theory of substitution which created the concept of elasticity of substitu-
tion. This conception is useful in settling in a few lines many problems that filled
pages and even volumes in the past (for instance the problem of the influence of the
introduction of machines upon the interests of labor). Corrections have been mainly
applied to the old theory of production by means of a closer analysis of the properties
of Production Functions [Part iv, ch. 7, sec. 8].

(c) Economic Dynamics. We call a relation static if it connects economic quantities
that refer to the same point of time. Thus, if the quantity of a commodity that is de-
manded at a point of time (f) is considered as dependent upon the price of this com-
modity at the same point of time ( t ), this is a static relation. We call a relation
dynamic if it connects economic quantities that refer to different points of time. Thus,

INTRODUCTION AND PLAN

1143

if the quantity of a commodity that is offered at a point of time (t) is considered as
dependent upon the price that prevailed at the point of time (f — 1), this is a dynamic
proposition. These definitions of the terms ‘static’ and ‘dynamic’ must be carefully
distinguished from others that have been used and are still used sometimes. The
Marshall-Wicksell system was essentially static.

The Importance of a Dynamic Theory. The necessity of developing a dynamic theory
rests upon three facts: (1) It is obvious that most quantities demanded and offered,
both of finished commodities and of factors of production, as well as prices and in-
comes are in reality related to other economic quantities that belong not to the same
moment but to the past or to the expected future. It is particularly obvious that
monopolists want to maximize gains, not for the moment but over a stretch of time.
(2). It is not so obvious but it is nevertheless true that this makes a great deal of dif-
ference to results. If we drop the hypothesis that each element of the economy depends
only on the other elements as they are at the same point of time, quite different results
and quite new phenomena emerge, for instance the phenomenon of endogenous fluctu-
ations. (3) Finally, the task of developing a dynamic theory is very difficult and cannot
be accomplished simply by adding dynamic qualifications to static theory. It requires
new techniques and raises fundamental problems of its own. An example of the new
techniques required is the theory of difference equations. An example of the new funda-
mental problems is economic equilibrium, which, if considered from a dynamic stand-
point, appears in a new light.

An Illustration: the Cobweb Problem. When farmers observe current prices of, e.g.,
pork and fodder, they will decide to produce more or less hogs according as hog pro-
duction is or is not profitable at this current relation between the prices of pork and
fodder. But this decision cannot take effect before a certain period has elapsed. The
resulting supply of pork will then impinge on the market and change the pre-existing
relation between the prices of pork and fodder. This will induce new decision by the
farmers and so on. This ‘cobweb problem' or ‘hog cycle’ will be discussed, under simpli-
fying assumptions, by means of a simple diagram. A similar problem is the so-called
shipbuilding cycle studied by Tinbergen ( Weltwirtschaftliches Archiv, 1931). [All the
problems outlined for this lecture on Economic Dynamics are treated in Part v, ch. 4
of the History.]

„ (d) Income Analysis. We have a strong scientific interest in reducing the number of
the economic variables with which we have to deal. If we tried to write down the
equations that determine the static equilibrium of millions of firms and households, we
should never accomplish the task. In particular, we could never marshal the statistics
that would be the necessary complement of such a system. This suggests the idea of
reducing the number of variables to a few great social aggregates. This idea is very old.
From the first economists have tried to reason on national income, national sum total
of wages, and the like. But it was only during the last quarter of a century that this
idea has been systematically followed up. It is clear that we should be in a much better
position to apply theory to statistics and statistics to theory if we could, for some pur-
poses or for all, confine ourselves to such variables as National Income, National Con-
sumption and Investment, Quantity of Money, Employment, and Interest Rates. Anal-
ysis which attempts to do so is called Macroanalysis (R. Frisch). Because the National
Income is the central variable in which we are particularly interested, it is also called
Income Analysis.

The Keynesian Theory. The most successful of all the theoretical systems that have
been inspired by this wish to simplify the structure of economic theory is the static
system that is associated with the name of the late Lord Keynes. Many others have

V: A SKETCH OF MODERN DEVELOPMENTS

11 44

also been constructed, for example, by Amoroso, Frisch, Kalecki, Pigou, Tinbergen,
Vinci. Lord Keynes used only four variables explicitly: quantity of money (deposits),
consumption, investment, and interest rates. Income enters also, but is simply identical
with consumption plus investment. The price level is eliminated by the use of 'wage-
units’ or labor hours in which all quantities are expressed. Employment is wedded to
income by the assumption that it is strictly proportional to income expressed in wage-
units. The variables are linked together by three relations: the liquidity-preference func-
tion, the consumption function (which implies the famous 'multiplier’), and the invest-
ment function, all of which will be briefly explained.

Discussion of the Keynesian Theory. Keynes presented his theory as a macrostatic
system. But it is possible to turn it into a macrodynamic system without great difficulty.

It is much more serious that Keynes assumed not only that methods of production
remain unchanged but also that the amount of industrial equipment does not vary.
This restricts his analysis to very short periods of time (3-10 months). Moreover, since
technological change is the essence of the capitalist process and the source of most of
its problems, this assumption excludes the salient features of capitalist reality.

The novelty in Keynes’s theory of saving consists simply in this. Before Keynes, econo-
mists used to take it for granted that, normally, , savers invest whatever they save.
Keynes assumed that people save without having any definite intention to invest and
that, when they have saved, they may decide not to invest at all but to keep their
savings in the form of money ( General Theory of Employment, Interest, and Money,
1936, pp. 165-6). On this alone rests the peculiar features of his theory of interest. But
saving without investment occurs only in deep depressions, that is to say, in about one
year out of every ten on the long-time average. The concept of marginal efficiency of
capital is not the same as the old marginal productivity of capital, but essentially it ex-
presses the same facts.

Keynes’s theory of wages is interesting because it seems to supply an explanation of
permanent unemployment as distinguished from cyclical unemployment. But it does
so only by means of the assumption that monetary wage rates are rigid. And nobody
has ever denied that unemployment may persist indefinitely in this case.

The Success of the Keynesian Theory. We have seen that fundamentally Keynes ac-
cepts the Marshallian apparatus of economic theory and that he only adjusted it in a
number of points. But these points were very important for the explanation of the de-
pression of the 1930’s and therefore rightly attracted attention. Moreover, his simple
system that considers only a few aggregates was easy to master and to manipulate. From
these factors of scientific success we must, however, distinguish a much more potent
factor of political success. Keynes seemed to present an argument that saving,, the great
virtue that the majority of bourgeois economists from A. Smith on had always extolled,
was really a vice that was the cause not of capital formation but of unemployment and
capital destruction. This attracted many people who had for other reasons renounced
allegiance to the values of capitalist society, and thus made Keynesian doctrine — not
quite logically — the banner of economic radicalism. [All the salient points of this Lec-
ture on Income Analysis will be found developed in Part v, ch. 5, 'Keynes and Modem
Macroeconomics.’]

(e) Summary of the Course. It is impossible to foresee what future generations will
think of the work in economic theory from 1920 to 1945. We can survey the points
which posterity will have to judge but we cannot pronounce upon their value. One
thing must be kept in mind, however. The economic theory of our own time and of
all future times can never again be so fascinating to the wider public as it had been
in the times when it was understandable to every educated person and when it seemed

INTRODUCTION AND PLAN

II45

to establish directly 'eternal laws’ and practical rules. Everyone can understand A.
Smith. Only specialists can understand the matrix calculus and functional equations.
Everyone is interested in free trade or protection. Only specialists are interested in
questions of determinateness and stability.

The Progress in Technique. The one thing that can be confidently asserted about
the work of the period we have been surveying is that the theory of 1945 is greatly
superior to the theory of 1900 as regards technique. Results are more reliable, proofs
are more rigorous. This in itself also means more results and more specialized results
that fit better the endless variety of the configurations of economic reality. At the same
time it must be admitted that fundamentally new ideas have been almost wholly
absent. We make much more of the ideas which we have inherited from the pre-
ceding period and often present them in a new light, but we have added little
to them. As a conspicuous example, the theory of Business Cycles will be briefly dis-
cussed in order to show that all the essential ideas were developed before 1914 [Part v,
ch. 4].

Economic Theory in the Service of Economic Policy. Modem theory no longer un-
dertakes to show that free trade is the right policy for all times and places. But it
shows much better than could have been shown by Smith or Mill what will be the
effects of a particular measure of protection on the interests of all classes of society.
Modem theory no longer undertakes to prove that perfect competition is an ideal. But
it can show what the effects of given deviations from competition will be. Modem
theory no longer recommends saving under all circumstances. But it gives to economic
policy a complete description of the process of saving and of the effects that different
kinds of saving will exert upon the economic situation of a country. Many other ex-
amples could be cited in order to show that modem theorists are developing an ap-
paratus that is indeed no longer simple but will render in the end the same service to
economic policy which theoretical physics renders to engineering.

Planning and Socialism. What has just been said may be applied to any kind of
economic planning. Economic theory is slowly developing the mental instruments that
are necessary in order to 'rationalize' planning and to tell planners what they must
do and avoid in order to attain certain given ends. If a socialist society is defined as the
perfectly planned society, then we may further say that modem theory is building the
foundations of a truly 'scientific’ socialism [Part iv, ch. 7, sec. 5]. To say that pure
theory is of no interest for practice is as unreasonable as to say that pure mechanics
is of no interest for building the machines we want. The ends themselves, that is to
say, the kind of society or culture we want, we must choose ourselves. No science can
do more than indicate the means of attaining whatever it is we want.

[3. Background and Patterns] 1

Very roughly, the beginnings of what I believe to be a new period in the
history of economic analysis date from the First World War. But this was a
coincidence. Causally, that world war had littlfe to do with the new tendencies,
which in fact were discernible before 1914* The public, of course, was under
the impression, as it always is in any epoch of striking events, that the eco-
nomic phenomena it observed were entirely novel, unheard-of, and of a na-

1 [Apparently J. A. S. intended td do here very briefly what he did for the preceding
period in Part iv, ch. 2.]

II46 V: A SKETCH OF MODERN DEVELOPMENTS

ture to upset completely the schemata of analytic economics. And it was a new
experience for some people to be poor instead of rich and for others to be rich
instead of poor, for some to see their interests championed by politicians in-
stead of ignored, for others to see their interests attacked by politicians in-
stead of defended as they used to be. But no economic fact or process ob-
servable during that war and its aftermath had anything new to teach to the
scientific economist. The inflationary processes in particular fitted beautifully
into the oldest of old schemata. Nor is this anything to wonder at. Economics
is a very unsatisfactory science. But it would have to be much more unsatis-
factory than it is if such an event as a war, however extensive and destructive,
sufficed to upset its teaching.

The fundamental independence from war influences of the developments
that brought about a new period of economic analysis can be easily established
by listing them. First, there was the unprecedented wealth of statistical facts.
Second, there were new results that grew out of working the old apparatus.
Third, there was the development of dynamics. Fourth, there was the new
relation between economic theory and statistical methods (Econometrics). It is
these four — obviously interdependent — aspects of contemporaneous work that
will be discussed in the chapters that are to follow. The rest of this chapter
will be devoted to the discussion of a matter of ‘atmosphere.’

Our time is one of transition, not only in the sense in which any time is of
necessity transitional, but also in the specific sense defined by rapidity, and by
universal awareness and expectation, of actual and impending social change of
a fundamental nature. Few will deny this. It will be convenient to state at
once the two ways in which that fact bears upon the scientific work in our
field.

The first things to occur to most of us are the new patterns and the new
problems. But so far as these are concerned, it is more important to realize the
extent to which they are but old friends in new sociological garb than it is to
realize the extent to which we are really facing new scientific problems. For to
begin with, we may repeat for recent economic history what was said a mo-
ment ago for the economic history of the First World War. Social patterns,
economic and other policies, economic situations are all quite different, but
this does not iri itself imply that new economic principles are either Suggested
by them or required in order to understand them. Thus foreign policies, eco-
nomic and other, that strike the good old liberal as novel heresies and more
enthusiastic observers as great discoveries would, as we have seen, have looked
very familiar to Malynes and Misselden. The labor contract is no longer ‘free,’
but not only has it never been so except during comparatively short spells of
history but also this does not mean a novel problem to the analyst — all he
has to do is to take a different model from his box of tools. Political rents —
payments from public funds to particular groups to which no specific economic
service corresponds — are a salient feature of modern society; but they were
not less important in the society of Louis XV: the fact that the recipients car-
ried different class connotations is, for purposes of purely economic analysis,
less important than it might seem. Friends and foes of the New Deal agreed

INTRODUCTION AND PLAN 11 47

in looking upon it as new. So it was in more than one sense. But not in ohr
sense: practically every measure that is covered by that slogan had been ob-
served and fully analyzed before. Nor is this all. There are possible events
that would create historically novel situations. Fullfledged (not bolshevist) so-
cialism, adopted by modern industrial society, is an example. But to the econo-
mist it would not present a new problem. The theory of a socialist economy
lies ready at hand, fully worked out in part by thoroughly bourgeois econo-
mists at a time when there was no hope or danger of that exercise in pure
theory ever being put to practical use. In this respect, economists were better

than was their, repute. .. .

Nevertheless, there are patterns and problems that are analytically novel.
Among the examples, I might have mentioned ‘going off gold/ devaluation, de-
preciation, exchange control, and other features of monetary management' as in-
stances of time-honored devices — only they were not always ‘honored’ and
hence they were known under uncomplimentary names. But this would be only
substantially, and not quite, correct We do see other sides of them that were
not seen before, and we have learned to reason about them in different ways.
Moreover, theory tends to become — in part intentionally, but still more unin-
tentionally — specialized when, by tacit agreement, theorists look for a long
time at the same social and, economic pattern. Its features are then taken for
granted, and many propositions are framed to fit even the least persistent of
them. If central banks are practically, treasury departments; if other banks have
almost lost all functions but the clerical ones of cashing checks and buying
government bonds; if the market rate of interest does not mean a thing and
money-market and stock-exchange mechanisms are well-nigh paralyzed; if the
profit motive of the industrial family is rapidly vanishing; if salaried employ-
ees administer the most important concerns; if private thrift and private in-
vestment have ceased to function, and income generation through government
expenditure is looked upon as a . normal element of the economic process, in
which taxation absorbs the higher incomes; and so on — then the relative im-
portance of the various pieces of the capitalist engine is so; thoroughly affected
(many of the pieces dp not work at all, whereas others that could be justifiably
neglected before assume a dominant role) that all the ‘applied’ fields will natu-
rally acquire an entirely different complexion. And theorists will redistribute
their emphasis upon their various models and work out some of them more
fully while shelving others. But it is important to realize that this is all and,
that from the standpoint of analytic technique it means much less than the
layman is inclined to believe.

[Unfinished; many shorthand notes and then a sentence, which began: ‘The other
way in which awareness of actual and impending change influences scientific work . . .’]

CHAPTER 2

[Developments Stemming from the Marshall-Wicksell

Apparatus]

[1. The Modern Theory of Consumers’ Behavior and the ‘New’ Theory of
Production] 1148

[2. Theory of the Individual Firm and Monopolistic Competition] 1150

[1. The Modern Theory of Consumers’ Behavior and the ‘New’
Theory of Production]

The modern theory of consumers’ behavior developed almost wholly dur-
ing the last quarter of a century so far as the doctrine is concerned that is
actually used and taught by the sector of the economics profession that is
primarily interested in theory in this sense. But what was and is being devel-
oped consists in methods and results, mainly associated with the work of
Fisher, Pareto, Barone, Johnson, and, if we do not mind adding a paper that
remained practically unknown for a decade or more after its publication,
Slutsky. This means that the fundamental ideas were present before the close
of the First World War, not in the form of embryonic suggestions only, but
well worked out, mainly by authors of international reputation, in forms ac-
cessible, so we should think, to every professional theorist. They had only to
sink in and to be clarified, amplified, applied, and occasionally straightened
out in the process. But little had to be added to them that was fundamentally
new. The situation was much as it was in the automobile industry: in spite
of all the improvements and new gadgets, a modern motor car is still much
the same kind of thing as the motor car of 1914. 1 Exactly the same holds for
what may still be called the new theory of production. And the concept of

1 While I think it necessary to emphasize this fact because it is quite essential in
order to understand the present situation, I do not wish it to be misunderstood. Such a
misunderstanding would be involved for instance in any impression the reader might
conceive to the effect that emphasis upon that fact implies derogation either of the
performance of our age or of the talent that went into it: a physicist writing in 1730
might have been equal in mental stature to Newton; but it was ‘objectively’ impossible
for him to produce another work like the Principia Mathematica (1687): he would
have had to bend to ‘objectively’ and ‘relatively’ lesser tasks. Similarly, it is no reflec-
tion upon either Frisch or Samuelson to include their performances in the category
of elaborating or continuing work. On the contrary, both performances illustrate well
the types of originality that were possible in the field of the theory of consumers’
behavior at the time they wrote: both performances produced novelties but novelties
like the self-starter and not like the Otto motor.

1148

DEVELOPMENTS FROM MARSHALL AND WICKSELL 11 49

elasticity of substitution illustrates well not only what has been done but also
wbat could be done in this field under the given circumstances. 2 3 * * * *

A historian, inspired by his observations about similar events in the past,
might have expected that Walras would have missed the boat, that is, that
his work, in an epoch that was able to understand him at last, would have
been thrown into the limbo where dwell the works that, inadequately appre-
ciated in their own time, were condemned on technical inadequacies of their
apparatus when their real time had come. This was not so, however. The work
on consumers’ behavior and on production that can be fitted into his system
and that, in part, was fitted in by Pareto, instead of preventing him from
taking his proper place, produced rather a modernized Walrasian system. This
process extends from 1924, when Professor Bowley’s Mathematical Ground-
work of Economics made Walras’ equilibrium system internationally accessible
— already modernizing it in many spots — to 1939 when Professor Hicks’s Value
and Capital, or the first two parts of it, completed the task. 8 To some extent
this book was particularly successful in unearthing Walrasian problems of
which Walras himself had not been aware. And, partly in its wake and partly
independently, a rich stream of contributions was released from which I shall
merely head by name’ the works of Lange, Metzler, Mosak, and — only alpha-
betically last — Samuelson. Much or most of this work pivots around questions
of determinateness and around stability conditions and thus constitutes the
bulk of the work of our day in the field of fundamental theory or even Grund -
lagenforschung.

2 Tor a general survey of the nature and uses of total and partial elasticity of substitu-
tion, see again Allen, Mathematical Analysis, pp. 341-5, 372, 504, and 512. The con-
cept, first introduced in its simplest form by Hicks (Theory of Wages, 1932) and Joan
Robinson ( Economics of Imperfect Competition, 1933), was immediately put to good
use by both authors in the formulation of propositions that acquire delightful simplicity
thereby (e.g., see also J. R. Hicks, 'Distribution and Economic Progress: 'A Revised
Version,’ Review of Economic Studies, October 1936). For a time the concept was
therefore deservedly popular but this popularity was soon impaired' by the related facts
that it ceases to be so simple so soon as there are more than two goods or ‘factors’
under consideration and that it works with difficulty when applied to statistical data.
I regret my inability to survey the results of the considerable literature to which the
concept has given rise. See however the discussions in Review of Economic Studies,
February 1934 and February 1936). Another example of this type of gadget is A. P.
Lemer’s measure of monopoly power (‘The Concept of Monopoly and the Measure-
ment of Monopoly Power,’ Review of Economic Studies, June 1934).

3 Even in those two parts, Hicks did much more than modernize Walras. So far as

mere modernization goes, he also modernized Marshall, and I do not mean to suggest

that ‘modernization’ describes those two parts of Value and Capital adequately. On the

other hand, Hicks’s treatment is much too brief to accomplish the modernization of

Walras and Marshall completely; it should be said rather that he produced essential

material for it.

1150

V: A SKETCH OF MODERN DEVELOPMENTS

[2. Theory of the Individual Firm and Monopolistic Competition]

Equally important, however, and much more important as regards direct
applicability to practical questions and hence for the economic profession as
a whole, is another development/that objectively stems from Marshall — the
Theory of the Individual Firm and in connection with it, the Theory of
Monopolistic or Imperfect Competition. 4 Everyone knows that this new arm
of the economist’s analytic engine was added, in different forms, by English
and American authors who worked independently of one another — a striking
proof of the intellectual, still more than practical, need for this type of theory
and a not less striking illustration, of how the logic of the scientific situation
may drive different minds along similar lines of advance. 5 In the United States,
The Theory of Monopolistic Competition sprang, without any warning, fully
armed from Professor E. H. Chamberlin’s head in 1933 6 and met with a

4 Still more than in other cases, I am anxious in this one to divest my emphasis upon
a historical filiation from any semblance of derogation. This emphasis seems imperative
because of two different sets of facts. First, Marshall, on the strength of his frequent
use of the concept of the (small) individual industry, to which in particular most of
his diagrams refer, has been sometimes accused of having neglected the economics of
the individual firm. But as we have seen, and as analysis of his argument (and of such
concepts as a firm’s special market or internal economies) could prove, he gave, on the
contrary, quite unusual attention to the problems of the individual firm and offered
suggestions that indeed called for development but force us, precisely because of this,
to look -upon later "work, especially by Marshallians, as an offshoot from his. Second,
Marshall’s concepts and treatment of the individual industry and of increasing returns
invited criticism: their very shortcomings were fertile; they spoke with so certain a
voice that the critic’s constructive task was cut out for him.

5 This and the fact that we have here to do with a brOad movement in which many
participate,- though only few make the decisive hits that history records, stand out still
more clearly if we take account also of the related literature on oligopolistic patterns
We then discern a similar movement in the Northern countries (see especially F.
Zeuthen, ‘Mellem monopol og konkurrence,’ Nationalpkonomisk Tidsskrift, 1929, and
Problems of Monopoly and Economic Warfare, 1930) and in Germany (see von
Stackelberg, Marktform und Gleichgewicht, 1934, who noticed and discussed most of
the German as well as the non-German contributions).

6 Chapter 8 (on distribution), the contents of which were first presented in a paper
read before the American Economic Association (at the meeting in Philadelphia, 1933)
and which was then published in extenso in Explorations in Economics (in honor of
F. W. Taussig, 1936), was added to the 2nd ed. of the book (1937). Chapter 7 — the
second chapter on selling costs — was omitted from the Ph.D. thesis handed in at Har-
vard on April 1, 1927 in order to meet the time limit, although it was fully worked
out by then. The thesis does not differ in any essential from the 1st ed. of the book
and, since it was in the stage of final revision for several months before, does not owe
anything to Sraffa’s article ('The Laws of Returns under Competitive Conditions’),
which appeared in the Economic Journal, December 1926. The author proposed the
subject for a Ph.D. thesis as early as 1921, when he was a student at the University
of Michigan (author’s communication). In Spite of subconscious influences that may
have come from early Marshallian training, we therefore have here a striking instance of

DEVELOPMENTS FROM MARSHALL AND WICJKSELL H51

corresponding success, which was as much due to the force and brilliance of
his exposition as it was to the maturity of the scientific situation. The work
claimed to reconstruct the whole of value theory by blending or fusing the
hitherto separate theories of monopoly and competition. Nor was this all. It
also claimed to teach a new economic Weltanschauung from the standpoint
of which practically all economic problems appear in a new light. In any case
the most important original contributions of the work — mainly contained in
Chapters 4-7 on product differentiation and selling costs — met with very little
fundamental dissent, if indeed with any. But a whole literature that amplified
and applied these contributions followed in its wake.

In England, Mrs. Joan Robinson’s Economics of Imperfect Competition,
also in 1933, impinged upon a less unprepared profession and, for this and
other reasons, was less spectacularly successful. As we know, Piero Sraffa, in
1926, had thrown out the idea that appeal to the theory of monopoly was the
remedy for the difficulties about equilibrium that had arisen in connection
with increasing returns. In doing so he had already suggested that actual con-
ditions in industry will in general lie in the intermediate zone between monop-
oly and competition and that, since it was the competitive theory which held
the field, it was then necessary To turn towards monopoly.’ Finding monopoly
thus released 'from its uncomfortable pen’ (Robinson, op. cit. p. 4) in which
it had existed, in seclusion from the main corpus of economic analysis, Mrs.
Robinson proposed to reconstruct the theory of value by allowing monopoly
to 'swallow up the competitive analysis’ — every firm being a monopolist, that
is, a single seller of its own product, and competition coming in by bits until
we reach the limiting case where a large number of such single sellers of per-
fectly substitutable products sell in a perfect market, and the demand for the
product of each of them becomes perfectly elastic, the case usually described
as perfect competition (op. cit. p. 5). 1, It should be observed that this concept

subjective and objective originality — and of originality of the purely theoretical type
that owed nothing to ‘the collection of direct empirical evidence,’ though a ‘guiding
principle’ certainly was to create a theory that would fit facts better than what Cham-
berlin conceived to be the theory of competition current at that time (author’s com-
munication). It seemed worth while to abandon, in this case, the principle of sketchi-
ness that governs our exposition, especially in this Part, not only because of the im-
portance of the book that — next to Keynes’s General Theory and with Hicks’s Value
and Capital and Hayek’s contribution — must certainly be considered as one of the
most successful books in theoretical economics that the period since 1918 has produced,
but also because its author is not, like most authors mentioned in this book, beyond
reach of personal interview. And personal contact, though only one of several methods
for studying the ways of the human mind and especially the manner in which original
work emerges and takes effect, is an important one and particularly useful in providing
a check on the others. Three elements of scientific achievement are particularly ob-
vious in this case: the maturity of the scientific situation; the ability to grasp an im-
portant idea with force and enthusiasm; and the ability to stay with it and to shut
oneself off from the disturbing effects of other scientific ideas or aspects.

7 In her Foreword and Introduction, Mrs. Robinson not only acknowledged obliga-
tion to Marshall and Pigou but gave ample credit to Sraffa, to whose papers — both the

1152 v: A SKETCH OF MODERN DEVELOPMENTS

of monopoly is not the traditional one. In fact the traditional concept can
be satisfactorily defined only by the criterion that it admits the application
of the Cournot-Marshall theory of monopoly. But this theory in turn presup-
poses the existence of a demand curve that is independently given and im-
mune to influences from other firms upon the behavior of the one under con-
sideration. Hence the traditional theory of monopoly is constitutionally un-
able to 'swallow up’ any cases where these influences cannot be neglected,
and hence the traditional concept of monopoly becomes inapplicable.

English and the Italian contribution mentioned in Part iv, ch. 7, sec. 8d — it is there-
fore necessary to recur in all questions that touch upon her fundamental analytic in-
tentions. This is rendered more difficult by the fact that Sraffa (see next sentence in
our text) did not use the word Monopoly in the Robinsonian but in the usual sense.
But she also acknowledged indebtedness to, or a sort of partnership in the spirit with,
a number of other fellow economists of whom we must in particular notice three.
There was Harrod, whose share in the analysis of impurely or imperfectly competitive
patterns must be valued more highly than his papers (including his ‘Doctrines of Im-
perfect Competition,’ Quarterly Journal of Economics, May 1934; ‘Imperfect Compe-
tition and the Trade Cycle,’ Review of Economic Statistics, May 1936; and Trice and
Cost in Entrepreneurs’ Policy,’ Oxford Economic Papers, May 1939) would in them-
selves indicate, especially considering the dates of their publication. And there were
Shove and Kahn, whose names may, at some future time, owe the greater part of
their recognition to Mrs. Robinson’s generous tributes. These tributes were fully de-
served (as was Keynes’s tribute to Kahn, see below ch. 5). Both are scholars of a type
that Cambridge produces much more readily than do other centers of scientific eco-
nomics or rather of science in general. They throw their ideas into a common pool.
By critical and positive suggestion they help other people’s ideas into definite existence.
And they exert anonymous influence— influence as leaders — far beyond anything that
can be definitely credited to them from their publications. I take this opportunity to
mention a point on which Mrs. Robinson lays great emphasis in her Foreword and in-
deed throughout her book, the ‘marginal revenue curve/ She gives credit, for both the
thing and the word, to several of her contemporaries, particularly to Mr. Harrod and
Professors Yntema and Viner. It is quite natural that use of this convenient tool sug-
gested itself at that time to many (including Chamberlin), especially to those who had
previously struggled with the clumsier Marshallian total curves. We must not, however,
forget that the tool was first used by Cournot, and no author of the 1920’s or 1930’s
can have any objective claim to it.

CHAPTER 3

[Economics in the 'Totalitarian'

Countries] *

1. Germany 1154

2. Italy 1156

3. Russia 1157

No explanation should be needed of what to sorpe leaders may seem to be
an unjustifiable neglect of 'totalitarian’ economic literatures. However I do
wish to state that such neglect has nothing to do with political prejudice. I
have no intention of neglecting any analytic work that has been done or is
being done in 'totalitarian’ countries, and the mere fact that such work is pre-
sented in the wrappings of a ‘totalitarian’ philosophy or even intended to
serve and to implement it is no more reason for me to neglect it than my
strong personal aversion to utilitarianism is a reason for neglecting the ana-
lytic work of Bentham. The various totalitarian philosophies themselves, how-
ever, are excluded — just as has been the utilitarian philosophy qua philosophy
— not because they are 'totalitarian’ but because they are ‘philosophies,’ that
is, speculations that live outside the sphere of empirical science. In this re-
spect we are merely carrying out a principle that has been followed all along
and has been fully discussed in Part 1, where the distinction between analytic
economics and political economy was introduced mainly to give effect to it.
Since this view is at variance with deeply rooted beliefs, the reader is invited
to refresh his piemory about what was said there.

The principle above does not, however, fully explain why the economic
literature introduced in totalitarian countries will not figure greatly in the
sketch that is to follow. There are two other reasons for this: first, some of
the most important contributions, such as von Stackelberg’s Marktform und
Gleichgewicht (1934), or part of Del Vecchio’s work on money, have already
been mentioned in Part iv, where we carried the histories of a number of
topics down to the present; second, material of the kind that belongs in a
history of economic analysis has not been plentiful under totalitarian regimes.
For the rest, the cases of the three main totalitarian countries, Germany, Italy,
and Russia, 1 are too different to be covered by a single generalization.

* [This is the only chapter written for Part v, the subject matter of which is not
mentioned in the Mexican lectures (eh. 1, sec. 2 above).]

1 Japan and Spain never were 'totalitarian’ in any meaningful sense of the term. But
as regards Japan, it should be observed that the interruption of contacts during the
war and my ignorance of the language have created a lacuna which, in the time at
my disposal, I have been unable to fill. All that prewar contacts enable me to say is
that the importance of this lacuna is certainly not negligible and may be considerable.
[In the two years since his death, former Japanese students have published translations
or arranged for translations of all the books and long essays of J. A. S. This includes

1153

ii 1

1154 V: A SKETCH OF MODERN DEVELOPMENTS

i. Germany

In Germany, methods of teaching and research had been rapidly improved
in the period of the Weimar Republic (1918-32). Historical work and work
on current problems (of the kind cultivated by the Verein fur Sozialpolitik)
went on as before; as noticed in Part iv, chapter 4, these types of work grad-
ually lost their anti-theoretical methodological bent, and both interest and
competence in ‘theory' increased, the spreading use of Cassel’s treatise 2 be-
ing equally significant as an effect, a cause, and a symptom; in addition there
were the autochthonous messages of such teachers as von Gotti, Liefmann,
Oppenheimer, and Spann, to which even their most severe critic cannot deny
the merit of having stimulated many minds; and there were, more accessible
to Anglo-American understanding (and to my own), the performances of
Diehl, Eucken, and others and, above all, those of Spiethoff and Sombart. The
Viennese group, under the leadership of Professor L. von Mises, though it
retained a vital individuality until it was, for the time being at all events, dis-
persed in the 1930’s, entered into closer relations than before with the rest
of German economists and was thus in a position to assert its own distinctive
doctrines.

Two tendencies toward Americanization cannot be left out of this sketch.
One was the inexorable progress of specialization. Though the comprehensive
courses on general economics, economic (and social) policy, and public finance
remained in their dominant positions, specialized groups began to acquire
more and more definite existence; in a more significant sense than before, it

the early work in German and this History. Das 'Wesen und der Hauptinhalt . . .
(1908) and Theorie der ’WirtscJiaftlichen Entwicklung (1912) were translated in 1936
and 1937.]

2 Gustav Cassel has repeatedly been mentioned before. It seems appropriate, how-
ever, to recall in this place the stages in the career of the most influential international
leader of our science in the 1920’s — for such he was, whatever his critics (including
myself) may say. We recall first the three pieces of work by which he established him-
self (his sketch of a theory of prices in the Z eitschrift fur die gesamte Staatswissen-
schaft, 1899; the paper, not yet mentioned, on the causes of the variations in the gen-
eral price level, ‘Orsakema, till fbrandringar i den allmanna prisnivan,’ Ekonomisk Tid-
skrift, 1905; and The Nature and Necessity of Interest, 1903). Partly owing to the
advantage he held as a ‘neutral/ he rose into international fame during and after the
First World War — chiefly as an expert on money and international relations and as
an assiduous participant in international conferences on these subjects (I mention only,
as a sample. Money and Foreign Exchange after 1914, 1922: today’s monetary ex-
perts could do worse than study this book), Finally, he made a great success, at least
outside the sphere of orthodox socialism, by his treatise, Theoretische Sozialokonomie,
which, guided by chance or else very shrewd insight, he published in German (1918).
I ara myself the author of a review of the 4th ed. (1927) that was as far from favorable
as was Wicksell’s review appended to the English ed. of vol. 1 of the latter’s Lectures.
I do not think that either Wicksell or I said anything that ought to be retracted. But
we overlooked something, viz., that the book was exactly what German economists
needed.

ECONOMICS IN THE ‘TOTALITARIAN’ COUNTRIES 11 55

was possible, after 1918, to speak of agricultural,, or labor, or industrial econo-
mists. Again, research institutes like the National Bureau of Economic Re-
search or the Bureau of Agricultural Economics grew up both inside and out-
side the government departments concerned with economic problems. It will
suffice to mention the Institut fur Weltwirtschaft at the University of Kiel,
founded by one of the most efficient organizers of research who ever lived,
.Professor Bernhard Harms, and the Institut fiir Konjunkturforschung, the
foundation of a similarly efficient organizer, Professor Ernst Wagemann in
Berlin 3 — both of which added new economic journals to the existing ones.
There is only one point in this picture of considerable advance and still more
considerable promise that, from the standpoint taken in this book, must be
registered as of sinister import. As the Weimar Republic . settled down, the
governments of the individual states — there were neither federal nor private
universities, only state universities — yielded increasingly, to. the demand of por
litical parties, mainly the Social-Democratic and the Centrist parties, that the
appointments to professional office in economics should take account of the
politics of candidates. The argument, discussed quite openly, ran as follows:
economics, unlike physics and like philosophy, is a W eltanschauungswissen-
schctft, that is, a ‘science’ into the research and teaching of which necessarily
enter the ultimate beliefs and allegiances of the investigator or teacher. These
ultimate beliefs and allegiances were embodied in the socialist and the centrist
(Catholic) parties and in an agglomeration of all other parties defined by the
negative characteristic that they were neither socialist nor Catholic; hence,
professorships should be divided up, as equally as possible, between members
of these three political groups, though nobody advocated, to be sure, that this
should be done irrespective of qualifications. There is no need to discuss this
matter again. Less openly, the tendencies verbalized by the theory of the
W eltanschauungswissenschaft make themselves felt under any circumstances
and. in all countries. Also they never prevail fully anywhere — except in mod-:
ern Russia. In the Weimar Republic the resistance of the faculties and of
upright members of the bureaucracy kept them in relatively narrow bounds.

Under these circumstances the advent of National Socialism did not mean
quite as great a break and did not cause all the damage that a foreign observer
might expect. The National Socialist regime was intolerant not only of criti-

8 The latter started frankly from the Harvard barometer curves, though , its work,
mainly statistical, soon expanded — much as did the work of the Harvard Economic
Society — far beyond what these curves imply. This institute was perhaps the most im-
portant single influence in spreading knowledge of modem statistical methods (as then
understood). Its methodological work is therefore of historical importance. It is mainly
contained in supplements to the institute’s journal, the Vierteljahrshefte zur Kon-
junkturforschung; see e.g. supplements no. 4 on The Analysis of Economic Curves
(H. Hennig); no. 6 and 11 on Seasonal Variations (O. Donner); no. 9 on Trend (P.
Lorenz); and no. 12 on Russian Contributions (A. L. Wainstein, S. A. Perwuschin,
M. W. Ignatieff) . There was close co-operation with the Federal Bureau of Statistics
( Statistische Reichsamt ), which published a series of monographs in addition to its
current publications.

H56 V: A SKETCH OF MODERN DEVELOPMENTS

cism of its policies but also of any display of lack of sympathy with the party
philosophy. It promoted party members and demoted Jews. If it did not in-
sist on acceptable professions of faith, it welcomed them. In individual in-
stances, the party or groups within the party and even the authorities went
much further than all this implies. And in addition, the disturbing effects of
the general conditions then prevailing upon research and study must be taken
into account. However, though less so than in the field of the physical sci-
ences, the bulk of professional work went on. In particular, nobody would
have got into trouble in consequence of having worked out new theoretical or
statistical tools. A work like Keynes's General Theory could have appeared un-
molested — and did . 4 It must not be forgotten that the creed of National So-
cialism was not primarily or , essentially economic and that, hence, it was com-
patible not only with all kinds of technical economics but also with the ad-
vocacy of widely differing policies.

2. Italy

In Italy we find a similar situation, only much more pronounced. The
Fascist regime resented criticism of its measures as much as or, since individ-
ual policies were much more closely associated with the leader personally, still
more than was the case in Germany . 6 It also insisted either on a sympathetic
attitude of economists or else on neutrality — perhaps the best way of express-
ing the situation is to say that what the government insisted on was absence
of active hostility to Fascist principles. A few leading men — such as Ricci and
Bresciani-Turroni — expatriated themselves, but most were not seriously dis-
turbed. Purely scientific work was not interfered with at all . 6 Under these

4 See Carl Fohl, Geldschopfung und 'Wirtschaftskreislauf (1937). The author tells us
in the preface that his manuscript had been completed in December 1935. All the
more interesting is the far-reaching though not complete parallelism between his argu-
ment and Keynes’s (see below ch. 5).

5 Hitler left individual measures, and especially economic measures, to his lieuten-
ants, who stayed in positions of leadership for relatively long spells and were allowed to
acquire reputations with the public and to develop policies of their own. Mussolini
did not permit this. In consequence the economic policies of Fascism, even . as regards
details, tended to become in the public eye his own personal measures.

6 It is important to emphasize that even in treatises that took a professedly sympa-
thetic attitude to the citth corporativa the analytic parts did not differ from generally
accepted economic doctrine and could have been written just as well by enemies of
Fascism. As an example I mention Professor Luigi Amoroso’s Principii di economica
corporativa (1938). The first two parts deal respectively with the theories of money
and of equilibrium and are completely free from political implications. Fascist or other.
Only the third part develops what might be termed the economic philosophy of
Fascism — much of which, as formulated by Amoroso, would command the hearty
approval of the modal American economist. As another example, I mention a course
of lectures on economic policy or political economy that did not keep to the ivory
tower of what we call here ‘purely scientific work’ and still displays not much con-
straint: Professor Giovanni Demaria’s La politica economica dei grandi sistemi coprcitivi
(i937)-

ECONOMICS IN THE TOTALITARIAN COUNTRIES II 57

conditions, scientific economics continued to move at what we have seen in
Part rv was a high level, both within and withotit the Pareto school, until the
war. Barring war effects there was no break and neither was there one after
the fall of the regime.

3 . Russia

But the case of Russian economics 7 in the Stalinist period differs from the
German and Italian cases, not in degree but in kind. In the decade preceding
that period — roughly between 1917 and 1927 — this was not quite so. Op-
ponents of the Soviet regime or even neutrals were indeed dealt with much
more ruthlessly than were opponents of the National Socialist or Fascist
regime. Scientific research itself, not only discussion of policies, was regi-
mented in a manner unheard of in Germany or Italy, not only because of the
nature and methods of the bolshevist administration but also because of two
other reasons that contradicted and, nevertheless, reinforced each other. On
the one hand, the Soviet creed, ideologically at least, was essentially an eco-
nomic creed and slight deviations from the holy books, even if of a purely
theoretical kind, acquired an importance that is difficult for us to understand;
on the other hand, the bolshevist government very naturally exploited to the
full the naive emotionality of the ‘revolutionary people/ who necessarily be-
lieved that, the millennium having arrived, there were no longer such things
as ‘economic laws' and hence no need for any economic analysis at all. In
this situation discussion tended to be geared exclusively to the momentary
wishes of the men who were, or were believed to be, at or near the helm,
and such arguments as that a certain view was ‘reactionary' or ‘leftist’ — in fact,
pure denunciation — began to replace scientific views. Nevertheless the break
was not complete. Conversion to Soviet orthodoxy was made easier by the
facts that Marxism, now the prescribed creed, had had a strong hold on
Russian economists even before 1917 and that there is plenty of room for
scientific analysis within the limits set by allegiance to its principles. So long
as genuine Marxist stalwarts like Bukharin played some role, we might have
still to state that, qualitatively more than quantitatively, genuinely analytic
work was at an ebb, but there would be no reason to question that there was
genuinely scholarly work — as the mere existence of the Marx-Engels Institute
suffices to show. However there were other institutes, for example one for re-
search in agricultural economics and another for business or cycle research,
which for the time being enjoyed some freedom not only in collecting but

7 I repeat that I do not know Russian. The following remarks are based upon (a)
such Russian works as are available in languages I know, especially English and Ger-
man; (b) conversation with colleagues who do know Russian but must not be held re-
sponsible for the impression I received from it; and (c) secondary literature of very
unequal value, of which most, though not all, has an anti-bolshevist bent. I mention
only the item that I have found more useful and, so far as I can judge, more correct
than any other: A. Zauberman, ‘Economic Thought in the Soviet Union/ Review of
Economic Studies (vol. xvi (1), 1948-49 and vol. xvi (2) and (3), 1949-50). [J. A. S.
had apparently read only the first of the three articles by Zauberman.]

1158 V: A SKETCH OF MODERN DEVELOPMENTS

also in interpreting economic data. KondratiefFs work, already mentioned,
caused a great stir 8 and constitutes, so far as I can make out, the peak per-
formance of the work produced by a considerable number of competent econo-
mists (Perwuschin, Oparin, Sokolnikoff, and others); this work, in spite of the
sinister implications of the fact that some of the authors have not been heard
of since, may be taken as proof that serious economics survived until the
rigors of the Stalinist regime fully asserted themselves. Then the break oc-
curred after all, and teaching as well as the work of the Institute of Economics
of the U.S.S.R. was more and more, reduced to descriptive treatment of the
practical problems of the Soviet government and to mutual recriminations of
slaves incessantly in fear for their lives . 9 We confine ourselves to two points
that promise better things for the future. First, Soviet Russia inherited from
pre-Soviet times an excellent tradition of work in statistical methods and their
mathematical — mainly probabilistic — background. This work, much less ex-
posed than economics to political attack, survived and continued to produce
internationally recognized contributions. Second, it is evidently impossible to
‘plan’ investment without developing an apparatus, however primitive, for com-
paring alternative methods of carrying it out, even if the purpose : itself -is
given by dictatorial command, and for comparing alternative investment pur-
poses if there is some freedom of choice. But into any attempt to do so, actu-
arial norms and the concepts of value, marginal productivity, and interest enter
by logical necessity. The task of Soviet economists was and is not to improve
these concepts but to smuggle them in in such a manner as to hide their
fundamental identity with the corresponding 'capitalist 7 concepts . 10 Advance

8 N. D. KondratiefFs long-cycle theory has been published in several books and ar-
ticles, some of which are available only in • Russian. An abbreviated translation by
Professor W. F. Stolper of a German article that Kondratieff himself believed to give
the gist of his theory can be found in the Review of Economic Statistics, November
1935, and a survey by Mr. George Garvy of the controversy that arose about it ('Kon-
dratiefFs Theory of Long Cycles’) in the same journal, November 1943. This survey
shows very well, on the one hand, the venomous ferocity with which controversies
were carried on in that atmosphere and, on the other hand, the facts that scientific
points of view were not absent and that scientific work was still possible. Kondratieff
was exiled to Siberia in 1930.

9 The bulletins of the Academy of Sciences of U.S.S.R. (Department of Economics
and Law) contains comments on this state of things (though not in the terms above)
that waver between condemnation and recommendation of a sterilized Marxism. But it
seems questionable whether analytic work of the kind that is being turned out, with
its childish attempts at rediscovering elements of economic logic without running into
heresy, is really preferable to total suspension of such work. The importance of these
attempts seems to be greatly overestimated by C. Landauer, ‘From Marx to Menger,’
American Economic Review, June 1944. Also see John Somerville, Soviet Philosophy
(1946).

10 An almost pathetic example has been presented by Holland Hunter, 'The Plan-
ning of Investments in the Soviet Union,’ Review of Economics and Statistics, Feb-
ruary 1949. Professor Hunter there translated a chapter of a textbook by Professor
Khachaturov on the Economic Principles of Railroad Transportation (1946), and ana-

ECONOMICS m THE TOTALITARIAN COUNTRIES 1 1 59

on this line is difficult and slow owing to the incessant threat of denunciation
that lurks behind the unfavorable reviews that publications of this kind seem
to have received so far. However, there is in these publications some promise
for the future, especially because it is safe to predict that denunciations of this
type will go out of fashion: bolshevist economists are bound to discover in the
end what Pareto and Barone realized half a century ago, namely, that there is
an economic logic that has nothing specifically ‘capitalist’ about it. Nor is this
all. National income accounting and budgeting techniques are rapidly develop-
ing in non-bolshevist countries — they can hardly be called ‘capitalist’ any more
— and traditional economics will have to adapt itself to them. [J. A. S. in-
tended, but did not actually write, a section on national income accounting in
this concluding Part.] These techniques and corresponding methods of anal-
ysis are still more obviously needed in the Soviet state. There thus exist two
tendencies that, bom of similar needs, have begun to assert themselves inde-
pendently in Russia and elsewhere, especially the United States, and now
tend to converge — as do so many others. Still, beyond this there is nothing to
report for a history of economic analysis, and only he can wonder at this who,
even at this point, has not grasped the purpose of this book , 11

lyzed the Coefficient of Relative Effectiveness of Investment under the aspect men-
tioned in the text in a most instructive manner. The reader finds other examples,
though less completely worked out, in the [first of the three] articles by Zauberman,
who gives prominence to the work of S. G. Strumilin. He also mentions (vol. xvi (i),
p. 3n.) an early attempt made by Mrs. B. Khmielnitskaya to secure room for economic
theory by defining it — quite sensibly — as the science of the norms of rational manage-
ment of a socialist (‘organized’) society. It is amusing to note that in doing so she
seems to have adapted for her purposes the German von Gotti’s concepts of idiography
(the description of individual facts, ‘ideographic’ must be a misprint) and nomothesis
(the generalizing statement of laws, which she changed into ‘normography,’ wisely re-
placing von Gotti’s ‘nomos’ by ‘norm’).

11 One of the causes of the scientific sterility of Russian economics in the period
under survey was, of course, the fact that some of the rulers, in particular Lenin,
Trotsky, and even Stalin, wrote so extensively and authoritatively on questions that or-
dinarily belong in the sphere of professional economics. Therefore even a reader who
does grasp the purpose of this book and who knows how to distinguish economic anal-
ysis from political economy might still object that I do not report on the works of
those three men or at least on the voluminous works of Lenin. The answer has been
given already: however great their historical importance in other respects, as contribu
tions to economic analysis they are negligible.

CHAPTER 4

Dynamics and Business Cycle Research

[1. Dynamizing Aggregative Theory: Macrodynamics] 1161

[2. The Statistical Complement: Econometrics] 1162

[3. The Interaction of Macrodynamics and Business Cycle Research] 1163

Let us recall once more that here, as throughout this book. Dynamics means
exclusively analysis that links quantities pertaining to different points of theo-
retic time — in the sense that has been repeatedly explained before — and not
the theory of evolutionary processes that run their courses in historic time: it
is practically coextensive with sequence analysis and includes period analysis
as a special case, but it is not coextensive with the theory of economic growth
or development, or ‘progress/ 1 Thus defined dynamics is a genuinely new de-
parture. We have indeed seen at various turns of our way, particularly in the
case of Sismondi, that dynamic considerations in our sense intruded into eco-
nomic analysis times out of number, chiefly by implication but also explicitly.
But the exact core of economics was nevertheless static and was believed to
constitute a self-contained body of doctrine, a body moreover that embraced
all or almost all of the essential insights. This is obvious in the case of Walras.
But it also applies to Marshall. 2 He no doubt added plenty of extra-static con-
siderations, chiefly about growth but also about sequences, so much in fact
that he may be said to have posited the task of future dynamic theory (see
e.g. Principles, p. 519), just as he posited the task of future econometrics; but
though he presented material, viewpoints, and desiderata, he did not cross the
Rubicon. For the rest, we have noticed the suggestive pointers of Pantaleoni
and Pareto, but there was no advance toward the goal to which they pointed.

By the phrase, ‘crossing the Rubicon/ I mean this: however important those
occasional excursions into sequence analysis may have been, they left the
main body of economic theory on the ‘static’ bank of the river; the thing to
do is not to supplement static theory by the booty brought back from these
excursions but to replace it by a system of general economic dynamics into
which statics would enter as a special case. The realization of the fact that even
a static theory cannot be fully developed without an explicit dynamical schema

1 This is repeated here because many modem authors do identify dynamics with the
theory of growth. The chief authorities for our terminology are Frisch and Hicks.
Prominent examples of another terminology are Harrod (see especially Towards a Dy-
namic Economics, 1948) and Stigler. An intermediate position is held by many, e.g. by
Charles F. Roos ( Dynamic Economics, 1934). I also repeat that my insistence on this
distinction is due not to any wish to quarrel about words but merely to a wish to avoid
confusion.

2 But not to Bohm-Bawerk, see above ch. 6, sec. 5.

1160

DYNAMICS AND BUSINESS CYCLE RESEARCH Jl6l

(Samuelson), 3 which we have noted before, is a first step in this direction,
and if space permitted, a few others could be mentioned. 4 However, no at-
tach on the whole front of Walrasian theory has as yet developed and the anal-
ogy with a building plot is still painfully apposite: an increasing number of
workers see the new goal; but for the time being this is practically all, since
H, L, Moore’s effort did not go substantially beyond comparative statics. More
positive success has attended the efforts to 'dynamize’ aggregative theory.

[ 1 . Dynamizing Aggregative Theory: Macrodynamics]

This is understandable. On the one hand, aggregative theory that reduces
truly innumerable arrays of variables to half a dozen or even less can evidently
stand up much better than could a Walrasian system under the complications
that are inseparable from even the simplest dynamic schema. As an illustra-
tion, consider so simple a dynamizing device as the introduction of lags. Off-
hand and until more powerful methods are invented than are available now,
there is very little we can say when we give different time indices to all the
quantities that enter the Walrasian system, except that it becomes unman-
ageable thereby. But this is no longer so if the only variables we have to take
care of are 'consumption/ 'investment/ and a national income that is identi-
cally equal to current consumption plus current investment. Suppose we postu-
late arbitrarily that the consumption (C*) of some period (t) equals a constant
proportion (<x) of the income of period (t ~ r), aY t _ 1 ; and that the invest-
ment (I f ) in period t equals a constant proportion ((5) of the difference between
current consumption and the preceding period’s consumption, (5(Cf — C t _j) or
^(aY t _ 1 — aYf_ 2 ). Remembering that Y ( = C t + I t , we get as, on the
strength of grammar-school mathematics, it is easy to see: 6

Yf = a(i + P)Yf_i — apY f _ 2 .

This is a homogeneous second order difference equation with constant co-
efficients, which is very easy to solve by an elementary technique that lies
ready at hand and yields certain economically interesting results. The tempta-

3 See Foundations, Part ii, especially ch. n. I take the opportunity to submit that
there and in Appendix B, also in 'Dynamic Process Analysis/ his contribution to A Sur-
vey of Contemporary Economics (H. S. Ellis, ed.), Professor Samuelson has performed
a most meritorious pedagogical task; there is no better introduction to the meaning
and techniques of modem dynamics.

4 Pressing considerations of space are, however, not the only reason for refraining:
on the one hand, I do not wish to blur the main contours by details; on the other
hand, I do not wish this sketch to degenerate into a bibliography. Going over the vol-
umes of Econometrica is almost all that the reader needs in order to find the ropes.

5 This is (the gist of) the Hansen-Samuelson equation; see P. A. Samuelson, ‘Inter-
actions between the Multiplier Analysis and the Principle of Acceleration/ Review of
Economic Statistics, May 1939, reprinted in Readings in Business Cycle Theory (se-
lected by a Committee of the American Economic Association, G. von Haberler,
chairman, 1944).

1162

V: A SKETCH OF MODERN DEVELOPMENTS

tion to avail oneself of so tremendous a simplification is almost irresistible
and impervious to the objections that might be raised on theoretical grounds. 6
No wonder, then, that the early 1930’s were fertile in such aggregative schemata
- — R. Frisch’s macrodynamics. 7 Not all of them were mathematically exact of
course — a fuller survey would have to mention several important ones that
were presented by non-mathematical economists such as Professor von Hayek.
It should be carefully observed that this drive toward macrodynamics was in
itself quite independent of any wish for a closer alliance of economic theory
with statistical figures: macrodynamics would have asserted its claims even if
theorists’ attitudes to statistics had not changed at all as compared with the
preceding period, and as a matter of fact several writers who displayed no
symptoms of such a change in attitude were just as anxious as anyone can be
to secure the advantages of aggregative simplification.

[2. The Statistical Complement: Econometrics]

But, On the other hand, the equally strong drive toward a numerical eco-
nomics, an economics that would be statistically operational, is also a domi-
nant factor in our scientific situation. And this factor, however independent
of the desire for a simplification of the pattern of economic theory per se,
also favors macrodynamic methods. For with few exceptions the aggregative
variables — particularly if their number be augmented by price levels and in-
terest rates — are easy to identify with our most important time series. As an
outstanding example, which displays both tendencies closely united and which
constitutes so important an element in the economic research of our time that
it cannot be omitted from any sketch of it, however brief, I mention the work
of Tinbergen. 8 His numerous aggregative schemata, most of which use many

6 It is convenient to defer consideration of these objections and of an important
qualification that should be added to them. But let us note at once that our example
also illustrates the fact that economists are prone to yield to the further temptation
to improve upon the situation hy introducing additional simplifications: in our exam-
ple, it is not only the reduction in the numbers of variables which simplifies things but
also the postulate that the coefficients are constant; if they were not, the equation
would not be so easy to handle.

7 We mention here only one example, namely Professor Frisch’s own schema pre-
sented in his powerful paper, ‘Propagation Problems and Impulse Problems in Dy-
namic Economics,’ Economic Essays in Honour of Gustav Cassel (1933). The reader
will find many others in Tinbergen’s survey article quoted in the next footnote.

8 In the long list of Professor J. Tinbergen’s publications the one that is perhaps
most suitable to serve as an introduction, to American and English readers, of his
theoretical and statistical methods is his Statistical Testing of Business-Cycle Theories:
I, A Method and its Application to Investment Activity; and II, Business Cycles in
U.S. 1919-32 (League of Nations, ,1939). Still more useful as a survey of what may be
called now the earlier work in dynamics is his article ‘Suggestions on Quantitative Busi-
ness Cycle Theory,’ Econometrica, July 1935. Both titles are unduly unassuming. Just
now the reader should ignore the specific reference to business cycle research — the rea-
son for which will be explained presently- — and accept the first as a treatise on, and the
latter as a survey of, general dynamics.

DYNAMICS AND BUSINESS CYCLE RESEARCH 11 63

more variables to start with than do those of other authors, are in the first in-
stance set up on the basis of purely theoretical considerations that are ex-
tremely simple — so much so that it is perhaps more enlightening to speak of
common-sense considerations: they embody, in a system of (almost always)
linear equations with constant coefficients, the definitions of obviously im-
portant aggregates (definitional equations); the relations that common sense
suggests should subsist between them (balance equations); and relations that
are supposed to describe the behavior of classes of households and firms (be-
havior or ‘decision’ equations ). 9 This involves the fundamental principle that
construction of the theoretical set-up should precede the statistical work: the
relations themselves are not suggested by statistical observations; they are
postulates and not results . 10 Statistical figures are to ‘explain’ the numerical
values of some variables by given numerical values of others by the method of
multiple correlation — a process which also eliminates those ‘explanatory’ vari-
ables whose partial regression coefficients indicate the insignificance of their
influence. The system is then, by process of successive substitutions, reduced
to ‘final’ equations that are held to depict the economic mechanism . 11 In it-
self, every step in this procedure is open to serious criticisms, about which no
more can be said than that they should not blind us to the greatness of this
pioneer effort. Since most of these criticisms are of a statistical nature, the
statistical work of Frisch — partly taken account of by Tinbergen — and his
group should at this point be mentioned again, particularly the work of
Haavelmo, who during his brief sojourn in the United States, without holding
a teaching position, exerted an influence that would do credit to the lifetime
work of a professor . 12 In any case, however, the economist who accepts macro-
dynamics as it stands, with or without its statistical complement, may speak of
conquest already achieved— and not only of a developing attack and of the
increasing clearness of a goal, which is all that we are able to record in the
matter of dynamizing the Walrasian or Paretian system.

[3. The Interaction of Macrodynamics and Business Cycle Research]

Exactly as macrodynamics has been and is being propelled by the specifi-
cally econometric drive — the tendency toward reasoning in terms of statistical
figures— so both the theoretical and the numerical components of macrody-
namic work have been propelled by the preoccupation with business cycle

9 For examples, see the work cited in the preceding footnote. It should be remem-
bered that Tinbergen’s publications of this type begin (so far as I know) in 1934.

10 This is the fundamental difference between the methods of Tinbergen and those
of W. C. Mitchell, whose methods will be touched upon below.

11 1 feel in duty bound to offer my apologies to Professor Tinbergen for this sort of
report. But I hope that he and the reader will prefer even these jejune sentences to
the bare reference to his works which not every reader ean be trusted to follow up.

12 The bulk of his teaching has been embodied in a number of papers published
in Econometrica. But see especially Trygve Haavelmo, ‘The Probability Approach in
Econometrics,’ Supplement to Econometrica , July 1944 (Cowle’s Commission Papers,
New Series 4).

II64 V: A SKETCH OF MODERN DEVELOPMENTS

problems. This preoccupation is, as we have already seen, a salient character-
istic of our time. From the foregoing analysis of the factors that produced
macrodynamics and in particular statistical macrodynamics, we may infer that
this development would have occurred even if there were no such thing as
the particular kind of fluctuations that are commonly identified as business
cycles. From what has been said earlier in this Part and in Part iv we may
infer that preoccupation with the phenomena of business cycles would have in-
creased, as compared with the times before 1914, even if modern macrody-
namics had not emerged. But it is obvious that both developments were
bound to reinforce one another and that, on the one hand, the methods, ma-
terials, and results of business cycle research encompassed more and more of
general economics and, on the other hand, the methods, materials, and re-
sults of modern macrodynamics evolved principally with a view to serving
business cycle research, 13 so much so that reference to business cycles intrudes
even into the titles of many macrodynamic publications of much wider range. 14
It is now easy to formulate more precisely the nature and results of this inter-
action.

We have seen in Part iv, Chapter 8, that all the fundamental ideas con-
cerning the phenomenon of business cycles were present before 1914. 15 What
our period added, besides critical development of these ideas, was in the first
instance the new wealth of data and new statistical methods of handling them.
Even the econometric program, barring the ‘higher’ mathematics, had been
carried out by such outstanding students as Juglar, Mitchell, and Spiethoff. 16
But incomparably greater possibilities have offered themselves since 1919.
Some writers were content to use whatever figures the arms of their analytic
apparatus could grasp. An outstanding example is Professor Pigou, whose
Industrial Fluctuations (1st ed. 1927), though remaining a ‘theoretical’ work,
nevertheless, owing to the new material, differs greatly from the kind of work
that an economist of the same type would have produced before 1914. Others
displayed a tendency to plunge into the statistical material directly and to

13 A simple way for the reader to realize this is to glance over Professor H. M.
Somers’ ‘Classified Bibliography of Articles on Business Cycle Theory,’ appended to
the volume of Readings in Business-Cycle Theory, to which reference has been made
already, or to some of the other bibliographies mentioned there (p. 444), particularly
the one by Professor R. A. Gordon.

14 This is why, speaking of macrodynamics per se and not intending to speak of
business cycle research specifically, I had, nevertheless, in a previous footnote, to quote
two of Tinbergen’s works whose titles carry this connotation. The reason why, with
what might seem uncalled-for pedantry, I insist on this point is simply that it is es-
sential to a correct diagnosis of the modem scientific situation.

15 This also applies to Professor von Hayek’s theory, if it is permitted to link it up
with that of Professor von Mises. If it is not, I apologize.

a6 SpiethofFs preliminary presentation of his business cycle analysis as a whole did
not, it is true, appear before 1923, and his comprehensive work, as well as its trans-
lation into English, is still expected. But this delay was and is caused by the heroic at-
tempt to master vast materials single-handed. As regards Mitchell, the reference above
is to his book of 1913.

DYNAMICS AND BUSINESS CYCLE RESEARCH

1165

scrap the existing apparatus as well as the existing explanatory hypotheses. We
may illustrate this tendency by two instances that in other respects have very
little to do with one another, namely the work of the Harvard Committee
(W. M. Persons) and the work of Mitchell.

The Harvard University Committee on Economic Research, presided over by Charles
J. Bullock and chiefly directed by Warren M. Persons and W. L. Crum, embarked
upon extensive historical-statistical investigations and developed important time series,
but owes its international renown — its methods being discussed, copied, and further
developed almost everywhere, especially by E. Wagemann’s Berlin Institute— to the
'three-curve barometer/ a revised version of which the reader finds authoritatively de-
scribed in the April 1927 number of the Review of Economic Statistics ('The Con-
struction and Interpretation of the Harvard Index of Business Conditions'). No analysis
of its method is possible here. We must confine ourselves to indicating the fundamen-
tal principle and to adding three remarks which the reader is urgently requested to bear
in mind. The principle is to correlate time series which common sense indicates to be
particularly relevant, after having ‘eliminated’ from them seasonal variations and the
‘secular trend/ so that cycles are given as a residual (for details see W. M. Persons,
‘Correlation of Time Series/ Rietz’s Handbook of Mathematical Statistics , 1924, ch.
10 )-

The remarks I wish to add are these: (1) The statistical methods used by the Har-
vard Committee are in the light of later, and even of contemporaneous, developments
of ‘higher’ statistics exposed to serious objections. But this must not induce us to over-
look the impulse that both further compilation of statistical figures and the develop-
ment of statistical method derived from that pioneering venture; or to overlook the
fact that there was a rough common sense about those methods that would go some
way toward justifying their results as approximations, if anyone cared to undertake the
task.

(2) If critics erred in failing to give due weight to the historical importance of that
venture, they erred still more in that part of their criticism which was directed against
the forecasting value of the barometer. The fact is that the barometer curves indicated
the approaching break in 1929 clearly enough — the trouble was that the interpreters
of the curves either would not believe their own methods or else would not take what
they believed to be a serious responsibility in predicting depression.

(3) The constructors of the Harvard Barometer emphasized for the benefit of their
readers and also believed themselves that they were not using any of that discredited
and discrediting monster, economic theory. Professor Persons was quite prone to reply
to theoretical objections by pointing to the hundreds of correlation coefficients that
had been figured out under his direction. As a matter of fact, however, they did use
a theory that was all the more dangerous because it was subconscious: they used what
may be termed the Marshallian theory of evolution. That is to say (if we neglect the
important but in this connection secondary correction for seasonal variations, one of
their most lasting contributions) they assumed that the structure of the economy
evolves in a steady or smooth fashion that may be represented (except for occasional
changes in gradient, ‘breaks’) by linear trends and that cycles are upward or downward
deviations from such trends and constitute a separate and separable phenomenon. This
is an error which we shall have to mention again presently. But though erroneous, this
view constitutes a' theory, or the backbone of one. The little methodological contro-
versy on the subject of ‘business cycle research without theory/ which flared up occa-
sionally, was of a nature similar to the one that arose about the work of Mitchell and

Il66 v: A SKETCH OF MODERN DEVELOPMENTS

the National Bureau of Economic Research and will hence be touched upon together
with the latter.

The importance of the work of Wesley Clair Mitchell and the National Bureau of
Economic Research, which he led and inspired, has been emphasized already. Just as
Professor E. Wagemann said somewhere that the publications of his Institut fur Kon-
junkturforschung were simply the second volume of his Allgemeine Geldlehre (1923),
so Mitchell might have said that (most of the) publications of the National Bureau
formed all together a huge second volume to the first he had published in 1913. And
his volume of 1927, Business Cycles: The Problem and its Setting, was, like Wage-
mann’s Konjunkturlehre of 1928, an organizing survey of problems, viewpoints, and
materials — for work which it was given to him to carry, if not to completion, at least
as far as his (and A. F. Burns’s) monumental Measuring Business Cycles (1946). We
cannot enter into a discussion of what is known as the National Bureau method of
depicting cycles statistically. All we can do is to point out that this effort of establishing
and of marshalling a vast amount of (primarily) statistical material essentially con-
tinues the plan that was partially executed in the book of 1913 and owes nothing to
macrodynamic theory, though it may eventually set problems and provide important
checks for it: the work of Mitchell and his group aims primarily at showing what it
is we have to explain and, beyond this, suggests viewpoints from which to do so.

I use this opportunity for a brief comment on the little controversy about
methodology adverted to above. Mitchell might have done something toward
preventing it, had he distinguished more clearly between theory in the sense
of explanatory hypothesis and theory in the sense of analytic apparatus. Most
of us would agree with him if he felt that the formulation of explanatory hy-
potheses should wait upon acquisition of a fuller command of the facts and
that the explanatory hypotheses, so far offered, old and new, lacked proper
substantiation and might be unable to stand up in the light of the facts he
was going to assemble. Even so he displayed no active hostility to the many
'theories’ of business cycles which he listed in his book of 1927 with perfect
detachment. But in addition he cared little for the technical refinements of
‘theory’ in the instrumental sense of the term, just as he cared little for the
modern refinements of statistical method. His early associations with Veblenite
tendencies did the rest to make him appear, in the eyes of the profession, as
more of an anti-theorist than he was — and still more so in the v eyes of those
votaries of macrodynamics for whom economic theory and the mathematical
model tend to be synonymous. But actually, in intention as well as in fact,
he was laying the foundations for a ‘theory,’ a business cycle theory as well as a
general theory of the economic process, but for a different one. Similarly, the
Harvard Committee, in professing to proceed without theory, really meant no
more than that they did not intend to be guided in their factual work by pre-
conceived explanatory hypotheses.

But business cycle research is research into sequences of business situations
which are also the subject matter, or part of the subject matter, of macro-
dynamics. Co-operation between the two was thus obviously indicated. All
students of business cycles, not debarred by mathematical disabilities, should
have recognized this from thq first. The formal logic of lags, rates of change,
cumulations, and of the oscillations they may produce is bound to be helpful

DYNAMICS AND BUSINESS CYCLE RESEARCH 11 67

in the interpretation of the observed behavior of time-series material. Macro-
dynamics should be not less helpful in any attempt to put the existing theo-
retical material into a more promising shape, for instance, in deciding ques-
tions of determinateness and in formulating conditions of damping or ex-
plosiveness and, the like. Problems of the mechanisms by which impulses are
propagated through the economic system may be cleared up by macrodynamic
methods, which therefore may contribute substantially, among other things, to
our understanding of cyclical turning points . 17 The star example by which to t
demonstrate the usefulness of these methods is the theory of oscillators, that
is, of factors that create fluctuations in the system, although they are perfectly
steady — free from fluctuations — themselves . 18 ‘Literary’ students of business
cycles will not easily see the possibility of this. They will be prone to argue
that no factor can contribute to cyclical fluctuations unless its own time series
is oscillatory. And so they might be expected to show some signs of gratitude
to macrodynamics for thus widening their horizon as they should in other in-
stances for having their arguments sharpened and corrected. If they do not
always do so, this is no doubt primarily owing to mathematical disabilities. But
there is also another reason which it is important to state.

It has been said above that macrodynamics helps us to understand mech-
anisms of propagation. It will perhaps assist the reader if he will look upon
the economic system as a sort of resonator, which reacts to the impact of dis-
turbing or ‘irritating’ events in a manner that is partly determined by its phys-
ical structure. Think for instance of a violin that ‘reacts’ in a determined man-
ner when ‘irritated’ as the player applies the bow. Understanding the ‘laws’
of this reaction contributes to a complete ‘explanation’ of the phenomenon
that we call a violin concert. But evidently this contribution, even if reinforced
by the contribution of the neurophysiologist, does not explain the whole of it:
aesthetic evaluation and the like apart, there is a range of purely scientific
ground that acoustics and physiology are constitutionally unable to cover.
Similarly macrodynamics, while quite essential to an explanation of cyclical phe-
nomena, suffers from definite limitations : 10 its cyclical models are what acous-

17 An instructive example of this type is the discussion between Professors R. Frisch
and J. M. Clark concerning the relation between the turning points of consumption
and the production of capital goods in the cycle (‘The Interrelation between Capital
Production and Consumer-Taking,’ ‘Reply,’ ‘Rejoinder,’ and ‘A Further Word,' Journal
of Political Economy, 1931-2).

18 A mechanical model will illustrate this phenomenon. Let an electric clock be
placed upon a somewhat rickety table. The electric current that keeps the clock going
is perfectly steady. Yet it may produce an oscillatory movement of the table.

19 The simile limps, of course, like all similes. And so does the following suggestion
which is not a simile. Cycles run their courses in the historical evolution of the capital-
ist economy. Even neglecting all the economic sociology that must therefore inevitably
enter into their explanation, we cannot help recognizing that their theory or, to avoid
this word, their analysis must be largely bound up with the theory or analysis of evolu-
tion rather than with dynamics, which is the theory or analysis of sequences that do
not carry any historical dates. No doubt there are certain mechanisms that played as
great a part in 1857 as in 1929. And these must be taken account of in any observed

l 68

V: A SKETCH OE MODERN DEVELOPMENTS

tic models of resonators are for the violin concert. But its votaries will not see
this. They construct macrodynamic models that are to explain all there is to
explain, for economists, in the cyclical phenomena. The very attempt to do
so involves several definite errors of fact . 20 And flimsy structures based upon
arbitrary assumptions are immediately 'applied’ and presented as guides to
policy, a practice that of course completes the list of reasons for irritation in
the opposite camp. One sometimes has the impression that there are only two
groups of economists: those who do not understand a difference equation;
and those who understand nothing else. It is therefore a hope, rather than a
prognosis to be presently fulfilled, which I am expressing if I venture to say
that this entirely unnecessary barrier — but one which is no novelty in our sci-
ence— to fertilizing interaction will vanish by virtue of the logic of things.

I have still to advert to a promising branch of dynamics that is not indeed
microeconomics, because it does not reach the individual deciding agents, but
is not macroeconomics either, because its models do not embrace the whole
of the economy: it is akin to Marshall’s partial analysis and is (mostly) con-
cerned with individual industries. The famous corn-hog cycle is the best-
known instance: if farmers, under the influence of a favorable relation be-
tween the price of hogs (pork) and the cost of rearing them (price of corn),
all decide at roughly the same time to increase their hog production and if,
as will be the case in this instance, they all come put at roughly the same
time with an increased supply of hogs, this may cause a sharp drop in the
price of pork (and also a rise in the price of corn), which might induce a ma-
jority of them to contract their production, which would recreate favorable
conditions that would in turn lead to another expansion in hog production.
The resulting cycle may of course be damped, explosive, or stationary, and a
very simple general model can be set up to describe this mechanism that is
indeed observable, not only on the hog market but in a large class of cases . 21

cycle by more or less generally applicable macrodynamic schemata, just as must, on a
lower level of technique, the ordinary theory of supply and demand. But they are only
tools and do not in themselves suffice, even if supplied with all conceivable time
series, to reconstruct the phenomenon as a whole and, of course, still less its long-run
outcomes.

20 Three of these may serve as illustrations. They will at the same time show why the
respective objections do not tell against the models themselves but only against the
claim alluded to. (1) Macrodynamic models, presented with that claim, involve the
proposition that the 'causes’ of business cycles must be found in the interaction be-
tween the social aggregates themselves, whereas it can be proved that business cycles
arise from sectional disturbances. (2) With the same proviso, macrodynamic models
carry the implication that the structural changes that transform economics historically
have nothing to do with business cycles, whereas it can be proved that cycles are the
form that structural changes take. (3) Constructors of macrodynamic models, almost
always, aim at explaining all the phases of cycles (and the turning points) by a single
'final’ equation. This is indeed not impossible. But it spells error to assume that it
must be possible and to bend analysis to this requirement.

21 The reader is. referred to M. Ezekiel, 'The Cobweb Theorem,’ Quarterly Journal of
Economics, February 1938 (reprinted in the volume. Readings in Business Cycle

DYNAMICS AND BUSINESS CYCLE RESEARCH

1169

Another famous instance, displaying the phenomenon for durable goods, is
Professor Tinbergen’s shipbuilding cycle. 22 On the one hand, it stands to rea-
son that no great confidence can be placed in the results that such schemata
yield — more apparently than really — and that extreme care is imperative in ap-
plying them, if indeed they be applicable at all to any practical cases at all.
Thus, readers of Professor Tinbergen’s paper will note with concern the for-
midable list of assumptions contrary to fact that they are asked to accept. But
even if they accept them all, they will find it difficult to reconcile themselves
to the complete neglect of all the influences upon shipbuilding that other in-
dustries and general business conditions are bound to exert; and they may see
in the basic graph (op. cit. p. 154) more traces of the business cycle than of
the mechanism that the schema isolates. On the other hand, however, schemata
of this kind are first steps toward a more perfect dynamic theory and must
therefore be listed as pioneer ventures of first-order importance: the same
reader who is impressed with their shortcomings — much as he would be in
reading a description of Columbus’ flagship — should be also impressed with
the fact that an element of the mechanism they describe is undoubtedly pres-
ent in almost every practical case and, furthermore, with the host of well-
defined tasks that they suggest for further work on the same line. Such work
cannot at present claim to be more than exploratory. But it explores the
ground on which a new structure will stand some day.

Theory), where he will find all that is necessary including almost all the relevant lit-
erature.

22 J. Tinbergen, 'Ein Schiffbauzyklus?,’ 'Weltwirtschaftliches Archiv, July 1931 . The
model is very interesting. Let currently available tonnage of freight carrying vessels be
represented on a time axis. Call it f(t) and assume, as a first approximation, that it
varies only in consequence of new tonnage produced, which we can therefore denote by
Postulate that freight charges will be high (low) when tonnage is low (high) rela-
tively to its trend which will stimulate (discourage) orders for new tonnage, the execu-
tion of which will discourage (stimulate) further orders and so on. Increase of tonnage
at any point of time will thus depend upon the relative scarcity or abundance of ton-
nage some time (say § years) before: f(t) ~ — af(t — ft) where d is a constant that
represents the intensity of reaction. This is a mixed difference and differential equation,
the first of its type to enter economic theory. Its solution will describe the. develop-
ment in time of the tonnage (theoretically ever after), if the development in an initial
interval be given. According to a standard method much used by physicists, we get
the solution by means of the (tentative) substitution, f(t) = e^ + P. Mathematically
trained readers will notice that this solution will be periodic if we make a an imag-
inary number (Euler s relation: e^ at = cos at + i sin at). [See J. A. S-, Business Cycles
P- 533-1

CHAPTER $

[Keynes and Modern Macroeconomics] 1

[1. Comments on the Wider Aspects of Keynes's Work] 1171
[2. The Analytic Apparatus of the General Theory] 1174

[3. The Impact of the Keynesian Message] 1180

In a history of economic analysis, it is from the standpoint of modern macro-
economics that we must look upon the greatest literary success of our epoch,
J. M. Keynes’s General Theory of Employment, Interest and Money (1936),
and it is from this standpoint only that we can attempt to do justice to it.
From any other view, this inevitably spells injustice. Like most of the great
economists whose messages reached the general public, especially like A. Smith,
Lord Keynes was much else besides being a worker in the field of economic
analysis. He was a forceful and dauntless leader of public opinion, a wise
adviser to his country — the England that was born in the First World War
and that afterwards kept, with deepening lines, the social physiognomy then
acquired — and a successful representative of her interest, a man who would
have conquered a place in history even if he had never done a stroke of
specifically scientific work: he would still have been the man who wrote The
Economic Consequences of the Peace (1919), bursting into international fame
when men of equal insight but less courage and men of equal courage but
less insight kept silent. 2

His General Theory, in a sense, was a similar feat of leadership. It taught
England, in the form of an apparently general analysis, his own personal view
of her social and economic situation and also his own personal view of ‘what
should be done about it.’ In addition, impinging as it did upon the moral
atmosphere created by the depression and upon a rising tide of radicalism, the
message of the book, issued from the vantage ground of Cambridge and propa-
gated by many able and faithful disciples, met with equal success elsewhere
and particularly in the United States. Considering that Lord Keynes’s attitude

1 [This was the last thing written by J. A. S. for his History. It was left behind to
be typed when he departed from Cambridge for the Christmas vacation, December
1949. It was not typed until after his death. Hence there was no opportunity for cor-
rections or modifications.]

2 In Parts 11, in, and iv, I have occasionally attempted to sketch personalities as
personalities. This cannot be done in this brief survey. Therefore I shall merely add
that the tribute above fails to convey a picture of the man or even the wealth of his
interests. Even his purely scientific work will not enter our picture in all its aspects. I
have described the words above as a tribute. But behind this tribute there is a much
ampler one that remains unwritten here. [See ‘John Maynard Keynes (1883-1946),’
written by J. A. S. for the American Economic Review, September 1946, reprinted in
Ten Great Economists (1951).]

1170

KEYNES AND MODERN MACROECONOMICS

I-I7I

was rather conservative in many respects, especially in matters touching free-
dom of enterprise/ this might seem surprising. But it must not be forgotten
that he rendered a decisive service to equalitarianism in an all-important point.
Economists with an equalitarian bent had long before learned to discount all
other aspects or functions of inequality of income except one: like J. S. Mill
they had retained scruples concerning the effects of equalitarian policies upon
saving. Keynes freed them from these scruples. His analysis seemed to restore
intellectual respectability to anti-saving views; and he spelled out the implica-
tions of this in Chapter 24 of the General Theory. Thus, though his scien-
tific message appealed to many of the best minds of the economic profession,
it also appealed to the writers and talkers on the fringes of professional eco-
nomics who gleaned nothing from the General Theory except the New Eco-
nomics of Spending and for whom he brought back the happy times of Mrs.
Marcet (see Part in, eh. 4) when every schoolgirl, by learning the use of a
few simple concepts, acquired competence to judge of all the ins and outs of
the' infinitely complex organism of capitalist society. Keynes was Ricardo's
peer in the highest sense of the phrase. But he was Ricardo’s peer also in that
his work is a striking example of what we have called above the Ricardian
Vice, namely, the habit of piling a heavy load of practical conclusions upon
a tenuous groundwork, which was unequal to it yet seemed in its simplicity
not only attractive but also convincing. All this goes a long way though not
the whole way toward answering the questions that always interest us, namely,
the questions what it is in a man’s message that makes people listen to him,
and why and how. However, our only task is to insert into our survey Keynes’s
contribution to our analytic apparatus. But the importance of his work seems
to impose the duty, before doing this, of presenting a few comments on its
wider aspects.

[1. Comments on the Wider Aspects of Keynes's Work]

First, Keynes's work presents an excellent example for our thesis that, in
principle, vision of facts and meanings precedes analytic work, which, setting
in to implement the vision, then goes on hand in hand with it in an unending
relation of give and take. Nothing can be more obvious than that in the be-
ginning of the relevant part of Keynes’s work stood his vision of England's
aging capitalism and his intuitive diagnosis of it (which he followed up with-
out the slightest consideration of other possible diagnoses): the arteriosclerotic
economy whose opportunities for rejuvenating venture decline while the old
habits of saving formed in times of plentiful opportunity persist. This vision
was clearly formulated in the first pages of the Economic Consequences of the
Peace (1919) and adumbrated with increasing clearness in successive works,
especially in the Tract on Monetary Reform (1923) and the Treatise on Money
(1930), Keynes's most ambitious purely scholarly venture. This Treatise,
though no failure in the ordinary sense of the term, met respectful but damag-
ing criticism and, above all, failed to express Keynes’s vision adequately. There-
upon, with admirable resoluteness, he determined to throw away the impeding

II72 V: A SKETCH OP MODERN DEVELOPMENTS

pieces of apparatus, and bent to the task of framing an analytic system that
would express his fundamental idea and nothing else. The result, given to the
world in 1936, seems to have satisfied him completely, so much so that he
felt himself to have led economics out of 150 years of error into the land of
definitive truth — a claim that cannot be put to test here but was as readily
accepted by some as it discredited his work in the eyes of others.

Next, we must record Keynes’s acknowledgments of indebtedness, which in
all cases can be independently established, to Mrs. Joan Robinson, Mr. R. G.
Hawtrey, Mr. R. F. Harrod, but especially to Mr. R. F. Kahn, whose share
in the historic achievement cannot have fallen very far short of co-authorship.
I take this opportunity to rescue from threatening oblivion, in addition to his
share in Keynes’s General Theory and in the theory of imperfect competition,
another contribution of Kahn’s. Marshall, though offering plenty of material
about the theory of short-run processes, always emphasized primarily the prop-
erties of the long-run normal without, perhaps, making it sufficiently clear
that what he really meant was the pure logic of the economic process rather
than any state of things that will actually emerge at any future time. It was
necessary to realize that what in fact emerges and can be observed is the result
of a succession of short-run events and short-run responses to them and will in
general bear little resemblance to the perfect equilibrium that would emerge
if time were given for everything to work itself out without any further dis-
turbances occurring meanwhile. This point of view, obviously very important
for the improvement of economic analysis, has been taken consistently by
Mr. Kahn, more consistently and consciously than by anyone else, I believe,
although I am unable to put my finger on any particular publication of his
that would substantiate this assertion. (On the possible relation of this scien-
tific contribution to the short-run philosophy of our age, see above Part iv,

ch - 7 ;)

Third, Keynes must be credited or debited, as the case may be, with the
fatherhood of modern stagnationism. In itself stagnationism is practically as
old as economic thought. In any prolonged period of economic malaise econo-
mists, falling in like other people with the humors of their time, proffer theo-
ries that pretend to show that depression has come to stay. We have had in-
stances before. But so far as our own epoch and scientific literature are con-
cerned, this attitude can be traced as we have seen to Keynes’s Economic Con-
sequences of the Peace. In the United States, very naturally, it did not 'catch
on’ until the crisis of 1929-32, but in the aftermath of this crisis it caught on
with a vengeance. A group that might almost be called a school and that
found resonance in almost all the strata of public opinion — the opinion of the
harassed business community included — rose to scientific importance under
the brilliant leadership of Professor Alvin H. Hansen, who amplified and ex-
panded the doctrine of the mature or stagnating economy in part on different
grounds than Keynes. We cannot attempt a critical analysis of it and shall
confine ourselves to noting that it stood up better than might have been ex-
pected in the face of apparently contradicting evidence for three reasons: (ij
because the new economic opportunities that are unfolding themselves may be.

KEYNES AND MODERN MACROECONOMICS 11 73

in part with justice, attributed to the consequences of the Second World War
and thus be interpreted as an intermezzo that is irrelevant to questions of
fundamental trend; (2) because every span of prosperity, however prolonged,
displays setbacks that it will always be possible to interpret as manifestations
of that trend; (3) because some workers who are not ‘stagnationists' in either
Keynes's or Hansen's sense nevertheless arrive at a similar result for reasons
of their own. 3 It sometimes looks as if we ought to speak not of stagnationists
and anti-stagnationists but rather of two different lines of a single stagnationist
argument — at least if we neglect all those anti-stagnationist writers who con-
fine themselves to criticizing individual stagnationist arguments.

Finally, fourth, let us note the significant fact — significant in that it shows
the extent to which Keynes’s General Theory was a response to widely ac-
cepted ideas — that in the 1930*8 other works appeared that, each in its own
way, attempted to express views that were similar to Keynes’s in important
points. An enthusiastic Keynesian has for instance spoken of ‘Swedish step-
ping stones to Keynes’ and, if we neglect the value judgment which this phrase
implies, we may indeed agree that the leading Swedish economists, in par-
ticular Lindahl, Myrdal, and Ohlin, developing certain pointers of Wicksell’s,
built with similar materials according to a similar plan. However, I shall merely
mention two works that will illustrate what I mean.

Erik Lundberg’s Studies in the Theory of Economic Expansion (1937) ap-
peared a year after Keynes’s General Theory, took full account of the latter,
and contains explicit acknowledgment of its ‘stimulating influence.’ But no
work of this range and depth can, within a single- year, be formed by an out-

8 Thus, it is possible to feel unconvinced by Keynes’s and Hansen’s arguments and
nevertheless to predict that capitalist evolution tends to peter out — i.e. to settle down
into a condition that might be just as well described as ‘stagnation’ — because the mod-
ern state may crush or paralyze its motive forces. Modem taxation is only an example
of the numerous factors which work that way, all of which can be established by an
analysis of the present state of England. And inhibitions of this kind — which more-
over can also be shown to be the inevitable outcome of capitalist history — will do as
well as the factors emphasized by Keynes and Hansen: evidently it comes to the same
thing, in a profit economy, whether the objective opportunities for gainful enterprise
decrease or the profits after having been made are taxed away. Let us note in passing
that there is, in some points, a strong affinity between the Keynes-Hansen and the
Ricardo- J. S. Mill argument concerning the advent of a stationary state. This is par-
ticularly clear in the case of Keynes, who in his earlier writings repeatedly spoke of a
‘decreasing response of nature to human effort’ — on the eve of a period of unsaleable
foodstuffs and raw materials— and of pressure of population. This element is not only
absent from Hansen’s argument but has been by him actually turned into its opposite.
But the notion that opportunities for investment will in the future tend to decline as
compared with people’s propensity to save, though handled in a manner different from
Ricardo’s, is present with both authors [Hansen and Keynes]. The main difference is
that they predicted difficulties in the process of the economy’s settling down to a sta-
tionary state that did not occur to Ricardo. [J. A. S. in his Capitalism, Socialism, and
Democracy (1942) put forward the point of view ‘that capitalist evolution tends to
peter out because the modem state may crush or paralyze its motive forces ’]

V: A SKETCH OF MODERN DEVELOPMENTS

side influence unless its author has arrived at somewhat similar conclusions by
himself. In addition, WickselTs influence is much more obvious than Keynes's,
and Lundberg’s work, both in methods and results, differs sufficiently from
Keynes’s to put his fundamental independence from the latter beyond doubt.
Indeed, except for effectiveness of presentation, we .might well speak of su-
periority, especially (but not only) because Lundberg tackled from the first
the problem of sequence which had to be done for Keynes by followers. For
us the book is particularly interesting because it displays the micro- and macro-
dynamic roots of current Keynesianism much better than did Keynes himself.
And for the post-Keynesians of our day it should be particularly interesting be-
cause of the enlightening experience that it may afford of seeing ‘Keynesian’
propositions in a different light and in different connections.

Carl Fohl’s book, Geldschopfung und Wirtschaftskreislauf (1937), owes
nothing to Keynes’s General Theory because, as the author stated in the
preface, his manuscript had been completed in December 1935 so that he
was not able to do more than to add references to the General Theory here
and there. All the more striking are a number of parallelisms between his and
Keynes’s propositions though, for English and American readers, the full ex-
tent of actual agreements will not be obvious at first sight. This is owing to
two facts: Dr. Fohl used a different conceptual apparatus and arrived at his
conclusions by methods that tend to obscure those agreements; and writing in
a different environment he gave much space to problems that are no longer
interesting to the American profession. Precisely because of this, the study of
this book would be extremely instructive to American economists: precisely
because of its apparently un-Keynesian approach, it reveals (objective) doc-
trinal relations and sheds what amounts to new light on several Keynesian
problems> especially the problem of equilibrium underemployment. This book
has had some influence in Germany and, so I have been informed by a Dan-
ish fellow economist, a considerable influence in Denmark.

[2. The Analytic Apparatus of the General Theory]

The analytic apparatus of the General Theory is, first, essentially static. We
shall explain presently the apparent paradox that its place in the history of
analysis is nevertheless bound up with the impulse it gave to macrodynamics.
Nor do I mean to deny that large parts of the book — some would say, its most
valuable parts — are devoted to dynamic considerations. But these were added
to a skeleton 4 that was severely static, so much so as to neglect, on principle,
all sequences and periods. 5 Second, this static theory is not the statics of long-
run normals but the theory of short-run equilibria. Third, the most impor-
tant point in this connection is that, of all the aspects of the investment proc-

4 This skeleton has been exactly formulated many times. We content ourselves with
mentioning O. Lange ‘The Rate of Interest and the Optimum Propensity to Con-
sume,’ Economica, February 1938, and L. R. Klein, The Keynesian Revolution (1947).

5 The outstanding example of this is the Kahn- Keynes multiplier. [J. A. S. planned
to discuss this in the later portion of this chapter which was not finished.]

KEYNES AND MODERN MACROECONOMICS

1175

ess, it is only the expenditure effect of new investment which enters the
model (not the book): as Keynes himself rightly emphasized, physical capital
(equipment) is assumed to remain constant throughout, both in kind and
quantity. This limits the theory to an analysis of the factors that determine
the higher or lower degree of utilization of an existing industrial apparatus.
Those who look for the essence of capitalism in the phenomena that attend
the incessant recreation of this apparatus and the incessant revolution that
goes on within it must therefore be excused if they hold that Keynes's theory
abstracts from the essence of the capitalist process. 6 Fourth, though aggregative,
Keynesian analysis-— no doubt for the : sake of simplicity — presupposes ‘free/ if
not actually 'pure/ competition in all commodity and factor markets. Fifth,
everybody is supposed to react to a particular kind of ‘real’ values, namely, to
prices expressed in wage-units or prices divided by an average money wage
per unit of labor, which is determined by bargains between employers and
employees — a well-nigh desperate measure of simplification that makes results
incomparable as between two different points of time unless wage rates are the
same in both. But there is an important exception to this postulate that people
calculate in terms of real values in this sense: workmen do so only in so far
as they save and invest but not in their bargains about their labor; when they
negotiate wage contracts they consider exclusively money wage rates. 7

Within the framework set by these five points, Keynesian analysis — the
analysis of current national income — works five endogenous variables, that is,
variables which the system is to determine: national income itself, employ-
ment, consumption, investment, and the rate of interest; and one exogenous
variable that is given to the system by the action of the 'authorities,' quantity
of money. 8 Employment may be allowed to drop out on the strength of the

6 This does not preclude us from finding several points of contact between Keynesian
and Marxian analysis. Fundamentally, however, they are opposites.

7 This raises three questions: (1) the question of the realism of this postulate per se;
(2) the question of the warrant for making this exception from the rule that is adopted
for all other transactions; (3) the question of the effects upon Keynes’s wage theory
of this postulate. In the available space we cannot answer any of them — beyond point- '
ing out that it was by virtue of this postulate that Keynes rejected the usual theory of
the supply function for labor, which is based on the opposite postulate. Slightly ex-
aggerating the importance of this point, Keynes calls it 'our point of departure from
the classical system’ (op. cit. p. 17). But it is tme that, as his argument is laid out,
it is this postulate which enables him to defend what is for his system a fundamental
proposition, namely, that the wage contract does not in principle determine real wages.
Followers have, gradually and tacitly, receded from this untenable position, which is less
essential for his argument than Keynes himself thought. Observe, however, the tenable
element in it: any increase or decrease of wage rates, if it increases or decreases wage
incomes in a sufficiently important sector of the economy (or even locality), will have
some influence upon prices and this influence may, in part or wholly, offset the effect
of the change in money wage rates — a nexus which is of course worth emphasizing.

8 One of the many inadequacies of our exposition, which cannot aim at more than
calling up a few essentials in the minds of readers who are supposed to be familiar
with the General Theory , is that we must follow the practice of many Keynesians in

V: A SKETCH OF MODERN DEVELOPMENTS

hypothesis, perhaps permissible in the very short run, that it is uniquely de-
termined by national income. The latter’s current value is by definition iden-
tically equal to current consumption plus current investment, all three quanti-
ties being expressed in wage-units . 9 And, with all the 'givens’ implied, current
value of national income may be said to be 'determined’ by three functions or
schedules that Keynes dignified with the title of 'psychological laws ’: 10 the
consumption function, the investment function, and the liquidity-preference
function, the three great simplifiers, which are to implement Keynes’s vision
of the economic process, in particular the intention to prove the existence of
underemployment equilibria and, to put it with perhaps inadmissible em-
phasis, his conviction that saving (or, alternatively, the rate of interest) holds
the role of villain of the piece that impoverishes nations . 11

In a sense similar to that in which the Marshallian demand curve descends
from Cournot (and, objectively, also from Verri), the Keynesian consump-
tion function descends from Mai thus and Wicksell 12 but received added pre-
assuming the quantity of means of payment to be externally given, i.e. of being freely
malleable by governments and central banks. This assumption brings us, all protests
notwithstanding, dangerously near to a crude quantity theory of which an externally
given quantity of money is, as we have seen, an outstanding feature. It would be un-
bearably unrealistic, even for modem England, unless, as Arthur Smithies has pointed
out, we define the quantity to mean legal teiider outside of banks plus the maximum
of deposits the law and the 'authorities’ permit banks to create.

9 Since savings are defined as the difference between income and consumption, this
identity yields the familiar identity between current savings and current (rate of) in-
vestment. But for the latter identity to be valid, current investment must not in turn
be identified, as has been done by Keynes, with the rate of production of new capital
equipment. See on this P. A. Samuelson, "The Rate of Interest under Ideal Conditions,’
Quarterly Journal of Economics (February 1939), pp. 292-5.

10 They have of course no claim to this title, not even in the sense in which, at a
push, it is admissible so to call Gossen’s law of satiable wants.

11 Those who are of the opinion that economic facts and Keynes’s analysis do not
bear out this conviction and that the element of truth in it reduces to so much of it
as had been recognized by J. S. Mill, W. Roscher, and A. Marshall (see Keynes’s and
even Hobson’s grudging admission of this, op. cit. p. i9n.), will naturally look for a
non-analytic explanation. They may find it, first, in England’s situation in which many
difficulties were capable of being solved by the expropriation of 'rentiers’ which, for
political reasons, were practically insurmountable in any other way; and, second, in the
kind of man Keynes was — he, the unattached intellectual, who abhorred bourgeois vir-
tues but was much too civilized to like violent measures, had a not unnatural prefer-
ence for the 'euthanasia’ of the creditor interest.

12 There is, however, this difference between the cases of Marshall and Keynes. They
would be exactly similar if the historian could say that Marshall saw his demand curve
in the less rigorous presentation of Mill and added rigor and 'edge’ to it. But Marshall
must have found all the rigor and edge that anyone could desire in Cournot. Keynes,
had he even been inspired by Malthus (Wicksell he then hardly knew), would have
had still to do all that remained for a disciple of Mill to do in the case of the Mar-
shallian demand curve. However, the (objective) affinity between Keynes and Malthus
stands out with particular clearness at the beginning of the General Theory (p. 25),

KEYNES AND MODERN MACROECONOMICS

11 77

cision at the hands of Keynes. As everybody knows, it represents current total
national consumption (total expenditure on ‘consumption’ in terms of wage-
units) as a function of current national income (in wage-units) and expresses
the arbitrary postulate that any increase in the latter is always attended by an
increase in the former but by a smaller one. 18 The investment function is less
easy to convey in a few words because of its connection with the very im-
portant dynamical considerations of Keynes’s chapters 11 and 12, which do
not enter into its explicit statement. It relates the rate of aggregate investment
to the marginal efficiency of (physical) ‘capital in general which that rate of
investment will establish’ (op. cit. p. 136), the marginal efficiency of capital
being defined as the relation between the expected yield of one more unit
(properly chosen) of any capital good and the cost of producing this unit. 14
This, as Keynes pointed out, is the same as Fisher’s ‘marginal rate of return

where Keynes worked out his concepts of Aggregate Supply and Aggregate Demand
Functions and of effective demand, Whatever weight we may attach to Keynes’s warn-
ings, we are inevitably driven to considering these functions, which are capable of in-
tersecting once (or several times) but are in any case not identical, as generalizations
of the genuine concepts of supply of and demand for individual commodities. Keynes,
aware of the pitfall, makes little use of this notion later on. But it is the Malthusian
notion. And if valid it would of itself suffice to establish the possibility of an equi-
librium of which full employment would not be a property. I repeat that the argu-
ments that Keynes set forth against what he conceived to be the classical theory (in his
sense) are entirely irrelevant against any correct statement of the full-employment
equilibrium theory and that his indictment that the classical theory knows no unem-
ployment except a frictional one is true only if the term frictional is defined so widely
as to rob the indictment of all significance.

13 This ‘psychological law’ of the propensity to consume must of course refer to
individuals. But the postulate in question refers to social aggregates. I have called it
arbitrary merely to emphasize the fact that it formulates only one of several possibili-
ties. We can express the consumption function by writing C = /( Y), then the postu-
late reads that the marginal propensity to consume, dC/dY, is always smaller than unity.
But let us note at once that, since instead of this consumption function, we might just
as well write a savings function, S = cp(Y). It has become usual with many Keynesians
to insert into both functions a second variable, namely the rate of interest, i, the im-
portance of this concession being minimized by postulating that the influence of i is
negligible.

14 The investment function is usually written I = F(Y, i), which expresses the mar-
ginal efficiency of capital by the form of the function F. The marginal propensity to
invest at a given rate of interest is then 5F/8Y. But we may also leave out the i in
order to emphasize the cases where investment is ‘autonomous,’ i.e. either imposed
upon the system by an external factor, such as government, or else entered into with-
out any regard to current conditions. Or we may, on the contrary, consider investment
as wholly ‘induced’ by consumers’ buying and then write the investment function
I = tp(C, i) as has been done by Lange (see note 4 above). These and other expres-
sions suggest themselves for the purpose of underlining this or that possibility but none
of them, taken by itself, does full justice to the thought of Keynes, who wisely refrained
from presenting any of them himself.

V: A SKETCH OF MODERN DEVELOPMENTS

IX78

over cost.' 15 But there is this difference between the two: whereas with Fisher
this marginal rate of return over cost — which implies a discounting process of
the series of expected yields— constitutes the basic fact about the interest phe-
nomenon, Keynes broke away at this point from what I have termed the
Barbon tradition and, in intent at least, established a monetary theory of in-
terest, according to which interest is not derived from, or expressive of, any-
thing that has, in whatever form, to do with the net return from capital goods. 16

This brings us to the third of Keynes's basic functions or schedules, the
liquidity-preference function. In Chapter 13 of the General Theory Keynes
seemed to accept the theory that makes the rate of interest ‘depend on the
interaction of, the schedule of the marginal efficiency of capital with the psycho-

15 Theory of Interest (1930), p. 168. I can, however, testify to the fact that Keynes,
whose knowledge of economic literature and particularly of contemporaneous and non-
English literature was not of the first order, arrived at his concept quite independently
and that he inserted the acknowledgment in question upon his attention’s having been
drawn to Fisher’s formulation. When he received the information, Keynes possibly
acknowledged too much. Such, at least, is Professor Lemer’s opinion. On the other
hand, it may be argued that both concepts are indeed improvements upon the concept
of marginal productivity of capital as developed by Marshall and especially Wicksell —
and this again points back to Bohm-Bawerk — but not more than that. The ‘pro-
spectiveness’ of marginal productivity of capital and its relation to its replacement
costs, few if any authors who used it would have denied.

16 Since this is, speaking from the standpoint of theoretical analysis alone, perhaps
the most important original contribution of the General Theory , a few comments are
in order. First, Keynes’s monetary theory of interest was subjectively original qua mone-
tary theory of interest but not objectively so. From the scholastics through their
Protestant successors to several pre-Keynesian modem writers, explanations of the inter-
est phenomenon have been offered that link it to money and whose authors would all
agree to the divorce that Keynes pronounced between the yield of non monetary capi-
tal and interest. The objective importance of Keynes’s work, so far as this goes, was
the success that his teaching met with: he actually converted a large number of fellow
economists who twenty years or so before considered a monetary theory of interest
hardly worth serious attention. Second, we must again recall the fact that Wicksell,
without adopting a monetary theory, made such an important stride toward it as to
inspire Swedish followers of his to do so. This Wicksellian line of advance is most
easily accessible, for the English reader, in Professor Erik Lindahl’s Studies in the
Theory of Money and Capital (1939) and Professor Bertil Ohlin’s two articles ‘Some
Notes on the Stockholm Theory of Savings and Investment,’ Economic Journal, March
and June 1937. The articles gave rise to a discussion between Keynes, Ohlin, Robert-
son, and Hawtrey that was followed by a number of articles by other economists. But
we must be content to add, third, that the particular form that Keynes gave to his
monetary theory was original both subjectively and objectively. It may differ much or
little from the Swedish one or from the one sponsored by Professor Hicks (Value and
Capital , ch. 12), which perhaps comes nearest to holding the field in that part of

1 Anglo-American literature that accepts the monetary theory of interest at all; but it
differs a great deal from other forms — so much so that it is a mere question of tem-
perament whether one wishes to see in them any affinity at all with the Keynesian
fonn.

KEYNES AND MODERN MACROECONOMICS 11 79

logical propensity to save' (time preference). For he stated as his only objec-
tion that it is impossible to deduce the rate of interest merely from these two
factors bcause it will also depend on the form in which the saver wishes to
hold whatever he saves. Having decided how much he will ‘reserve in some
form of command over future consumption’ (p. 166; note the classical ring of
this phrase), he has still to decide whether and to what extent he will part
with immediate command for a specified or indefinite period, that is, on his
liquidity preference. 17 On the face of it this clearly amounts to not more than
an amendment. Later on, however, even in the General Theory , Keynes him-
self and still more some orthodox followers of his, especially Professor Lerner, 18
went much further than that in the direction of the propositions that interest
is nothing but a payment for overcoming one’s reluctance to part with the one
ideally liquid asset in existence (own-rate theory of interest) and that the
quantity of money, considered relatively to the amount of it that is absorbed
by transactions, is the sole directly governing factor in its determination. 19
Current saving and current investment, being identically equal, cannot deter-
mine anything. Planned (ex ante) saving and planned (ex ante) investment
determine income (total net output) but not interest. And a number of para-
doxes follow for which some verification can be found in the freakish situa-
tions of deep depression. 20

17 In the exact formulation, this liquidity preference is usually introduced in an
equation of the form M = L(Y, i), which compares the available amount of money
(see note 8 above) — I bar the M in order to' indicate that it is given — with a 'demand’
for money that is partly determined by the volume of transactions, represented by Y,
and partly by people’s expectations about the future behavior of the various interest
rates (the 'speculative motive’), which is represented by i.

18 On Professor Lerner’s argument see Franco Modigliani, ‘Liquidity Preference and
the Theory of Interest and Money,’ E conometrica, January 1944, p. 79. I take this
opportunity to recommend this paper as a general commentary on this whole range
of questions.

19 Observe that, among many other things, interest must indeed also equalize the
advantages of holding cash and other assets. This is another instance of Keynes’s
Ricardian way of reasoning: the fact that the rate of interest must be such as to com-
pensate savers for their marginal 'abstinence’ — if it did not, it could not be what it
actually is — is obviously insufficient to establish the abstinence theory of interest. Ob-
serve further that, like everything else, both propositions — the own-rate and the absti-
nence theory — can be made formally true by a sufficient number of ‘givens,’ with the
added advantage that the tables can be turned upon the objector with the utmost
ease on the ground that he does not understand the assumptions of the argument. See
in this connection W. Fellner and H. M. Somers, ‘Alternative Monetary Approaches
to Interest Theory,’ Review of Economic Statistics, February 1941.

20 To mention one example: the Keynesian theory, taken literally, yields .the con-
clusion that an increase in the inducement or the propensity to invest, or in the pro-
pensity to consume, will only increase employment but have no tendency to raise the
rate of interest. The opposite in any normal situation is evident and has been stated
as a theorem by Professor Samuelson, not as an objection to Keynesian doctrine but as
part of it (see Foundations, p. 279, and compare J. R. Hicks, ‘Mr. Keynes and the
“Glassies”; A Suggested Interpretation,’ Econometrics, April 1937, pp. 152-3).

ii8q v: a sketch of modern developments

[3, The Impact of the Keynesian Message]

By means of those three basic functions or schedules a system of three equi-
librium conditions (equations) and one identity can be written that will, with
the quantity of money as an externally imposed datum, and under proper as-
sumptions, uniquely determine interest, investment, and either savings or con-
sumption and can be. extended to include also other variables such as Keynes's
waige rates . 21 But it was not this exact and crippled rendering of Keynes’s mes-
sage which fascinated, but the resplendent whole of it. Particularly in its bear-
ings upon saving, interest, and underemployment, this message seemed to re-
veal a novel view of the capitalist process not only, as we saw before, to the
public and 'writers on the fringes’ but also to many of the best minds in the
sphere of professional analysis — a novel view that was as attractive to some as
it was repellent to others . 22 This created almost immediately an atmosphere

21 The identity is either Y == C +. I or S = I. In the first case we may use the
equations C = /(Y, i ) and I = 3 >(C, i), in the latter case the equations S = <p(Y, i )
and I = F(Y, i). For an extension see Modigliani, op. cit. p. 46. But the system, espe-
cially any extended system, is not so simple a matter as it might seem to the layman.
This is the reason why, though I cannot go into the problems involved, I have tried
to save my conscience by inserting the words, 'under proper assumptions.’ It is not
difficult to difiw up a system that will display inconsistencies and fail to. define an
equilibrium or even multiple equilibria. This is important to observe because such
disequilibrium systems play a role in the Keynesian discussion: for the Keynesian they
may be a means for showing that, without government expenditure (‘fiscal policy’), the
economy may be incapable of hitting upon an equilibrium state, in particular a full-
employment equilibrium state.

Let us note, in passing, another important point. If we speak not of current but of
planned consumption and investment, then a condition of stability of the system is
that the sum of the marginal propensity to consume and the marginal propensity to
invest — the marginal propensity to spend — be smaller than unity. If it is equal to or
greater than unity, the system will still be determined but it will ‘explode’ instead of
converging toward equilibrium when displaced. Now several writers are prone to argue
as if this stability condition could be used to ‘prove’ that the propensity to spend is
actually smaller than unity because, so they hold, in capitalist reality the economic
system does not explode. This argument is quite inadmissible on logical grounds of
which I mention only one: a short-run theoretical system may be explosive while the
corresponding long-run system is not; and a long-run theoretical system may be ex-
plosive while the corresponding reality is not.

22 The division of professional opinion cannot be described in the same terms for
every country: in some it amounted to not more than a ripple on the surface. But in
England and the United States it went deep, and here a phenomenon asserted itself
unmistakably that deserves passing notice. Keynesianism appealed primarily to young
theorists whereas a majority of the old stagers were, more or less strongly, anti-Keynesian.
One aspect of this fact is too obvious to detain us and has, in addition, often been
emphasized: of course it is true that part of the resistance which every novel doctrine
meets is simply the resistance of arteriosclerosis. But there is another. The old or even
mature scholar may be not only the victim but also the beneficiary of habits of
thought formed by his past work, I am not referring now to that deeper understanding

KEYNES AND MODERN MACROECONOMICS ll8l

that was ideally suited for a struggle full of zest — as much so, in principle, as
was the atmosphere created by Ricardo in 1817, but more so, in fact, owing
to the temperature produced by the vastly increased number of professional
economists. All that can be done in this sketch is to list the three types of
tasks that were undertaken and together account for the torrent of more or
less Keynesian literature that is so characteristic of the decade after 1936.

The first task of course proceeded from the need felt by almost every econo-
mist to find out and to tell how he stood in relation to a message that no-
body could ignore. The bulk of the profession’s work went on as usual and was
but little affected by that message. But for all theorists, general economists,
and workers in the fields of money, banking, and business cycles, that need
could be satisfied only by laborious analysis, criticism, development. Since we
cannot survey the literature of this type satisfactorily, 23 we merely note two
facts. The one is that to have created such a response is, in and by itself, an
achievement, frank recognition of which is the greatest and most deserved of
the compliments that may be paid justifiably to the memory of Lord Keynes.
It was not the analytic performance which did it; nor was it the attraction of
the practical issues raised. As in the case of Ricardo, it was the intellectual
performance spiced by the — real or putative — relevance to burning questions
of the time which achieved what, in our field, neither could have achieved by
itself. The very blemishes of the intellectual performance and the very objec-
tions that may be raised against Keynes’s practical answer were instrumental in
bringing about spectacular success and in extending controversy over the whole
field that lies between, and includes, recommendations and purely logical ques-
tions of method. The other fact is the cumulative property of success of this
kind, which can be best conveyed with reference to teaching. Any successful
work of scientific standing must be mentioned in courses on the. subject to
which it is relevant. But a teacher, as soon as he discovers that students will
take to a work independently of his teaching or can be trusted to have be-
come acquainted with it before they entered his course, will also discover the
pedagogical advantages to be reaped from referring to, and building upon,
such previous knowledge; and he will, whatever his own opinions, deal much
more intensively with such a work than he would merely on its merits.. Thus
as in banking or insurance, growth induces further growth merely by increas-
ing reserves, success engenders success. Literature produces further literature.

The second task that the General Theory presented was the development,
critical or constructive, theoretical or factual, of a large number of individual

of things that can hardly be acquired except by the labor of decades: apart from this
and the difference in attitude to 'policy’ that results from this, there is such a thing
as. analytic experience. And in a field like economics, where training is often defective
and where the young scholar very often .simply does not .know enough, this element
in the case counts much more heavily than it does in physics where teaching, even
though possibly uninspiring, is always competent.

23 A sample of it, though heavily weighted ‘in favor,’ the reader will find in The
New Economics, edited and introduced by S. E. Harris (1947).

1182 V: A SKETCH OF MODERN DEVELOPMENTS

points. 24 There were the questions of Keynesian underemployment equilibrium,
of the ‘own-rate’ versus the ‘loan-fund’ theory of interest, of the principle of
aggregative (macroeconomic) theory, of the relation between money and real
wages, and many others, all of which produced ‘special literatures’ of their
own. But one example must suffice, the work that has been and is being done
on the consumption function. No theorist worthy of the name can accept as
an exact statement the postulate that links expenditure on consumption (in
terms of wage-units) with income (in terms of wage-units) alone. Still less is it
possible to accept the Keynesian property of this function ( dC/cLY , see note 13
above) as universally valid. We have therefore an approximation before us.
But how close is this approximation and, in particular, precisely how impera-
tive is it to add a term to allow for shifts of the function in time? And how
seriously are we sinning if we decree that the function be linear? Or must
we take in sails and admit independent variables other than income — for in-
stance, the amount of assets or at least liquid assets that individuals happen to
have already? All these questions are theoretical questions in the first instance
to be answered with reference to the autonomy of the function 25 and to its
consistency with other relations that we mean to accept on the same plane
of argument. But evidently they have also a most important factual aspect,

24 It should be observed that, so far as effects upon the content of a theory are con-
cerned, criticism or elaboration and even apologetics come to much the same thing:
irrespective of the worker’s intention, his work gradually changes, and in the end anni-
hilates, original meanings. But this is not so as regards the renown of a work and the
position it will ultimately occupy in the history of a science. Here, the worker’s atti-
tude and value judgments are much more important, even for the opinion of future
theorists but, of course, still more so for the future opinion of the profession and the
reading public. For instance, it would be easy to compile a list of arguments (all of
them valid) from the writings of, say, Hicks, Lange, Modigliani, and Samuelson that
in hands less friendly than theirs would sum up to a very damaging criticism. But they
had no. intention to damage. In Keynes’s case, merit and luck combined to blunt the
edges of the criticism of some of those who were most competent to inflict injury —
compare Marshall’s attitude to Ricardo.

25 The concept of the autonomy of a function or equation is due to Professor Frisch.
In a system of relations (mathematical or not) that are supposed to hold simultaneously
in a given framework of data, there may be some that hold individually only if the
others do and perhaps also if the given framework of data remains unchanged, and
others that retain individual validity even if some do not hold (and in another frame-
work of data). The latter we call autonomous, though we use this term also in other
senses (as in ‘autonomous investment’). The property is not absolute: a relation may be
more or less affected by a failure of the others. Therefore we had better speak of
higher or lower degrees of autonomy. Frisch’s paper on the subject (not published to
my knowledge) is one of the- most interesting contributions of our time to the pure
logic of modem theory. [In reply to a query by the editor, Professor Frisch stated that
the idea of autonomy of a function or equation is explained at great length in several
of his mimeographed lectures in Norwegian and that in printed form it is mentioned
only briefly in a note ‘Repercussion Studies at Oslo,’ American Economic Review,
June 1948.]

KEYNES AND MODERN MACROECONOMICS 11 83

And it is not surprising but a matter for congratulation that a dozen or so
econometricians have devoted, and are devoting, attention to it.

The third task springs from the necessity of 'dynamizing' the Keynesian
system either on the lines suggested by Keynes himself or on others. This ne-
cessity became obvious as soon as people began to 'work' the Keynesian system
seriously, for, as we know, even the mere question of the stability of a static
system quickly leads into dynamic considerations. But in addition many
Keynesians set about introducing into their models the usual 'dynamizers,' es-
pecially lags. As examples I mention Professor Smithies’ model 26 and then
again the Hansen-Samuelson equation which we have already met. Thus,
Keynesian equilibrium analysis gradually gave way to Keynesian 'process anal-
ysis,' and at present this Keynesian process analysis tends to merge with the
older and broader macrodynamics, the development of which we have glanced
at before. Here, at long last, we are at the point from which it is possible to
define and locate the historical importance of Keynes’s purely analytic con-
tribution to economics. This being important and, owing to the brevity of our
exposition, not easy to grasp, the reader’s attention is requested for the follow-
ing resume.

So far as the exact core is concerned, Keynes’s system is essentially static.
This static theory sufficed for the purposes he had most at heart, particularly
for his doctrine of underemployment equilibrium. However, partly because it
was inevitable that he should have had to add dynamic considerations to that
core, partly because his work impinged on a situation in the field of pure
theory that was dominated (independently of him) by the novel interest in
macrodynamics, this macrodynamics absorbed his work. But, owing to the
position Keynes’s work conquered in the thought of the profession, it was not
simply swamped by macrodynamics but in turn helped to mold and to propel
the latter — for which Keynes’s model was particularly qualified by virtue of
its simplicity. Professor Hicks was obviously right in saying that 'the General
Theory of Employment ... is neither the beginning nor the end of Dy-

26 Arthur Smithies, 'Process Analysis and Equilibrium Analysis,’ E conometrica, Jan-
uary 1942. It has been pointed out already that most Keynesians (or writers who use
the Keynesian or a similar apparatus) introduced planned (or ex ante) savings and in-
vestments so as to be able to make equality of savings and investments an equilibrium
condition instead of the identity it is in the case of savings and investments actually
performed. This is in agreement with Keynes’s position for he surely emphasized the
gulf that exists between saving and investment decisions strongly enough. Nor does it,
in itself, involve leaving the precincts of Keynesian statics. But it does so as soon as we
connect savings and investments explicitly with some quantity of the past, e.g. with
yesterday’s income. And then we are led away easily, though not by logical necessity,
not only from Keynesian statics but also from the Keynesian structure as a whole.
Take for instance the concept of idle savings. Laymen sometimes believe that the
Keynesian argument implies that there must, somewhere in the economy, exist savings
that are -idle in the sense that they are not being invested. But this notion is meaning-
less within the Keynesian argument. However, it immediately acquires meaning if we
introduce lags. Nor is it difficult to tell where the introduction of lags tends to lead
us, if it leads us away from Keynes: it leads us toward Robertson and Lundberg.

V: A SKETCH OF MODERN DEVELOPMENTS

1184

namic Economics/ 27 But it is also true that, unintentionally and perhaps even
against his will , 28 Keynes gave a mighty impulse to it — almost all work in
macrodynamics now starts from a ‘dynamized’ form of his model. In a history
of analysis this is the point to stress . 29 In a history of economic thought
Keynes’s policy recommendations — time-bound as they were — and certain char-
acteristically Keynes’s doctrines — which are losing their hold already — may be
much more important.

[The manuscript breaks off at this point; there are brief notes, partly in shorthand:
‘Other points to be added . . . Macroeconomics will need a new conceptual apparatus
. . . new general objects . . . multiplier . . . accelerator . . .’]

27 ‘Mr. Keynes and the “Classics,”’ Econometrica, April 1937, p. 159.

28 ‘Forget all about periods/ he once said to a pupil.

29 An interesting instance of a macrodynamic model of inventory cycles that makes
use of Keynes’s consumption function and thus illustrates well what I was trying to
convey is Lloyd A. Metzler, ‘The Nature and Stability of Inventory Cycles,’ Review of
Economic Statistics , August 1941.

Editor's Appendix

This appendix is written for the specialist who is interested in the order in
which the various parts of the History were written and to what extent they
were completed. I have already touched briefly upon these problems in the
Editor’s Introduction and in editorial notes (in square brackets) throughout
the book. The ordinary academic reader will find everything he needs to know
in the introduction. As I stated there, everything had been written out in long-
hand originally; some of the chapters had been written early and rewritten later;
most of them had been typed and corrected in pencil by J. A. S.; a few sections
had been typed toward the end and the typescript had been read very hastily
or not at all; and, finally, there was some material still in manuscript. There
were even alternative versions of some of the manuscript in the chapter on
Equilibrium Analysis (ch. 7 of Part IV).

The reader is reminded that the original manuscript, the alternative versions,
many bits of discarded manuscript, the notes (some of them on those little
pieces of yellow paper with which every student and close associate was so
familiar), and the first typescript with corrections and suggested revisions in the
hand of J. A. S., will all be deposited in the Houghton Library at Harvard Uni-
versity, where they may be consulted by the interested scholar. Although I
attempted to present as complete and accurate a version as possible of what
was actually written, there are undoubtedly some places where a different in-
terpretation would be possible. It is, therefore, a great source of satisfaction to
me that the original manuscript and the notes for revision will be available in
the Houghton Library.

In my anxiety to show that the author would not have sent his History to the
publisher without further work upon it, it may be that I have overemphasized
the degree of its incompleteness. In reality, the History was substantially
finished. The three main Parts (11, hi, and iv) needed a little polishing here and
there, a few additional pages to complete some of the sections, a few titles and
subtitles, and, of course, the references needed to be checked. The chapters on
The 'Mercantilist’ Literature (Part II) and on Sozialpolitik and the Historical
Method (Part IV), which date from the early period, would have been revised.
This was also true of the section on Senior’s Four Postulates in Chapter 6 of
Part III. A little more work remained to be done on some of the sections in the
chapter on Equilibrium Analysis. On the whole, however. Parts II, III, and IV
were all but completed. As for the rest, the introductory Part I and the con-
cluding Part V were being written at the very end and were somewhat less

1185

ii 86

editor’s appendix

complete. These two parts, however, were distinctly subsidiary and not abso-
lutely necessary to the main plan, the divisions of which were based on those
of the Epochen der Dogmen- und Methodengeschichte of 1914. Part I was to
be a brief exposition of methodological problems of which all but the last two
sections of the final chapter had been written; Part V was to be an equally brief
treatment, relating the present state of economics to the work of the past as
described in the three main parts. The photostats of the plans of Part V (which
appear below in this appendix) indicate that perhaps two-thirds of the conclu-
sion must have been written. There is another way of indicating the relative
importance in the whole work of the introduction and the conclusion, namely,
by comparing the relative amount of space allotted to them with the total. The
copy which eventually went to the publisher consisted of 1919 typed pages
— about 20 per cent of it in single space. Had the History been completed,
there might have been 2000 typed pages, of which the introduction would have
occupied a little more than 100 pages or 5 per cent of the total and the con-
clusion another 100 pages or 5 per cent of the total. Thus the two together
would have taken up only about 10 per cent of the total space.

It has already been stated in the Editor’s Introduction that J. A. S. probably
began writing the History in 1941 or 1942 and that substantial portions were
typed in 1942 and 1943. At that time he intended merely to translate, revise,
and bring up to date the Dogmengeschichte. Subsequently most -of this early
work was rewritten — so completely rewritten that often only a page or two
(much crossed out and written over) of an early version was used in a final
version. A question naturally arises at this point: how do we know when various
chapters and sections were written? For the most part we do not know the
actual dates of writing, but we do know in many cases either the actual or
approximate dates of typing. The date of typing may be considerably later than
the date of writing, since J. A. S. often accumulated a large amount of manu-
script before sending it off to be typed. He did not have even a part-time
secretary until the fall of 1948, and the typing was done by at least five different
people using different typewriters and having distinctive typing styles. Mrs.
Thorpe, who did much of the typing between 1943 and the middle of 1948,
often put the date of typing on the carbon copy. (It was a great pile of these
carbon copies, in the attic of the Acacia Street house, which first indicated, to
me just what had been written and kept me searching until I found manuscripts
and first typescripts for all the carbon copies.) One young woman typed manu-
script only in the summer of 1948, a second in the academic year 1948-9, and
a third in the fall of 1949. Other means of determining the approximate time
and order of writing are two reports of progress, which were made to me in the
second half of 1947 and the first half of 1948, and the dates of some of the
references quoted. The following outline of dates of typing will help the reader
to understand the detailed explanation of the order in which the History was
written and the extent to which various parts were rewritten. Many of these bits
of manuscript were without a title. Where there was a title provided by J. A. S.,
I have enclosed it in quotation marks. Otherwise the headings are merely de-
scriptive, of the material covered. The references in parentheses at the end of

editor’s appendix 1187

each description indicate the part, chapter, and section in which this subject
matter was eventually treated. Items dated 1950 (and after) were typed after
the death of the author.

Known or Approximate Dates of Typing 1

1942 (?)

Jan. 10, 1943
Feb. 19, 1943
March 15, 1943

June 19, 1943

June 19, 1943 1
July 10, 1943 j
July 13, 1943

Dec. 1, 1943

1943 (?)

Dec. 12, 1943
Dec. 17, 1943
March 26, 1944
March 27, 1944 \
April 4, 1944 j

Aug. 23, 1945
Sept. 17, 1945 '

Feb. 21, 1946

Summer 1948
1948-9

1948-9

'The Beginnings.’ Early version of Graeco-Roman Eco-
nomics, The Scholastic Doctors and the Philosophers of
Natural Law, and The Consultant Administrators and
Pamphleteers, (n, chs. 1, 2, 3)

The Historical Method. 2 Final version (iv, ch. 4, sec. 2) ,
Equilibrium Analysis. Early version (rv, ch. 7)

Wages, Unemployment, Poverty. Early version (n, ch. 5,
secs. 3 & 4) • ' ' ;j

'Consultant Administrators and Pamphleteers/ Interme-
diate version (n, ch. 3)

‘The "Mercantilist” Literature.’ 2 Final version (11, ch. 7)

Population, Increasing and Decreasing Returns. Early ver-
sion (n, ch. 5, secs. 1 & 2)

‘The Political* and Intellectual Scenery.’ Early version (hi,
ch. 3)

'Scope and Method.’ Early version (hi, ch. 5)

Senior’s Four Postulates. 2 Final version (111, ch. 6, sec. 1)
Sozialpolitik. 2 Final version (iv, ch. 4, sec. 1)

Value and Money before 1790. Early version (11, ch. 6)

The Scholastics and Their Successors. Intermediate version
(11, ch. 2)

‘Graeco-Roman Economics’ and 'The Scholastic Doctors
and the Philosophers of Natural Law.’ Final version (11,
chs. 1 & 2)

'Unemployment and the "State of the Poor.” ’ Final ver-
sion (11, ch. 5, sec. 4)

'Money, Credit and Cycles.’ Final version (111, ch.7)

‘Some Questions of Principle.’ Early version of Introduc-
tion (1)

'Fundamental Unity of the Period’s Economic Theory.’
Final version (iv, ch. 7, sec. 1)

'Cournot and the "Mathematical School”: Econometrics.’
Final version (rv, ch. 7, sec. 2)

1 Known dates give month, day, and year; approximate dates (especially after mid-
1948) are based on the typewriter used and the typing style. The term ‘final version’
means the last version, the one actually used. Sometimes, of course, there was only one
version. In such a case, even if unfinished, it became the final version.

2 These four portions of the manuscript were never revised; the final version was
also the early version. There is ample evidence that the author intended to revise them.

ii 88

1948-9

editor’s appendix

‘Statics and Dynamics. Determinateness. Stability, Equi-
librium.’ Early version (iv, ch. 7, sec. 3)

1948-9 ‘The Competitive Hypothesis and the Theory of Monop-

oly.’ Early version (iv, ch. 7, sec. 4)

1948-9 ‘The Theory of Planning and of the Socialist Economy.’

Final version (iv, ch. 7, sec. 5)

1948-9 ‘Partial Analysis.’ Early version (iv, ch. 7, sec. 6)

1948-9 ‘Note on the Theory of Utility/ Final version (iv, ch. 7,

App. secs. 1-6)

1948-9 ‘Welfare Economics.’ Early version (iv, ch. 7, App. sec. 8)

Late 1949 Introduction: Scope and Method. Final version (1, chs. 1,

2 , 3f 4)

Late 1949 ‘Partial Analysis.’ Final version (iv, ch. 7, sec. 6)

Late 1949 ‘The Walrasian Theory of General Equilibrium.’ Final

version (iv, ch. 7, secs. 7a, 7b, 7c)

Late 1949 ‘The Production Function.’ Final version (iv, ch. 7, sec. 8)

Late 1949 Developments Stemming from the Mar shall- Wicksell Ap-

paratus. Final version (v, ch. 2)

Late 1949 Economics in the Totalitarian Countries. Final version

( v , ch. 3)

Late 1949 - ‘Dynamics and Business Cycle Research.’ Final version

(v, ch. 4)

1950 Walras’ Theory of Production. Final version (iv, ch. 7,

sec. 7d) .

1950 Keynes arid Modern Macroeconomics. Final version (v,

ch. 5) .

1950 ‘Value and Money.’ Final version (n, ch. 6)

1950 ‘The Contribution of the Applied Fields.’ Final version

(iv, ch. 6, sec. 6)

1950 ‘The Concept of Equilibrium.’ Dis-'

carded

1950 ‘Statics, Dynamics, the Stationary! , , x

State, Evolution.’ Final version ' ' ’ 7 ’ 3)

1950 ‘Determinateness and Equilibrium.

Stability.’ Final version

1950 ‘The Competitive Hypothesis arid the Theory of Monop-

oly.’ Final version (iv, ch. 7, sec. 4)

1950 ‘Welfare Economics/ Final version (rv, ch. 7, App. sec. 8)

Sept. 1951 Walras: The Introduction of Capital Formation and of

Money. Final version (iv, ch. 7, sec. ye)

April 1952 Adam Smith and the 'Wealth of Nations. Final version

(11, ch. 3, sec. 4e)

The outline above is, of course, not complete. For many portions of the
History, we have no specific information about the dates of typing. The outline
does serve, however, to show what was written at the very beginning and at the

editor’s appendix 1189

very end. The manuscript typed in 1942 and 1943 was all completely rewritten
with the exception of those items commented on in' footnote 2. This was prob-
ably accomplished with respect to Part II (with the exception of the chapter on
value and money) by the end of 1945. 3 It is my impression that Chapters 1-5
of Part III and Chapters 1-5 of Part IV were written next. The chapters on
pure theory in Parts III and IV and the chapters on money in these parts were
written relatively late. The money chapters were written at roughly the same
time, but not in chronological order, the latest chapter having been written
first. The earliest chapter on Value and Money (in Part 11) had not been typed
by January 1950, and I am frankly puzzled as to when this chapter was re-
written. 4 This knowledge of the order in which some of the' later chapters were
written I owe to two brief interviews with J. A. S. in which he outlined for me
the state of the History. This he did somewhat reluctantly, at my request, be-
cause publishers’ agents were attempting to find out from me when the book
would be finished. I jotted down a rough outline but unfortunately I did not
put down the dates. I believe the first interview may have been in the fall of
1947 and the second in early 1948 because J. A. S. had a Sabbatical half year
in the fall term 1947-8. During this period he worked steadily at the History.
On the first occasion he told me that Part II was complete except for the chap-
ter on Value and Money; that Part III was complete except for Chapters 6 and
7, which remained largely to be done; and that in Part IV, Chapters 1-5 and
Chapter 8 (Money, Credit, and Cycles) 5 were typed but that Chapters 6 and 7
remained to be done. The Note on Utility (appendix to ch. 7) was written but
not typed. On the second occasion he reported that Chapter 6 of Part IV could
be used substantially as it then stood.

Chapter 6 of Part III was typed before the summer of 1948 and Chapter 7 of
the same part — the money chapter — during that summer. Finally, J. A. S. began
to work on the chapter on ‘higher pure theory’ (Part iv, ch. 7, Equilibrium
Analysis). Sections 1-6 and the Appendix (Note on Utility, which had been
written for some time) were typed in the fall of 1948.

During 1949, the last year of his life, J. A. S. apparently wrote the introduc-
tory and concluding Parts I and V, revised sections 3-6 in Part IV, Chapter 7
(Equilibrium Analysis), and wrote section 7 of this chapter on The Walrasian
Theory of General Equilibrium and section 8, the Production Function. All of
these were typed during the last quarter of 1949 or were found in manuscript
and typed after the death of the author. References in several of these sections

3 The final version of ch. 5 (Population, Returns, Wages, and Employment) was
typed in February 1946, and ch. 7 was left as it had been written in 1943. Ch. 6 on
Value and Money was rewritten very late (possibly in 1948).

4 This problem will be discussed below.

5 I have here used the final numbering of the chapters as later determined by
J. A. S. At that time he was thinking in terms of ten chapters. Sozialpolitik and the
Historical Method were to be treated in two separate chapters (chs. 4 and 5) and the
Note on Utility was to have been a chapter (ch. 9). This naturally changed the num-
bering of the other chapters (the money chapter becoming ch. 10).

EDITOR S APPENDIX

1190

or chapters to articles in periodicals which were published in February and May
1949 confirm these impressions as to the date of writing.

Part I was found with a pile of notes, manuscript, and reprints in the Cam-
bridge study. It was to have been in six chapters, which I reduced to four. The
first three chapters were so very short that I made them three sections of Chap-
ter 1, retaining the original chapter titles as section titles. Two sketchy plans
for Part I found among the notes indicate that J. A. S. was at work on the final
chapter of the introduction. (See also editorial notes on pp. 43-5 above.)

There was an earlier introduction typed the previous year by the part-time
secretary who worked during the academic year 1948-9. It consisted of 38 pages
of typescript as compared with 87 pages in the final unfinished version. It was
labeled 'Chapter I: Some Questions of Principle/ There were six subheadings,
some of which appear as section titles in the final version:

Why Do We Study the History of Economics?

But Is Economics a Science at All?

The Historical Character of Our Subject Matter
Is Economics an Ideology?

Economic Thought and Economics
Economics and Economic Theory.

Very little of this earlier introduction is embodied in the final one. Typed
pages 1 and 6-8, much crossed out and revised, were used in Chapter 1 (J. A. S.
chs. 1, 2, and 3) and typed pages 15-17 in Chapter 4 (J. A. S. ch. 6). Otherwise
the material in the final manuscript of Part I was completely new.

I do not know why J. A. S. entitled Chapters 2 and 3 (originally chs. 4 and 5)
'Interlude P and 'Interlude II/ I added the titles and subtitles in square
brackets, as I have done throughout wherever J. A. S. failed to supply detailed
titles. He had indicated the six divisions in Chapter 2. The title supplied by
me (The Techniques of Economic Analysis) is not quite accurate since strictly
speaking there are only three such techniques (Economic History, Statistics,
and Theory) with Economic Sociology as a possible fourth (see above, pp. 12
and 20-21). The last unfinished chapter in Part I (The Sociology of Economics)
is concerned with many of the problems treated in 'Science and Ideology/ the
author’s presidential address before the American Economic Association in
December 1948, and I am sure that he worked on both simultaneously. As was
his custom, J. A. S. spoke from rather detailed notes and wrote up the address
for publication afterward.

Part II was complete except for the money chapter, which was written but
not typed, and the inevitable revisions. The manuscript, notes, and discarded
manuscript for Part II, Chapters 1-4 and 7 (2-5 and 8) were found in a pile in
the closet of the Taconic study. 6 The first typescript for Chapters 1-5 and 7
(2-6 and 8), read and corrected by J. A. S., were in a file box labeled by the
author. The manuscript for Chapter 5 (6) was also in this file box apparently

6 The numbering of chapters in parentheses was the original numbering which was
changed at the very end. Since it occurs in many places in the manuscript, it is put in
here for the convenience of people who may use the material in Houghton.

editor’s appendix 1191-

because the author had not yet read the typescript of section 4, the concluding
section. The carbon copies were with all the others in a room on the third floor
of the Cambridge house. The manuscript of Chapter 6 (7), Value and Money,
with numerous notes and discarded bits of manuscript, including some pages
from the early version typed in March 1944, were found in a separate file box.

Until the last year or so J. A. S. had planned to have eight chapters in Part
II. He then reduced the number to seven. There was a fragment of a Chapter x
entitled "From the Beginnings to the First Classical Situation’ beginning with
T. Plan of the Part.’ The first two paragraphs of this plan have been used at
the beginning of the chapter on Graeco-Roman Economics (see above, pp.
51-2), since it is obvious that J. A. S. had not made the necessary revisions at
the beginning of this chapter when he made it the first instead of the second
in the Part.

Part II was written earliest and rewritten more than any other. It is here that
we see most clearly how the original plan (to translate, revise, and bring up to
date the early sketch of doctrines and methods) grew and changed almost be-
yond recognition. It will be recalled (Editor’s Introduction, p. v) that the
Epochen der Dogmen- und Methodengeschichte was divided into four parts or
chapters, which in turn were divided into sections. These sections were given
titles in the table of contents but were merely numbered as they occurred in
the text.

This practice of numbering his sections, without titles, J. A. S. followed when
he began writing the History of Economic Analysis. It was mainly in the chap-
ters which were written early and not subsequently revised (chs. 1 and 7 of
Part 11 and ch. 4 of Part iv) that the editor had to supply section titles. Later
the author gave titles not only to sections but even to subsections, for example,
in Parts III and IV. This last was not done at all in Part II. Where the sections
in Part II were long, the editor divided them and supplied titles for subsections.

The first part or chapter of the Dogmengeschichte (The Development of
Economics as a Science) treats very briefly the sources of economics in the
writings of the philosophers (from ancient times' down to the eighteenth cen-
tury) and in the popular discussion, subjects that are covered in considerable
detail in Chapters 1-3 of Part II of the History; the second part or chapter (The
Discovery of the Circular Flow of Economic Life) includes roughly those
authors (the physiocrats, Turgot, and Adam Smith) and topics that are dis-
cussed in Chapters 4-7 of Part II of the History. The Dogmengeschichte de-
voted 32 pages — somewhat large pages, to be sure — to what required 326 pages
(pp. 51-376) in the History.

A glance at the outline (pp. 1187-8) of the Known or Approximate Dates
of Typing various portions of the History will be most helpful in tracing the
evolution of the chapters in Part II. Most chapters went through at least two
stages but Chapters 2 and 3 (The Scholastic Doctors and the Philosophers of
Natural Law and The Consultant Administrators and the Pamphleteers) went
through no less than three stages — an early, an intermediate, and a final treat-
ment.

The early version of Chapters 1-3 (entitled 'Chapter I: Beginnings’) consisted

119 2 editor’s appendix

of 77 typed pages divided into 17 sections without titles. It starts with a descrip-
tion of the author’s concept of Classical Situations and ends with a short ac-
count of the Consultant Administrators and of Public Finance. It must have
been typed not later than 1942, since a few pages of it are embodied in an
intermediate version of Chapter 2 typed June 19, 1943. Several pages of this
early version were used in the final manuscript of the first chapter, Graeco-
Roman Economics. For example, typed pages 5-6, 14-16, and 19-21 became
manuscript pages 2-3, 42-4, and 52-4 of the final version. I believe the date of
typing in this case is somewhat misleading, and that this chapter was kept back
and sent off to be typed only when Chapter 2, which was revised in 1944 and
again in 1945, was ready. There were no section titles, although the sections
were numbered.

Chapters 2 and 3 were revised and expanded twice. There is no trace of the
early version in the intermediate treatment of the Scholastics and only four
pages (39-42) of the early version appear in the intermediate treatment of the
Consultant Administrators. A few pages from both the early and intermediate
versions are used in the final manuscripts of Chapters 2 and 3 but most of the
material is entirely new. Chapters 1 and 2 were typed finally in August and
September 1945, and it seems probable that Chapter 3 was typed about the
same time, but we have no definite date. The editorial note on page 181 above
explains how Chapter 3, section 4e (Adam Smith and the 'Wealth of Nations),
which had been discarded by the author without ever being typed, was restored
by the editor.

Chapter 4 (The Econometricians and Turgot) was entirely new except for
two typed pages taken from the intermediate treatment of the Consultant
Administrators and the Pamphleteers. J. A. S. was somewhat in doubt about
the title. It was originally 'The Econometricians.’ He added 'and Turgot?’ in
pencil on the first typescript.

Chapter 5 (Population, Returns, Wages, and Employment) had a rather full
early version which was typed in two sections on March 15, 1943, and July 13,
1943. It was almost completely rewritten with only two typed pages from the
early version used in the final version, the last section of which was typed on
February 21, 1946. This last section of typescript had not been read and
corrected by J. A. S.

Chapter 6 (Value and Money) was found in manuscript, obviously not quite
finished, with the pages unnumbered and slightly mixed up. The order of pages
in such cases was determined by Arthur W. Marget, who put this chapter to-
gether and did much of the work of editing it. Some of the manuscript was
much crossed out and written over, but it seemed to be divided into seven
sections, of which 1, 3, 6, and 7 had titles. In the file box with this manuscript,
there were voluminous notes (largely in shorthand) and many discarded bits
of manuscript — also the manuscript of the early treatment of money typed in
March 1944. Several typed pages from the early manuscript were used in sec-
tions 2 and 3 of the later version. Among the notes was a plan of the chapter,
which is reproduced on the opposite page. This plan confirmed the impression
that seven sections were intended and supplied the missing section titles. This

editor's appendix 1193

page, as well as the three others reproduced in this appendix, will give the
reader a more vivid impression than mere words could convey of the appearance
of many of the notes and the difficulty of deciphering them.

As I have said already, I am frankly puzzled as to when this revision of
Value and Money in the early period was written. I have some reasons for
feeling that it might have been done rather early, as I stated in my note on
page 276 above. If that was so, however, I do not understand why it was never
typed, unless J. A. S. wanted to do a good deal more work on it and decided to

editor’s appendix

1194

wait until he was working on the money chapters in Parts III and IV. We do
know that the 9 arly version, which consisted of 31 typed pages, was typed on
March 26, 1944. Pages 1-12 of this early version were incorporated into section
2 of the later version (see above, pp. 289-98) and pages 14-18 on Galiani were
incorporated into section 3 (pp. 300-302).

For a time, I was convinced that this chapter on money was written rather
late, after those in Parts III and IV. The money chapter in Part IV was already
typed when J. A. S. outlined the state of the History to me in the first of our
two interviews on this subject — probably in the fall of 1947. At that time he
told me that Part II was complete except for the chapter on Value and Money
and that Part III was complete except for Chapters 6 and 7 (Pure Theory and
Money, Credit, and Cycles), which remained largely to be done. Chapter 7 was
typed in two installments, the second one during the summer of 1948. I as-
sume that, having finished the money chapters in Parts IV and III in that
order, he then undertook the rewriting of Value and Money (before 1790) for
Part II. At about this time, he had agreed to write two little books, one on
Money and one on Banking, for the Economics Handbook Series. He had taken
out of the brown trunk, in which it was kept, the manuscript of the book on
money, 7 which he abandoned on his return from Europe at the end of the
summer in either 1934 or 1935. It would have been natural at the same time to
revise his early treatment and to emphasize certain fundamental concepts that
were important to his own theory of money.

The only trouble with this thesis is that the manuscript does not look like
something written in 1948 or later. As time went on, J. A. S. became increas-
ingly sure of what he wanted to say. It is possible, of course, that this was a
very hurried version with which he was not completely satisfied — that he wanted
to go over it again before having it typed. It may even be that some of the
sections were revised earlier and some later. This may help explain why some
sections had titles and some did not. Sections 2, 4, and 5 lacked titles and were
not quite finished. The final paragraph of section 7 on Interest (p. 334), which'
is also the final paragraph of the chapter, was unfinished. The page, crowded
with notes to be used in carrying on the argument, is reproduced on the next
page as a typical example of many such pages.

Chapter 7 of Part II (The 'Mercantilist’ Literature) was written, very early
and was never rewritten as were the early versions of the other chapters in this
Part. It was typed in two sections on June 19, 1943 and July 13, 1943. It had
no title and was not even divided into sections, although it was a comparatively
long (71 typed pages) and detailed treatment of the subject. It gives evidence
of sustained reading of the literature in the Kress Library at the Harvard School
of Business Administration. The title for the chapter was suggested by the
author in a penciled note on the typescript, which he had read and corrected.
The editor divided the chapter into sections and subsections and supplied titles.

Part III presented no such problems as those we have just reviewed. It was
apparently written in a perfectly straightforward way and was complete except

7 This manuscript, written in German, is now being translated and edited by Arthur
W. Marget in the hope that eventually it may be published.

editor’s appendix

H95

for the first section ot Chapter 6. It corresponds to the third part or chapter of
the Dogmengeschichte (The Classical System and Its Offshoots). All of Part III
was assembled in Taconic. The manuscript of the first four chapters with notes

and discarded material was found in a heap in the closet of the Taconic study.
The first typescript of these chapters was in two folders on the desk. The
manuscript and typescript of Chapters 5 and 6 were in one file box, and there
was another box of notes and bits of discarded manuscript fpr these chap-
ters. The manuscript and the typescript of the two chapters on Money, Credit,

1196 editor’s appendix

and Cycles (Part 111, ch. 7 and Part iv, ch. 8) were in the same file box.

All the typescript of Part III had been read and corrected by the author in
pencil except the last two sections of Chapter 6 — section 5 (Capital) and section
6 (The Distributive Shares). It should be noted, however, that these were two
very long and important sections consisting of. 103 typed pages. Some of the
other chapters had been read very rapidly and superficially, especially the middle
portion of the money chapter. A few days before his death, on his return from
the meetings of the American Economic Association toward the end of Decem-
ber 1949, J; A. S. began to go through Part III systematically. In addition to
penciled corrections on the typescript, there was a little pile of notes on several
sheets still attached to a pad with the heading 'Reading III ? 30.xii.49/ These
were undoubtedly suggestions for changes. Then or earlier he had also removed
some pages from the end of Chapter 5 (sec. 5c, The Model, and sec. 6, The
‘Classic’ Conception of Economic Development). Clipped to the first of these
pages was a sheet of shorthand notes with the comment ‘Ch. 5, sec. 5 becomes
quite loose!’

There were not so many ‘early versions’ for Part III as for the preceding part.
There was a ‘Chapter II: The Political and Intellectual Scenery,’ a few pages
of which were used in the final version of Chapter 3; there was a ‘Chapter III:
Scope and Method,’ a few pages of which were used in the final version of
Chapter 5; and there was the material (with no title) on Senior’s Four Postu-
lates which, without being rewritten, became the first section of Chapter 6. The
first and last of these three were typed in December 1943.

The editorial note on page 575 explains that J. A. S. would have revised the
material on Senior’s postulates and integrated it with the rest of the chapter.
But how do we know this? The rest of this chapter was written rather late
— probably in 1948. There were 161 typed pages, but it began with section 2
(Value). The first page of section 2 was page 1 of the typescript. The material
on Senior’s postulates in a folder was put at the beginning of the chapter. In
discussing the plan of Part IV on page 758, J. A. S. wrote ‘Chapter 7 (Equi-
librium Analysis) corresponds to Chapter 6 of Part III and assigns the same
piloting function to Walras that was assigned to Senior in Part III.’

There was also another problem — that of a title for Chapter 6. All the other
chapters in Part III were complete with titles, section titles, and in many cases
subsection titles. All of Chapter 6 from section 2 on was complete with section
titles and subsection titles. But section 1, not having been revised, lacked a title
and so did the chapter, since the chapter title appears at the beginning of
section 1. Here again the Plan of the Part provided a solution. This time it was
the plan of Part III on page 383 where J. A. S. explained that he proposed ‘to
draw a picture of analytic developments with reference to a cross section . . .
represented (in Chapter 5) by J. S. Mill’s Principles’ and that he would simplify
matters ‘by reserving the details of pure theory and of money . . . for two
separate chapters (6 and 7).’ Hence the titles for Chapters 5 and 6 — General
Economics; A Cross Section and General Economics: Pure Theory.

Part IV may be considered a development of the fourth part or chapter of
the Dogmengeschichte (The Historical School and the Marginal Utility Theory)

editor’s APPENDIX 1197

but only so far as the broad subject matter is concerned. In the early sketch, this
material required only 27 pages; in the History, it required nearly 400 pages.

At one time this Part was to have consisted of ten chapters; then the number
was reduced to nine and finally to eight. This was not the result of any elimi-
nation of material but rather the result of the consolidation of Chapters 4 and
5 into Chapter 4 and of Chapters 8 and 9 into Chapter 7, the intervening
chapters having changed their numbers. Because this confused, me at first and
because it may confuse others using the manuscript and notes deposited in the
Houghton Library, I shall quote from Chapter 1 of Part IV as it was originally
written — before being edited. Probably the first three chapters of Part IV and
the parallel chapters in Part III had been written and typed not later than early
1947. After commenting on the first three chapters, the outline for the Plan of
the Part on page 758 read as follows:

Then follow comments on two allied groups of men and ideas that lend
themselves to separate treatment, the group whose work centered in the
contemporaneous interest in social reform and whose leaders were with
singular infelicity dubbed 'socialists of the chair’ ( Kathedersozialisten );
and the group that was called, and called itself, the historical school
(Chapters 4 and 5), The much -debated question of economists’ value-
judgments will conveniently be touched upon in connection with the
former and the famous 'battle of methods’ (and its American counterpart,
the institutionalist controversy) in connection with the latter. To some
extent, this arrangement impairs our picture bceause when we go on to a
brief survey of the men, groups, and developments in 'general economics’
(Chapters 6 and 7), we shall have already eliminated two of the most
important influences upon this 'general economics.’ Let me hence entreat
the reader to peruse these chapters in their order. The last three chapters
of the Part deal with sets of topics that it has seemed best to reserve for
separate treatment. Chapter 8 corresponds to Chapter 6 of Part III and
assigns the same piloting function to Walras that has been assigned to
Senior in Part III. It aims at presenting the emergence of the elements of
modem pure theory in a manner that will, I am afraid, prove as unsatis-
factory to the modern theorist as it will seem overloaded to the non-
theorist. The latter may be right in contenting himself with what he will
have read on these matters in Chapters 6 and 7. Chapter 9, on the for-
tunes of utility theory and its successors to the present day, stands by itself
or almost so and should only be read by those who take special interest in
the matter. Segregation of the topics of money, credit, saving and invest-
ment, business cycles in the last chapter (10) calls but for this remark:
segregation imposed itself for reasons of exposition as it did in Part III.

The manuscript and typescript of Chapters 1-5 were found in a file box. In
the folder with Chapter 4 were notes and reprints to be used in the rewriting
of this chapter. The manuscript, typescript, notes, and discarded bits of man-
uscript for Chapters 6 and 7 were found in another file box. There were also a
few bits from Chapter 7 found in the desk at Littauer. After mid-1948, the

119« EDITORS APPENDIX

carbons were no longer deposited in the attic on Acacia Street so that it was
somewhat more difficult to find out just what had been done and where it
belonged. J. A. S. had glanced over the typescript of most of the chapters in
this part very hastily and made small corrections in pencil. He certainly had not
read through the early chapters systematically as he was approaching the end
of his work. For example, he had not corrected the numbering of the chapters
in the Plan of the Part quoted above.

Part IV presented no real difficulties except with reference to Chapter 4
(Sozialpolitik and the Historical Method), Chapter 7 (Equilibrium Analysis),
and the concluding section of Chapter 6 (sec. 6: The Contribution of the
Applied Fields), all of which were unfinished. Chapter 4 as printed consists of
two early versions typed in 1943, which would have been extensively revised.
The long editorial note on pages 800-801 says all that is necessary about this
chapter. Chapter 6 was written and typed relatively late but seems complete
except for the final section on the applied fields which was only sketched out.
Of the five subsections, two had headings only and another — that on public
finance — was unfinished. This material was found in manuscript and typed
after the death of the author.

Chapter 7 (Equilibrium Analysis) aimed 'at presenting the emergence of the
elements of modern pure theory/ assigning the piloting function to Walras.
There is a brief early treatment typed in February 1943. It consists of 29 typed
pages with many blank spaces for footnotes to be filled in later. The concluding
paragraph, summing up and appraising the contribution of Walras to scientific
economics, breaks off in the middle of a sentence. J. A. S. had read the first
typescript 8 and made many penciled notes in the margins and other blank
spaces. These were not corrections but suggestions for elaboration of the argu-
ment. The final version is a long chapter of over 200 typed pages (123 printed
pages) which covers essentially the same topics as those discussed -in Economics
203, the course in Advanced Economic Theory given by the author.

Much of this chapter was written a few pages at a time during the second
half of 1948 and the whole year 1949 — possibly after a return from a classroom
discussion of the subject. This last fact explains to some extent the existence of
a number of abandoned ‘early versions’ for some sections and the existence of
alternative versions for other sections. It was a little confusing in the beginning
to choose from among these, but the choice was made easy in some cases by the
fact that an early version was revised and extended to form a final version (sec-
tions 4 and 6, for example) . The plan of the chapter and the numbering of the
sections was always perfectly clear with the single exception of the position of
the material on Welfare Economics which will be explained below.

The first six sections of Chapter 7, the first six sections of the Appendix to
the chapter (Note pn the Theory of Utility), and the section on Welfare Eco-

8 This typescript together with the manuscript will be deposited in the Houghton
Library at Harvard. This arrangement had not been made in the late spring of 1950
when Richard M. Goodwin read the various sections of this chapter. He wished to
incorporate it at the end of section 1.

:•

l 1

editor's APPENDIX 1 199

nomics were typed during the academic year 1948-9. 9 Sections 1, 2, and 5 were
left as they had been typed with minor corrections and revisions in pencil on
the typescript. The typed version of section 3 was abandoned by the editor,
two alternative versions in manuscript being used in its place. Sections 4 and 6
were revised and added to by the author. The final version of section 6, part of
section 7 (sub a, b, and c), and section 8 were typed in the last quarter of 1949.
The version of Welfare Economics typed in 1948-9 was abandoned by the
editor for another found in manuscript, which became section 8 of the Appen-
dix (Note on Utility). (It may be a little confusing that both Chapter 7 itself
and the Appendix to the chapter have eight sections.)

We now comment on the sections in their numerical order, omitting sections
1, 2, and 5, which — as has been stated — presented no particular problems.
Section 3 (The Concept of Equilibrium) presented several problems. There
were no less than four different versions with four different titles — the typed
version of 1948-9 and three alternative versions in manuscript to which J. A. S.
had clipped a page of shorthand notes with the comment 'There are now three
alternative formulations of [section] 3 [undecipherable shorthand] for the pur-
pose of inevitable rewriting of 3.' The title of the typed version was ‘3. Statics
and Dynamics. Determinateness. Stability. Equilibrium/ I labeled the three
alternative formulations (3a), (3b), and (3c). Their titles were as follows: (3a)
The Concept of Equilibrium; (3b) Statics, Dynamics, and the Stationary State,
Evolution; (3c) Determinateness and Equilibrium. Stability. There was a great
deal of repetition of the problems discussed in these four versions, and yet no
single one of them was complete. I abandoned the typed version for reasons to
be discussed in the next paragraph but one. I decided to use alternative formu-
lations (3b) and (3c), which were roughly complementary* whereas (3a) tended
to repeat what was treated more comprehensively in (3b). At first it was my
intention to publish (3a) and some other early and alternative versions in this
appendix. The arrangement whereby they will be deposited in the Houghton
Library at Harvard makes this unnecessary.

In the editorial note at the beginning of the chapter on Equilibrium Analy-
sis, I explained that it had first been put together with the assistance of Richard
M. Goodwin. This was done in the late spring and early summer of 1950 before
Parts II and III and the preceding chapters of Part IV had been edited
because Goodwin was leaving for Europe. In dealing with section 3, he used
parts of all four formulations, arranging them so as to give as much coherence
and continuity as could be achieved. Later, after much work on the earlier
portions of the History, I decided to present it as nearly as possible as it had
been written. This meant, of course, no mixing and rearranging of different

9 At this point, I should like to correct certain implications as to dating made in
the editorial notes on pp. 951-2, 983, and 1068-9. The first four sections of Chapter 7
were written, I believe, during 1948 and not 'long ago’ as stated. The Note on the
Theory of Utility was typed, in 1948-9 but written earlier. Section 8 of this Note
• (Welfare Economics) was written at about, the same time as the first six sections of the
Note. These corrections are based partly on a careful study of the typing; to some
extent they are due to the realization that the Appendix on utility was once Chapter 9.

1200

editor’s appendix

treatments of the same subject, even in the interest of more complete coverage.

I found no manuscript for the typed version of section 3, which was so general
and so completely lacking in specific footnote references that I began to wonder
if it could have been dictated. Later on I had the same feeling for the same
reasons about the typed version on Welfare Economics. As I have pointed out
on more than one occasion, J. A. S. first wrote all the History in his own hand.
Occasionally he bemoaned the fact that there was so much to do and so- little
time in which to do it. When during 1948-9 he had adequate secretarial assist-
ance for the first time, I remember encouraging him to attempt to dictate some
of the material he knew so well with the idea that he could revise it later. He
reported that the experiment was not successful.

Section 4 (The Competitive Hypothesis and the Theory of Monopoly) affords
an example of the difficulties encountered when the manuscript pages were not
numbered at all and several bits of typescript were each numbered independ-
ently with no hint of their order. The final version of this section consisted of
four different installments, written at different times. Three (the first two and
the last) had been typed in 1948-9 and one existed only in manuscript. Actually
the first two followed directly after one another despite the fact that the pages
were numbered 1 to 8 and 1 to 5 respectively. First J. A. S. read and revised in
pencil these two typed installments; then he added several pages in manuscript
with the last paragraph of the typescript continued on the first page of the new
manuscript. Finally the fourth installment (3 typed pages) seemed to follow the
last paragraph of the new manuscript installment although this last is not abso-
lutely certain (see note, p. 983). To further confuse the situation, there was
found among the notes another treatment in manuscript entitled 'Monopoly,
Oligopoly, Bilateral Monopoly.’ This was apparently a brief first attempt that
had been discarded without ever being typed.

There were three versions of section 6 (Partial Analysis), all typed from
manuscript, two in 1948-9 and one in the last quarter of 1949. The first of these
(5 typed pages) had obviously been discarded; typescript and manuscript were
found folded up together in the closet of the Taconic study. The other two
versions were found in the file box with the rest of the material for this chapter.
The second version (8- typed pages) was read and revised and had several pages
of new manuscript added to it. It was then retyped and became the third ver-
sion (12 typed pages). This last version had not been read and corrected by the
author after it was typed.

Now we come to section 7 (The Walrasian System of General Equilibrium),
which was unfinished and most of which had not been typed. Fortunately,
since this was to be the pivotal section of the chapter, a good deal of it was
found in manuscript. Perhaps it would not be out of place to recall here the
comments made on the work of Walras on page 827 above: 'His system of
economic equilibrium, uniting, as it does, the quality of "revolutionary” crea-
tiveness with the quality of classic synthesis, is the only work by an economist
that will stand comparison with the achievements of theoretical physics. . .
It is the outstanding landmark on the road that economics travels toward the

editor’s appendix 1201

status of a rigorous or exact science and, though outmoded by now, still stands
at the back of much of the best theoretical work of our time.’

The editorial note on page 998 explains how this chapter was put together
from six different installments, two of which were typed and four of which
existed only in manuscript. For the most part there were no subsection titles.
The two typed installments (of 9 pages each) were found with their manu-
scripts. They had not been read by J. A. S. These are now subsections 7a, 7b,
and 7c. Five different installments were found in manuscript with pages un-
numbered, I numbered them 1-3, 4-7, 8-24, 25-36, and 37-55. The first 3 pages
were used as the introduction to the section, pages 4-7 were discarded, pages
8-36 became subsection 7d (Walras’ Theory of Production), and pages 37-55
became subsection 70 (The Introduction of Capital Formation and of Money).
The discovery of this last important section of manuscript was rather dramatic.
It had been overlooked when the section was first put together. I was going
through the file box in September 1951 in the hope of finding a few discarded
paragraphs on this subject. I did find a few preliminary pages and I was having
them typed when suddenly I came upon pages 37-55. These last subsections
must have been written in the second half of 1949. There is a reference on
page 1021 to Leontief’s ‘Input and Output Analysis,’ Papers and Proceedings,
American Economic Association, May 1949.

Section 8 (The Production Function) was typed in the last quarter of 1949.
It must have been written during that year— possibly in the summer — since
there is a reference (p. 1040) to a controversy in the Quarterly Journal of Eco-
nomics for February 1949. (The February number probably appeared in
March.) J. A. S. had scarcely more than glanced at the typed copy and had
not made the usual corrections in pencil. He had been very busy in December
1949 — writing the article on Mitchell for the Quarterly Journal, putting down
notes for ‘The March into Socialism’ for the December meeting of the Ameri-
can Economic Association, preparing an outline of the Walgreen Lectures to
be given in Chicago in January, along with the usual lectures and consulta-
tions at Harvard. It is for this reason that none of the material typed in late
1949 was read carefully and corrected.

Finally we arrive at the appendix to the chapter. The first six sections of the
Note on the Theory of Utility and the version of Welfare Economics (printed
above as section 8 of the Note) had been written earlier than other parts of
the chapter. It will be recalled that the account of ‘the fortunes of utility
theory and its successors to the present day’ (which at one time was to have
been ch. 9) had been written but not typed when I had my first interview with
J. A. S. on the state of the History during the latter part of 1947. The six
sections of the Note were numbered, but the first four did not have titles.
Section 7 (The Consistency Postulate) and the beginnings of a new section 8
(The Corpse Shows Signs of Life) were apparently written later and had not
been typed at all. For reasons given in the editorial note on page 1068, I be-
lieve that Welfare Economics was originally to have been section ' 8 of the
Note on Utility and I have placed it in that position. Since the new section 8

1202 EDITOR'S APPENDIX

(The Corpse) consisted of only a single paragraph and a few notes, I have put
it in the editorial note already mentioned.

The version of Welfare Economics actually used was not the one typed in
1 948 - 9 - The latter was rather general and lacked specific footnote references
with one exception. Moreover, I could find no manuscript corresponding to
this treatment. As I have already explained, I had the impression that, like
the early version of section 3, it might have been dictated. There was another
version in manuscript, which had never been typed. It was writtten in ink and
corrected in blue pencil and lead pencil as were the first six sections of the
Note on Utility; it certainly looks as though it had been, written at the same
time as the latter. The section numbers for the Note (1-6) were in parentheses;
there was a pair of parentheses with no number inserted before the title. Wel-
fare Economics. Finally, the latest reference in this version of Welfare Eco-
nomics, as originally written, was to an article by Tintner in Econometrica,
January 1946. Later a reference to Samuelson’s Foundations (1947) was added
in pencil. This is consistent with the probable time of writing of the first six
sections. The manuscript version was more specific than the typed version;
each version had certain things the other lacked. Goodwin suggested a com-
posite version, using some pages from both treatments; but, as a matter of
editorial policy, for reasons already given, I had ruled, against this solution.
I finally decided — with qualms, to be sure — to use the manuscript version.

Chapter 8 (Money, Credit, and Cycles) was probably the first of the money
chapters to be completed; it was certainly the first to be typed. Apparently
when J. A. S. sent it off to be typed he was not happy about it. (Of course,
he was never really satisfied with his own work; if only there were time, he
felt, it could be improved in so many ways.) Clipped to the first typescript,
which had been hastily read and corrected by the author, were a number of
small pieces of paper with names, outlines, and shorthand notes. On the out-
side was the comment 'Now this was reserved as containing necessary additions
and corrections— they are not carried out and were thus left when I sent the
chapter off in despair.' For this chapter, I supplied some titles for subsections
which will be easily recognized from the fact that they are enclosed in the
usual square brackets. I also divided section 8 on Crises and Cycles into two
sections (8 and 9) so that I could preserve the subtitles under Non-Monetary
Cycle Analysis.

Part V (Conclusion: A Sketch of Modem Developments), like the introduc-
tory Part I, was intended to be brief. Its function was to help the reader under-
stand how modem work links up with the work of the past. J. A. S. was work-
ing on Parts I and V at the time of his death. There was a file box in the
Cambridge study containing 'Notes and Brief Plan for Part V.' It is from the
two pages of notes reproduced on the next two pages that we know what were
to be the main lines of discussion. Unfortunately the plan itself is mostly in
shorthand. It indicates eight items of which at least the last three- — Develop-
ments from Marshall, Business Cycles and Dynamics, and Keynes — had actu-
ally been written up. The list of 'Things still entirely lacking in V' is perhaps
more revealing because more of it is in longhand.

editor’s appendix 1203

Only a fragment of an introduction to the Part existed. It was for this reason
that a summary of the Mexican Lectures (see editorial note, p. 1140) on the

Progress of Theoretical Economics during the Last Twenty-five Years was pub-
lished in Chapter 1.

Chapters 2-5 were written in 1949. Chapters 2-4 were typed in late 1949,
but Chapter 5 (Keynes and Macroeconomics) was not finished and was not

List of Books Frequently Quoted

(With Editions Used)

What follows is by no means a complete list of the books quoted in the
History or even a list of the books quoted several times. The list is confined to
books which are quoted repeatedly or to books for, which the edition used is
important and where specific information about the edition is not given on
each occasion the book is quoted.

Allen, R. G. D., Mathematical Analysis for Economists , London, 1938.
Aquinas, Saint Thomas, Summa Theologica [Latin, 6 vols.], Turin (Italy),
Libraria Marietti, 1932.

Bohm-Bawerk, Eugen V., Capital and Interest: A Critical History of Economi-
cal Theory [1st German ed. 1884; English trans. 1890], Reprint, New
York, 1932.

Bohm-Bawerk, Eugen V., The Positive Theory of Capital [1st German ed.

1889; English trans. 1891], Reprint, New York, 1923.

Bowley, A. L., The Mathematical Groundwork of Economics : An Introductory
Treatise, Oxford, 1924.

Caimes, J. E., Some Leading Principles of Political Economy Newly Ex-
pounded, London, 1874. -

Cannan, Edwin, A History of the Theories of Production and Distribution in
English Political Economy from ijy6* to 1848 [1893], 3 r d ed. 1917;
4th printing, London, 1924.

[Cantillon, Richard], Essai sur la nature du commerce en general [1755], Re-
printed for Harvard University, Boston, 1892.

Chamberlin, Edward Hastings, The Theory of Monopolistic Competition: A
Re-orientation of the Theory of Value [1933], 5th ed., Cambridge,
Mass., 1946.

Cournot, Augustin, Researches into the Mathematical Principles of the Theory
of Wealth [1st French ed., 1838; English trans. by Nathaniel T. Bacon,
1897], New York, 1927.

Custodi, Pietro, Scrittori classici italiani di economic politica (50 vols.), Milan,
1803-16.

Fisher, Irving, Mathematical Investigations in the Theory of Value and Prices
[1892], New Haven, 1926.

Hayek, Friedrich A., The Pure Theory of Capital, London, 1941.

Heckscher, Eli F., Mercantilism [1st Swedish ed. 1931], London, 1935.

Hicks, J. R., Value and Capital: An Inquiry into Some Fundamental Principles
of Economic Theory, Oxford, 1939.

1205

1206 list of books frequently quoted

Jevons, W. Stanley, Investigations in Currency and Finance [papers written
1862-82], ed. with introd. by H. S. Foxwell, London, 1884.

Jevons, W. Stanley, The Theory of Political Economy [1871], 2nd ed., rev.
and enlarged, London, 1879.

Keynes, John Maynard, Essays in Biography, London, 1933.

Keynes, John Maynard, The General Theory of Employment, Interest and
Money, London, 1936.

Keynes, John Maynard, A Tract on Monetary Reform, London, 1923. Mone-
tary Reform (American ed. of above). New York, 1924.

Keynes, John Maynard, A Treatise on Money (Vol. I, The Pure Theory of
Money; Vol. II, The Applied Theory of Money), London, 1930.

Malthus, T. R., Principles of Political Economy Considered with a View to
Their Practical Application, London, 1820.

Marget, Arthur W., The Theory of Prices , New York, 1938-42.

Marshall, Alfred, Principles of Economics [1890], 4th ed., London, 1898.

Marx, Karl, Capital: A Critique of Political Economy.

Vol. I, The Process of Capitalist Production [1867], original English trans.
by Moore and Aveling, rev. and amplified according to 4th German ed.
by Ernest Untermann, Chicago, Charles H. Kerr & Co., 1906.

Vol. II, The Process of Circulation of -Capital [1885].

Vol. Ill, The Process of Capitalist Production as a Whole [1894].

Vols. II and' III, trans. by Untermann, Chicago, Charles H. Kerr & Co.,.
1909.

Mill, James, Elements of Political Economy, 1st ed., London, 1821.

Mill, John Stuart, Autobiography, London, 1873.

Mill, John Stuart, Principles of Political Economy with Some of Their Appli-
cations to Social Philosophy [1848], 7th ed. 1871; ed. with introd. by
Sir W. J. Ashley, London, 1909.

Pareto, Vilfredo, Cours d’econoitiie politique, Lausanne, 1896-7.

Pareto, Vilfredo, Manuel d’economie politique [Italian ed. 1906], Paris, 1909.

Ricardo, David, The Principles of Political Economy and Taxation [1817], 3rd
ed. 1821, Everyman’s Library ed., London and New York, 1912, re-
printed 1917.

Rist, Charles, History of Monetary and Credit Theory from John Law to the
Present Day [1st French ed. 1938], New York, 1940.

Robinson, Joan, The Economics of Imperfect Competition, London, 1933.

Roscher, William, Principles of Political Economy [1st German ed. 1854],
New York, 1878.

Samuelson, Paul Anthony, Foundations of Economic Analysis, Cambridge,
1 947 .

Say, Jean Baptiste, A Treatise on Political Economy; or The Production, Dis-
tribution, and Consumption of Wealth [1st French ed. 1803], trans.
from 4th French ed. by C. R. Prinsep, Boston, 1821.

Seligman, Edwin R. A., Essays in Economics, New York, 1925.

Sempere y Guarinos, Juan, ed., Biblioteca espahola economico-politica (4 vols.),
Madrid, 1801-21.

LIST OF BOOKS FREQUENTLY QUOTED 1207

Senior, Nassau William, An Outline of the Science of Political Economy
[1836], Library of Economics Reprint, London, 1938.

Smith, Adam, An Inquiry into the Nature and Causes of the Wealth of Na-
tions [1776], ed. by Edwin Cannan from text of 5th ed., Modern Li-
brary, New York. [The Modern Library ed. is the one referred to
throughout except in Part II, ch. 3, sec. ^e, where the page references
are to the Everyman’s Library ed., London and New York, 1910, re-
printed 1917.]

Stigler, George J., Production and Distribution Theories , New York, 1941.

Sweezy, Paul M., The Theory of Capitalist Development: Principles of Marx-
ian Political Economy, New York, 1942.

Tagliacozzo, Giorgio, Economisti napoletani dei sec. XVII e XVIII, Bologna,
1937.

Thornton, Henry, An Enquiry into the Nature and Effects of the Paper Credit
of Great Britain [1802], Library of Economics Reprint, London, 1939.

Tooke and Newmarch, A History of Prices and of the State of the Circulation
from 1792 to 1856 [6 vols., 1838-57], reproduced from original with
an introd. by T. E. Gregory, New York, 1928.

[Turgot, Robert Jacques], 'Reflexions sur la formation et la distribution des
richesses,’ Ephemerides du citoyen, 1769, vols. 11 and 12; 1770, vol 1.
[Republished in Oeuvres ed. by Dupont de Nemours, vol. V, Paris,
1808.]

Viner, Jacob, Studies in the Theory of International Trade, New York, 1937.

Walras, L6on, Elements d’economie politique pure (' Theorie de la richesse so-
ciale) [1874-7], 5th ed., Paris and Lausanne, 1926.

Walras, Leon, Etudes d’economie politique appliquee (Theorie de la produc-
tion de la richesse sociale) [1898], Paris and Lausanne, 1936.

Walras, Leon, Etudes d’economie sociale (Theorie de la repartition de la ri-
chesse sociale) [1896], Paris and Lausanne, 1936.

Wicksell, Knut, Lectures on Political Economy [1st Swedish ed. 1901-1906],
English trans., ed. with introd. by Lionel Robbins, London, 1934.

Index of Authors

Acworth, Angus Whiteford, 690
Acworth, William Mitchell, 949
Adams, Heniy C., 873
Adler, Max, 881
Aegidius Colonna, 162
Aftalion, A., 493, 843, 1089, 1109, 1129
Agricola, Georg, 157
Akerman, Gustaf, 908
Albertus Magnus, 81, 87-8, 93
Albrecht, Gerhard, 510
Alexander, Sidney S., 885
Alison, Sir Archibald (father), 127-8
Alison, Sir. Archibald (son), 584
Allen, John William, 96
Allen, R. G. D., 859, 993-4, 1028-9,
1043-4, 1063, 1149
Alt, Franz L., 871, 1063
Altmann, S. P., 1103
Ammon, Alfred Otto, 791
Amonn, Alfred, 493, 855
Amoroso, Luigi, 858, 1007, 1144, 1156
Anderson, Benjamin McAlester, 1090,
1104 .

Anderson, James, 263-5, 481, 676
Anderson, Oskar, 1104-5
Angell, James W., 336, 367, 690
Antonelli, fitienne, 829, 840, 1003
Antonelli, G. B., 858, 1061
Antonine, St,, 95, 98, 99, 101, 105, 323
Aquinas, St. Thomas, and scientific meth-
od, 8n; philosophy of, 28-9, 113;
Summa Theologica, 74, 78; on rev-
elation and authority, 77; as teacher,
78; division of sciences in, 82; as
creator of classic scholasticism, 87;
and Aristotle, 89, 93; economics of,
90, 91, 93-4, io5n; sociology of in-
stitutions, 91-3; on government bor-
rowing, 96; natural law in, 108-9,
138; on justice, 112
Arias, Gino, 272

Aristotle, as polyhistor, 29; Chrematistics,
53; division of labor, 56; theory of
money, 56, 62-4, 289, 29on; contrast

with Plato, 57; value judgments in,
57; pleasure-pain calculus in, 57; eco-
nomic sociology, 58, 59-60, 64; and
unified social science, 58, 783; in-
terest in dynamics, 58; the state in,
59; influence of sophists on, 59
Value: in use and exchange, 60,
61; objective and subjective, 61, 93;
and monopoly, 60-61; competitive
price, 61, 62

Interest theory: 64-5, 10 5n; defini-
tion of sciences, 83; re-emergence in
12th and 13th centuries, 87-91; in-
fluence on Aquinas, 89, 93; on justice,
60, 61, 62, 93, 108; precursor of as-
sociationist psychology, 125; on over-
population, 250

Armstrong, Clement, 166, 349, 369
Asgill, John, 296

Ashley^ William James, 82, 527, 822
Ashton, T. S., 1045
Attwood, Mathias, 714
Augustine, St., 72, 84
Aupetit, Albert, 840, 1082
Auspitz, Rudolf, 769
Auspitz and Lieben, 844, 849, 923, 956,
991, 1057
Avenel, G. d’, 782
Aylesbury, Richard, 353
Azpilcueta, Martinus de, 95, 104, 106

Baader, Franz Xaver von, 421, 459
Babbage, Charles, 541
Bachofen, Johann Jacob, 427, 787
Bacon, Francis, 125, 207, 345
Bacon, Nathaniel T., 958
Bacon, Roger, 81, 87, 90
Baden-Durlach, K. F. von, 224-5, 22 7> 2 3 2
Baert, Johannes Franciscus Benjamin, 183
Bagehot, Walter, 183, 445, 824, 1111
Bailey, C., 66

Bailey, Samuel, 478, 486, 599, 679, 935-6
Bain, Alexander, 447, 476
Balfour, Arthur James, 770

1210

INDEX OF AUTHORS

Balliere, Yvon, 211
Bamberger, Ludwig, 1075
Barbon, Nicholas, 184, 196, 223, 251,
294, 296, 308, 329-31, 350, 361,
363-4, 368-9, 647-8, 720, 733, 924,
1119

Barone, Enrico, 858, 946, 955, 986-9, 994,
1034, 1067, 1071, 1148, 1159
Barth, Paul, 786

Barton, John, 474, 640-41, 663, 679,
681-2

Bastable, Charles Francis, 608, 1107
Bastiat, Frdddric, 234, 440, 499-500, 510,
553 - 4 , 841

Baudeau, Nicholas, 175, 223, 225-6, 228
Baudrillart, Henri Joseph Leon, 164
Bauer, Otto, 227, 880-81, 1132
Baxter, Richard, 106
Baxter, Robert Dudley, 522, 524, 627
Bayle, Pierre, 118
Bazard, Saint-Amand, 461, 462
Beales, Hugh Lancelot, 760
Beauregard, Paul, 1124
Beccaria, Cesare Bonesana, Marchese di,
and utilitarianism, 132, 180, 408; life
sketch, 179; and Smith, 179-80, 248;
on laissez-faire, 180; on population
theory, 180, 258; economic doctrines,
180-81; as polyhistor, 182; and Tur-
got, 248; on bimetallism, 298; value
theory, 302, 306, 308; and quantity
theory of money, 315; as mathemati-
cal economist, 954; on isolated ex-
change, 983-4

Becher, Johann, 283-4, 306, 326, 1088

Beer, Max, 83, 225, 354

Bell, William, 253, 254

Bellamy, Edward, 206

Bellers, John, 347, 350

Beloch, Julius, 891

Below, Georg Anton Hugo von, 782,. 808
Bendixen, Friedrich, 1091
Beneke, Friedrich Eduard, 446
Benini, Rodolfo, 194
Benner, Samuel, 1134
Bentham, Jeremy, 66, 128-34, *93, 273,
302, 408, 429, 447, 724, 929, 1054-5,
1056, 1069, 1073, H53
Berardi, Domenico, 1104
Bercaw, Louise O., 961
Bergmann, Eugen von, 739, 740, 745,
1123, 1134

Bergson, Abram (A. Burk), 987* 989, 1072
Bergson, Henri, 774, 778
Berkeley, G., 121, 247, 257, 289, 294,
296

Bemhardi, Theodor von, 504
Bemouilli, D., 212, 302-5, 946, 955, 1054,
1089

Bemouilli, J., 14, 212, 960, 1058
Bemsteiri, Eduard, 532, 763, 880, 883
Berry, Arthur, 911, 984, 1032
Bertrand, Joseph, 958, 982
Besold, Christoph, 168, 202
B6thune, Philippe de, 169
Beveridge, Sir William, 582, 890, 944
Biel, Gabriel, 95
Bindoff, Stanley Thomas, 166
Birck, Laurits Vilhelm, 862
Bishop, Robert L., 1062
Black, R. D., 464
Blanc, Louis, 455

Blanqui, Jerome-Adolphe, 381, 498, 519
Bloch, Henri-Simon, 827
Block, Maurice, 841
Boas, Franz, 791
Boccardo, Gerolamo, 512 .

Bdcher, Maxime, 900
Bockh, August, 426

Bodin, Jean, 101, 164-5, 166, 311, 312-14,
362

Boese, Franz, 756

Bohm-Bawerk, Eugen von, on intermedi-
ate products, 2170, 56m, 633, 901-2,
904; and Turgot, 249, 332n; Long-
field as precursor of, 465; Rae as
precursor of, 469, 846; Malthusian
population principle in, 582, 890; on
increasing and diminishing returns,
587^ 588n, 905; and Ricardo, 594-5,
636, 846; and Marx, 597n, 65m, 845,
846, 926, 9 2 7n, 939n; and Senior,
638, 659, 846, 9390; as minister of
finance, 767^ and progressive income
tax, 769; life sketch, 844-8; and
Menger, 844, 845, 846; and Jevons,
846, 902-3, 905, 929; and Taussig,
847n, 871; Bortkiewicz on, 851; ef-
fect on Wicksell, 862, 930, 1118;
capital concept, 898, 899; on real
cost theory, 923; and quantity the-
ory of money, 928; on statics and dy-
namics, 967; macroanalysis in, 998;
use of social production function,
1030; on business cycles, 1134, See
also Capital; Capital, Theories of;
Distribution, Theories of; Interest,
Theories of; Profits, Theories of;
Value, Theories of;. Wages, Theories
of

Boileau, Etienne, 162, 203

’ -i 1 i ' j; . •

INDEX OF AUTHORS

1211

Boisguillebert, Pierre le Pesant, Sieur de,
204, 215-18, 243, 283-7, 2 93, 317,
324, 313, 389, 718, 828
Bollmann, Justis Erick, 714
Bonald, Louis Gabriel Ambroise, 681
Bonar, James, 28, 123, 183, 207, 254,
291, 481, 712

Bonesana, Cesare, see Beccaria, Cesare
Bonesana, Marchese di
Boninsegni, Pasquale, 1003, 1067
Bonnet, Victor, 742
Booth, Charles, 947
Bordewijk, Hugo William Constantijn,

216

Bomitz, Jacob, 168

Bortkiewicz, Ladislaus von, 392, 597, 850-
51, 907, 933

Bosanquet, James Whatman, 695
Botero, Giovanni, 164-5, 209, 255, 256
Bouniatian, Mentor, 1129
Bousquet, Georges, 513, 843, 859, 860
Bouvy, Eugene, 178
Bowen, Francis, 51^

Bowley, Arthur Lyon, 759, 829-32, 947,
956, 983, 1092, 1149
Bowley, Marian, 484
Boyd, Walter, 707
Brants, Victor, 83
Bray, John Francis, 460, 479
Brentano, Lujo, 461, 583-4, 671, 802,
809, 891, 939, 940

Bresciani-Turroni, C., 859, 1018, 1156
Brett, George Sidney, 89
Briaune ( cultivateur ), 745
Bright, John, 398

Briscoe, John, 296, 314-15, 705, 954
Brissot de Warville, Jacques-Pierre, 139
Brocard, Lucien, 175
Broggia, Carlo Antonio, 205
Brown, E. H. Phelps, 588, 962, 1032
Brown, Harry G., 1079, 1083
Brown, Thomas, 450
Bucher, Karl, 809, 850
Buckle, Henry Thomas, 434-5, 443, 811
Bukharin, N. I., 878-9, 1132, 1157
Bullock, Charles J., 183, 944, 1165
Buquoy, Georg, Franz August de Longue-
val, 502, 711
Burchardt, Fritz, 906
Burckhardt, Jacob Christoph, 427
Burgon, John William, 343
Buridan, Jean, 94, 1064
Burn, Richard, 275
Bums, Arthur F., 1092, 1124, 1166
Butel-Dumont, George Marie, 325
Butt, Isaac, 464

Cadet, Felix, 216
Caesar, Philippus, 106
Caimes, John Elliot, 379, 512, 533 - 4 , 536,
540, 605-6, 609, 611, 639, 655, 660,
670, 701, 716, 725, 733, 824, 1057
Calhoun, George Miller, 54
Campanella, Tomaso, 207
Campbell-Bannerman, Henry, 761, 767,
768

Campomanes, Pedro Rodriguez, 172-3
Canard, Nicolas Frangois, 217, 499, 955
Cannan, Edwin, 183, 263, 265, 471, 527,
580, 592, 645, 657, 676, 690, 692,
703, 728, 830, 832, 1090, 1113
Canning, John Bennett, 945
Cantalupo, Domenico de Gennaro, 373
Cantillon, Richard, and related schemata,
16, 474; definition of wealth, 216,
218; Jevons’ rediscovery of, 2i7n;
and Petty, 218; and Quesnay, 218,
238; economic sociology, 218-19; lo-
cation theory, 219; value theory, 214,
219, 302n; market vs. normal price,
220; theory of rent, 221, 263; in-
come analysis, 221; trois rentes, 222;
entrepreneur in, 222, 555, 646;

tableau economique, 222-3, 240; ve-
locity of money, 223, 316-17, 319,
706; gold mechanism, 223, 366; har-
monism in, 234; on population, 257;

■ and Smith, 270; theory of money,
291, 706; analysis of credit in, 319;
interest theory, 319, 72on; capital
theory, 323, 667; and Say, 492, 625;
as model-builder, 562, 632; profits
theory, 646

Caracciolo, Domenico, Marchese, 373
Carafa, Diomede, 162-4, 177, 1069
Carey, Henry Charles, 234, 440, 500, 510,
515-18, 553-4, 572, 583, 586, 676
Carli, Gian-Rinaldo, 213, 292-3, 375, 526
Carlyle, Thomas, 409-11, 528
Carr-Saunders, Alexander Morris, 891
Carver, Thomas Nixon, 659, 869, 926
Cary, John, 197, 267, 273, 293, 350, 358,
361, 363-4, 368

Cassel, Gustav, 332, 737, 849, 862, 953,
956, 966, 972, 1012, 1019, 1067,
1071, 1081, 1101, 1106, 1154
Castelot, E., 165
Castillo, Andres V., 165
Cauw&s, Paul Louis, 843
Caxa de Leruela, Miguel, 344
Cemuschi, Henri, 715
Cesare, Carlo de, 512
Ceva, Giovanni, 301, 954

1212

INDEX OF AUTHORS

Chadwick, Edwin, 401
Chalmers, George, 212
Chalmers, Thomas, 486-7, 519, 571, 583,
621, 640, 740

Chamberlain, Joseph, 351, 767, 768, 822
Chamberlen, Hugh, 296
Chamberlin, Edward H., 601, 973, 975-6,
977, 979, 982, 994, 1040, 1120,
1142, 1150-52
Chapman, S. 1045
Charles, Enid, 891
Charlety, Sebastien, 461
Chastellux, Francois Jean, Marquis de,

255

Chen, Huan Chang, 53
Chenery, Hollis B., 1140
Cherbuliez, Antoine Elisee, 501, 607
Chevalier, Michel, 397, 496, 519, 711,
716, 741, 766

Cheysson, Jean Jacques Emile, 841-2, 949
Child, Sir Josiah, 184, 195, 242, 245, 251,
266-7, 2 73, 2 9°, 29 1 , 3 2 3, 328-9,
337, 347, 350, 361-4, 368-9
Cibrario, Giovanni Antonio Luigi, 83
Cicero, Marcus Tullius, 67, 108
Clapham, Sir John Harold, 148, 1111
Clark, John Bates, synchronization proc-
ess, 564; role in marginal analysis,
868, 869, 918; and Ricardo-West
rent theory, 868; value judgments
and, 870; and Mill and Smith, 892;
profits theory, 894; capital theory,
902; distribution theory, 91 5n, 936n,
1030; wage theory, 941; and Mar-
shall, 952, 1057; confusion of statics
and stationary state, g 66 n; competi-
tion in, 972; equilibrium as normal
prices, 999, looon; real costs in, 1057
Clark, John Maurice, 875, 975, 1167
Clarke, Hyde, 743
Clement, Simon, 365
Cobb, C. W., 1642
Cobbett, William, 693
Cobden, Richard, 397, 399, 401, 716
Cohn, Gustav, 851

Coke, R., 286, 347, 357, 359, 361, 363,
368

Colbert, Jean-Baptiste, 147, 251, 359
Cole, Charles Woolsey, 148
Colerus, Johann, 156, 158
Colmeiro, Manuel, 165, 203, 381
Colquhoun, Patrick, 521
Colson, Clement, 841-2, 850, 949
Columella, Lucius Junius Moderatus, 71,
157

Combes, Jean, 202

Comte, Auguste, 415-18, 428, 435, 437,
442-4, 452, 528, 538-9, 563, 77 2 ,
782, 811-12, 820

Conant, Charles Arthur, 1076, 1111
Condillac, Etienne Bonnot de, 35, 124-5,
174-6, 302, 415, 600, 828, 954, 1054
Condorcet, Marquis de, 135, 138, 257,

435, 437, 44 2 -4, 45°, 579, 77 2
Conigliani, Carlo Angelo, 95, 857
Conrad, Johannes, 850
Corning, Hermann, 202, 209
Cooley, Charles Horton, 793
Copernicus, Nicholas, 81, 101, 119
Coquelin, Charles, 540
Cossa, Luigi, 512, 856-7
Cotrugli Raugeo, Benedetto, 157
Cotterill, Charles Foster, 478, 599
Cotton, Sir Robert Bruce, 314
Courcelle-Seneuil, Jean, 498, 661, 741,
841

Cournot, Antoine Augustin, marginal util-
ity in, 463; general interdependence
in, 467, 960; pure competition in,
545, 959, 973, 979; monopoly the-
ory, 6o2n, 839, 959, 960, 972n, 973,
976-7; effect on Marshall, 837, 959,
982, 994; demand and supply curves,
839, 959, 960; elasticity concept, 839;
and mathematical school, 954-63; in-
fluence of Ricardo, 959; algebra of
foreign exchanges, 959; advocacy of
macroanalysis, 960; appraisal of, 960;
on statistics, 962; oligopoly theory,
979-82; bilateral monopoly theory,
983-5; marginal revenue curve in,
115m

Court, Louis, M., 1014, 1028, 1044
Court, Pieter de la, 197, 368
Coxe, Tench, 199
Craig, John, 600
Crescenzi, Pietro de, 158
Crick, F. W., 1114
Croce, Benedetto, 136, 778, 786
Crum, William Leonard, 1165
Culpeper, Sir Thomas (father), 328-9, 344
Culpeper, Sir Thomas (son), 328-9
Cumberland, Richard, 129, 132
Cunningham, William, 156, 361, 821
Cunow, Heinrich, 88 1
Cunynghame, Sir Henry Hardinge, 957
Currie, Lauchlin B., 1102
Custodi, Pietro, 177, 178, 179, 315, 510
Cutolo, Alessandro, 177
Czuber, E., 448, 959

INDEX OF AUTHORS

1213

Dahlmann, Friedrich Christoph, 424, 432
Daire, Eugene, 204, 215
Darwin, Charles R., 28, 181, 185, 444-6,
447, 773, 790

Davanzati, Bernardo, 292, 300, 314, 316,
343, 1054, 1086

Davenant, Charles, 184, 196, 210, 212,
242, 251, 266, 347, 361, 363-4,
368-9, 960

Davenport, H. J., 309, 874, 917, 1116
Davidson, David, 862, 1033, 1085
Davidson, William Leslie, 132
Davies, David, 275
Davila, Juan Bautista, 203
Dean, Joel, 962
Defoe, Daniel, 267, 274, 372
Delatour, Albert, 183
De Leon, Daniel, 878
Delfico, Melchiorre, 607
Del Vecchio, Gustavo, 1082, 1153
Demaria, Giovanni, 1156
Dempsey, Bernard William, 95, 96, 104
De Quincey, Thomas, 470, 476-7, 595, 603
De Rinaldis, Bartolommeo, 177
Dermenghem, Emile, 207
De Santis, Marc’ Antonio, 194, 344, 355
Descartes, Rene, 89, 136
Desmars, Joseph, 175
Destutt de Tracy, A., 35, 499, 515, 591
De Viti de Marco, Antonio, 1089
Dewey, John, 5, 448, 793
Diderot, Denis, 137-8
Diehl, Karl, 457, 471, 479, 850, 852, 1154
Dieterici, Karl Friedrich Wilhelm, 522
Dietzel, Heinrich, 479, 507, 814, 849,
850, 852, 1056
Dilthey, Wilhelm, 777
Dionnet, Georges, 174
Divisia, Francois, 859, 902, 1093-5
Dobb, Maurice, 884, 894-7
Dobbs, Arthur, 349
Dohm, Christian Wilhelm von, 228
Dolleans, Edouard, 1104
Domar, Evsey D., 966
Donner, Otto, 1155
Dopsch, Alfons, 783, 808
Dorfman, Joseph H., 199, 514
Doubleday, Thomas, 583
Douglas, Paul H., 909, 941, 1042
Dove, Patrick Edward, 349
Dubois, Auguste, 225, 843
Duhem, Pierre, 81

Diihring, E. K., 381, 441, 500, 509-16,
516

Dumoulin, Charles, 100, 106
Dunbar, C. F., 198, 514-15, 865, 1111

Dunoyer, Charles, 498, 741
Duns Scotus, John, 76, 84, 87, 91, 92, 93,
98

Dupin, Claude, 373

Dupont de Nemours, Pierre Samuel, 223,
225-8, 231, 239, 243, 381
Dupont- White, Charles, 400
Dupuit, Arsene Jules Etienne Juvenal,
463, 837, 839-40, 842, 915, 949,
956, 957, 976, 978, 992, 1054, 1061,
1069-70

Durand, Ren6, 216
Du Refuge, Eustache, 169, 324
Durham, John George Lambton, 399
Durkheim, Emile, 413, 794

Edelberg, V., 471, 649, 846, 1042
Eden, Sir Frederick Morton, 275
Edgeworth, Francis Ysidro, and utilitari-
anism, 408, 780, 830, 831, 1056; in-
ternational trade theory, 504, 609,
996; on increasing and diminishing
returns, 585, 587, 831, 1037-8; rent
theory, 6750, 8740, 935n; work in
statistics, 831, 96m, 1092; indiffer-
ence and contract curves, 831, 984,
1044, 1064-5; on Walras, 839n,
ioo2n, io49n; on Pantaleoni, 857;
marginal utility, 872, 912, 1061,

1064-5; on maximizing satisfaction
in market, 888; on Bohm-Bawerk,
91m; on Marshall, 92on; marginal
productivity in, 940, i032n; on price
discrimination, 978; on duopoly,
982, 984; on pure competition, 986;
welfare economics in, 1070
Effertz, Otto, 854
Ehrenfels, Charles von, 798, 1057
Ehrlich, Eugen, 794
Einaudi, Luigi, 178, 206, 820, 855
Ellet, Charles, 602, 976
Ellis, Howard S., 1080
Ely, Richard Theodore, 873
Endemann, Wilhelm, 83
Enfantin, Prosper, 461, 462
Engel, Ernst, 210, 626, 961
Engels, Friedrich, 35, 206, 386-8, 434,
455, 459, 460, 748, 880
England, Minnie Throop, 1128
Epicurus, 66
Essars, Pierre des, 1098
Estienne, Charles, 158
Eucken, Walter, 907, 1154
Euler, Leonhard, 30, 1169
Evelyn, Sir George Shuckburgh, 526

INDEX OF AUTHORS

1214

Everett, Alexander Hill, 580-82
Ezekiel, Mordecai, 1168

Faguet, fimile, 461, 773
Fanno, Marco, 858, 996
Fauquier, Francis, 203
Faure, Andr6, 178
Fawcett, Henry, 533, 633
Feaveryear, A. E., 690
Fechner, G. T., 446, 448, 796, 961, 1058
Feilbogen, Siegmund, 183, 248
Fellner, William John, 1179
Fenton, Roger, 106
Ferguson, Adam, 184
Fernandez Navarrete, Pedro, 168, 170
Ferrara, Francesco, 381, 479, 500, 512,
518, 543, 626, 645, 711, 856, 860
Ferrari us. Jacobus, 105
Fetter, Frank Albert, 488, 514-15, 679,
874, 890, 898, 927, 932-3
Feuerbach, Ludwig Andreas, 414, 434
Feuerbach, Paul Johann Anselm von, 430
Fichte, Johann Gottlieb, 411-13, 430, 459
Filangieri, Gaetano, 177
Fisher, Irving, on marginal utility, 303,
872, 1065-6, 1148; monetary theory,
3 i 4 n, 72m, 872-3, 1075, 1079,

1082-3, 1087-8, 1096-8, 1101, 1102-3,
1115; capital theory, 63m, 72m, 872,
898, 899, 999n, 1177-8; interest the-
ory, 647, 72m, 847, 927, 930-31,
932; influence of Walras, 829, 850,
952, 999n, 1082; Sumner’s influence
on, 867; life sketch, 871-3; work in
statistics, 871, 961, 1092; indifference
curve analysis, 872, 1065-6; account-
ing theory, 872, 945; theory of capi-
talist process, 872; marginal efficiency
of capital, 872, 1177-8; ‘psychic in-
come’ in, 8g8n; on Cournot duopoly
solution, 982; ‘completing’ and ‘com-
peting’ commodities* 996; business
cycle theory, 1122
Fitzherbert, John, 157
Fitzmaurice, Edmond, 210
Fitzneale, Richard, 202
Flint, Robert, 135, 136
Fohl, Carl, 1156, 1174
Forbonnais, Frangois de, 137, 174, 375
Forchheimer, Karl, 979
Ford, Paul Leicester, 199
Fomari, Tommaso, 177, 344
Fortrey, Samuel, 347, 357
Fourier, Frangois, 455-6, 542, 749
Foville, Alfred de, 1081, 1104
Foxwell, H. S., 196, 197, 366, 826, 1078

Franchis, C. de, 178
Frank, Lawrence Kelso, 1134
Frank, Philipp, 776
Franklin, Benjamin, 199, 255, 267
Frantz, Konstantin, 431
Frazer, Sir James George, 787
Freher, Marquard, 100
Freud, Sigmund, 798
Friedman, Milton, 1067
Frigerio, Bartolomeo, 156
Frisch, Ragnar, 209, 278, 303, 563, 963,
968, 993, 1022, 1030-31, 1044, 1056,
1069, 1143, 1144, 1148^ 1160, 1162-
3, 1167, 1182
Froumenteau, Nicolas, 202
Fullarton, John, 699-700, 725-6, 728,
1111

Funck-Bretano, T., ,168
Funkhouser, H. G., and Walker, Helen
M., 526

Fuoco, Francesco, 511
Fumiss, Edgar Stevenson, 266
Fiirstenau, Karl G., 228
Fustel de Coulanges, Numa-Denys, 54,
426

Gaetano, Tommaso de Vio* Cardinal, 95

Gaius, 108

Gale, Samuel, 954

Galiani, Ferdinando, 177, 188, 269, 290,
292-3, 296, 298, 300-302, 315, 317,
319, 364, 373, 699, 706, 1054, 1057
Galilei, Galileo, 36, 79, 81, 90, 119
Gallo, Agostino, 158
Galton, Sir Francis, 790, 797
Ganilh, Charles, 498
Gamier, Henri, 83
Gamier, Joseph, 498, 519, 583, 741
Garvy, George, 1158
Gassendi, Pierre, 89
Gauss, Karl Friedrich, 960-61
Gee, Joshua, 372

Genovesi, Antonio, 177, 258, 315, 375,
1054

Gentile, Panfilo, 177

George, Henry, 231, 458, 802, 854, 865,
940

Georgescu-Roegen, N. 1068
Gervaise, Isaac, 196, 365-6, 374-6
Gesell, Silvio, 1118, 1131
Gide, Charles, 843
Giffen, Sir Robert, 947, 1075
Gifford, C. H. P., 907
Gilbart, James William, 725
Gioja, Melchiorre, 511, 519, 541

INDEX OF AUTHORS

Gladstone, W. E., 399, 402-5, 761, 769,
945

Gneist, Rudolph von, 431
Gobineau, Joseph Arthur, Comtede, 791
Godwin, William, 140, 579, 582
Gomperz, Theodor, 54
Gonnard, Rene, 254, 584, 890
Gonzales de Cellorigo, Martin, 194
Goodwin, Richard M., 619, 951
Gordon, Robert Aaron, 897, 1123, 1164
Goschen, George Joachim, 736
Gossen, Hermann Heinrich, 303, 463, 910-
11, 913, 915, 919, 923, 956, 1054,
1056, 1066, 1069, 1176
Gottl-Ottlilienfeld, Friedrich von, 854,
1139 , ii54, ii59
Gouge, William M., 711
Gould, Sir Nathaniel, 327
Goumay, Vincent de, 218, 244
Graebner, Fritz, 787
Graslin, Jean Joseph Louis, 175, 247
Graswinckel, Dirck, 197, 368, 373
Graunt, John, 210, 212
Gray, Alexander, 216, 453, 462
Graziani, Augusto, 177, 194, 364, 857
Green, David I., 917
Green, Thomas Hill, 430
Gregory, T. E., 272, 471, 520, 690, 744
Gresham, Sir Thomas, 297, 342-3 .

Grimaudet, Francois, 100
Grossmann, Henryk, 388, 493, 881, 1132
Grate, George, 581

Grotius, Hugo, 116, 118, 119, 136, 182,
185, 369-70

Gumplowicz, Ludwik, 792

Haavelmo, Trygve, 1163
Haberler, Gottfried von, 609, 612-13,
701, 732, 854, 1093-4, 1123, 1134,
1161

Hadley, Arthur Twining, 865-6, 949, 978

Haeckel, Ernst, 444, 773

Hahn, Albert, 1116

Hahn, Eduard, 787

Halbwachs, Maurice, .526

Hale, Sir Matthew, 253

Hales, John, 166, 349

Halevy, Daniel, 204

Hal^vy, Elie, 408

Hall, Charles, 460

Halley, Edmond, 212, 220

Hamilton, Alexander, 199, 523

Hamilton, Earl Jefferson, 165

Hamilton, Sir William, 412

Hampson, Ethel Mary, 271

Hankey, Thomson, 697

1215

Hansen, Alvin H-> 964, 1123, 1172-3,
1183

Hanssen, Georg, 810

Hardenberg, Friedrich von (Novalis), 422

Hare, Robert, 743

Harms, Bernhard, 1155

Harrington, James, 207

Harris, John, 118

Harris, Joseph, 184, 291, 308, 364, 367,
706

Harrod, R. F., 891, 966, 1046, 1048,
1134, 1152, 1160, 1172
Harsin, Paul, 204, 295
Hartley, David, 124, 125
Harvey, William, 240
Hasbach, Wilhelm, 183
Hauser, Henri, 195
Hawley, Frederick Barnard, 894
Hawtrey, R. G., 696, 721, 745, 1084,
1091, 1109, 1121-2, 1172, 1178
Hayek, Friedrich August von, 17, 603,
689, 701-, 707, 721, 724, 728
Hayem, Ferdinand, 195
Hazlitt, William, 583
Hearn, William Edward, 826, 903
Heckscher, Eli F., 149, 151, 152, 271,
306, 339, 359, 360, 361
Heeren, Arnold Hermann Ludwig, 426
Hegel, Georg Wilhelm Friedrich, 137,
411-14, 430, 436, 438, 448, 780
Heimann, Eduard, 855, 882
Held, Adolf, 627, 675, 809, 853
Helfferich, Karl, 1081
Helv6tius, Claude, 66, 130, 132, 138, 139
Henley, Walter of, 157
Hennequin, Jean, 202
Hennig, Hermann, 1155
Herbart, Johann Friedrich, 446
Herbert, Claude Jacques, 373
Herder, Johann Gottfried von, 418, 422
Heresbach, Conrad, 158
Herkner, Heinrich, 947
Hermann, F. B. W. von, 304, 503, 600,
628, 644, 656, 671
Herrenschwand, Jean, 224, 228
Herrera, Gabriel Alonso de, 158
Hertzler, Joyce Oramel, 461
Hicks, J. R., 679, 684
Higgs, Henry, 217, 225, 363
Hildebrand, Bruno, 442, 504, 507, 539,
808

Hildebrand, Richard, 1086
Hildebrandt, Reinhard, 962
Hilferding, Rudolf, 725, 881-2, 1131-2
Hill, Edwin, 699
Himes, Norman E., 581

12l6

INDEX OF AUTHORS

Hirst, Francis Wrigley, 522
Hobbes, Thomas, 58, 116, 118, 119, 120,
121, 125, 419, 796-7
Hobson, Charles Kenneth, 1 107
Hobson, John, 823, 830, 832, 1088, 1130
Hodges, James, 357
Hodgskin, Thomas, 479
Hohenheim, T. B. von (Paracelsus), 90
Holbach, Paul Henry Thiry, 123, 138
Hollander, Jacob Henry, 294, 471, 477,
490, 494, 706, 873
Holtrop, Marius Wilhelm, 317, 705
Holtzendorff, Franz von, 434
Homan, Paul Thomas, 869, 886
Hone, Joseph, 217
Homer, Francis, 707
Homigk, Philipp Wilhelm von, 198
Horton, Samuel Dana, 1076
Hotelling, Harold, 948, 996, 1072
Hovell, Mark, 395
Howlett, John, 254, 275
Huet, Francois, 461
Hufeland, Gottlieb, 501
Hull, Charles Henry, 2x0
Hume, David, 124-5, 127, 129, 135, 184,
226, 245, 253, 257, 267, 291, 315-17,
3M, 327, 33i-2, 347, 365-7, 374,
408, 419, 447, 706, 715, 720, 733-4,
796

Humpert, Magdalene, 159
Hunter, Holland, 1158
Huskisson, William, 707
Husserl, Edmund, 778
Hutcheson, Francis, 127L, 141, 182-3,
332

Hutchins, B. L., and A. Harrison, 272,
401

Ibn Khaldun, 136, 788
Ibsen, Henrik, 810
Ignatieff, M. W., 1155
Inama-Stemegg, Karl Theodor von, 813
Ingram, John Kells, 539, 823, 824
Isnard, A. N., 217, 242, 243, 301, 306-7,
'955

Jaffe, William, 828

Jakob, Ludwig Heinrich von, 501

Jarrett, Bede, 83, 95

Jenkin, Fleeming, 486, 664, 837-40, 942,
956, 1061

Jennings, Richard, 486, 1055
Jevons, Herbert Stanley, 826, 1133
Jevons, William Stanley, on Condillac,
175; rediscovery of Cantillon, 2170;
value theory, 301, 826, 837, 911-12,

913, 918, 1055-7, 1071; and utili-
tarianism, 408, 1056; and Tooke,
520, 744-5; and Mill, 408, 570, 826,
892; capital theory, 6370, 902-3, 905,
929; cycle theory, 742, 743^ 744-5,
1133; scientific methodology, 777n;
life sketch, 825-6; and Marshall, 826,
837, 920-24, 952; originality of, 826,
1055; Wicksteed and, 832; and
Bohm-Bawerk, 846, 902-3, 905, 929;
profits theory, 893; distribution the-
ory, 913, 941-2; general equilibrium
in, 918; abstinence in, 927; wage
theory, 940; on statistics and theory,
962; law of indifference, 973; on in-
terpersonal utility comparison, 1071;
monetary analysis, 1075, 1078; in-
dex number work, 1093
Jevons, Mrs. William Stanley, 826
Jewkes, John, 891
Jhering, Rudolph von, 431
Jocelyn, J., 376
Johnson, A. S., 938
Johnson, E. A. J„ 157, 355, 356, 37.
500, 514

Johnson, W. E., 1039, 1044, 1063, 114
Johr, Adolph, 228
Jolliffe, M. F., 479

jQnes, Richard, 343-4, 4 2 3, 448, 539? 54
669, 676, 822
Joplin, Thomas, 722-4, 733
Jovellanos, Gaspar Melchor de, 172-3
Juglar, C., 742, 1123-4, 1126, 1134, n(
Justi, Johann Heinrich Gottlieb von, 17
73, x 74» 177, 284, 315, 375
Justinian, 69

Kahn, R. F., 985, 1048, 1070, 108
1152, 1172, 1174

Kaldor, Nicholas, 848, 901, 906, 98
1008, 1040-41, 1072
Kant, Immanuel, 129, 411-12, 428, 43
446, 448

Kaufmann, Felix, 814
Kautsky, Karl, 388, 583, 749, 880, 88
986, 1058, 1131-2
Keckermann, B., 156
Kemmerer, E. W., 1076, 1089, 1096
1098, 1100

Kent, Clement Boulton Roylance, 408
Kepper, Georg, 731, 739, 744
Keynes, John Maynard, vision in, 41
mercantilist writers and, 28 3n; a:
Becher, 283-4; definition of ‘clas
cal/ 380; and Ricardo, 473n, 11'
and Malthus, 483, 582, 622, 6:

% i

INDEX OF AUTHORS

64m, 89cm; and Storch, 502; Say’s
Law and, 615, 619, 622, 624; ad-
vocacy of paper standard, 69$; Tract,
7o6n, 7i3n, 1171-2; hoarding in

. early work, 706, 1087-8, 1108, 1109;
and Tooke, 710; and Thornton, 720;
and Marshall, 833, 834, 997, 1045-6,
1057, 10830, 1084; acknowledgment
of predecessors, 8720; and Bohm-
Bawerk, 93 m; on frictional unem-
ployment, 944; and Walras, 1017-18,
i023n, 1082; on Sralfa, 1047; on
. gold exchange standard, i076n; and
- Swedish school, 1085, 1173-4; Trea-
tise, 1095, 1171-2; on credit crea-
tion, 1114-15; and Wicksell, 1117;
and Hobson, 1130; on Gesell, 113m;
Economic Consequences, 1171-2.
See also Keynesian System
Keynes, John Neville, 538, 777, 824, 966
Khachatiirov, T. S., 1158
Khaldun, see Ibn Khaldun
King, Gregory, 212, 213
King, Peter, 707, 722
King, W. T. C., 690, 1078, 1111
Kinley, David, 1081, 1098
Kitchin, Joseph, 1124
Klein, Lawrence Robert, 1174
Klock, Caspar, 202

Knapp, G. F., 288, 526, 809-11, 1090-91
Knibbs, Sir George Handley, 583, 891
Knies, Karl Gustave Adolph, 442, 504,
507-8, 539, 656, 808, 850, 1081
Knight, Frank H., 471, 543, 568, 636,
646, 827, 846, 848, 875, 894, 897,
900-901, 906, 917, 1018, 1040-41,
1046

Knoll, August' M., 104
Kondratieff, N. D., 1158
Koopmans, Johan G., 1089
Koppers, Wilhelm, 787
Kraus, Christian Jacob, 501
Kries, Johannes von, 448
Kuczynski, Robert Rene, 891
Kuznets, Simon Smith, 524

Laffemas, Barthelemy de, 195, 354, 357
Laidler, Henry Wellington, 762
Laistner, Max Ludwig Wolfram, 54, 74
Lamond, Elizabeth, 157, 166
Lampertico, Fedele, 178
Lamprecht, Karl, 782
Landauer, Carl, 1158
Landry, Adolphe, 843
Lange, Friedrich Albert, 304

1217

Lange, Oscar, 619, 622, 624, 884, 896,
987, 1023, 1063, 1072,-1082, 1149,
1174, 1182
Langton, W., 743
Lansdowne, Marquis of, 210
Laplace, Pierre, 14, 304, 448, 960, 1058
Lardner, Dionysius, 602
Larraz L6pez, Jose, 165
Laski, Harold Joseph, 123, 132
Laskine, Edmond, 510
Laspeyres, Etienne, 1093
Lassalle, Ferdinand, 453, 455, 650, 660
Lauderdale, James Maitland, 486-8, 560,
602, 623, 626, 639, 641, 648, 656,
682, 740

Laughlin, J. L., 873, 1081, 1087, 1089,
1104

Launhardt, Wilhelm, 850-51, 948, 957
Laurent, Hermann, 840
Lavalley, P., 168
Laveleye, Emile de, 820
.Lavergne, Louis-Gabriel Ldonce de, 174
Lavington, Frederick, 895, 1084
Law, John, 282, 284, 294-6, 300, 321-2,
325, 718, 1054
Lebeau, Auguste, 175
LeBon, Gustave, 794-5
Lecky, William Eduard Hartpole, 424, 443
Lederer, Emil, 884, 1133
Leduc, Gaston, 976
Lee, Leonard, 275
Lehfeldt, Robert Alfred, 962
Leibniz, G. W. von, 28-30, 117, 121, 283,
990

Lenin, Vladimir Ilich, 879, 881, 1159
Lenoir, Raymond, 124
Leontief, Wassily W., 241, 473, 631,
643, 909, 980, 1021, 1029, 1066,
1140

Le Play, P. G. Freddric, 491, 522-3, 539
Lemer, Abba Ptachya, 617-18, 884, 987,
993, 1040, 1045, 1149, 1178-9
Leroy-Beaulieu, Paul, 497, 841
Lescure, Jean, 1104, 1129
Leslie, Thomas Edward Cliffe, 539,. 823
Lessius (Leonard de Leys), 95, 96, 98, 99
Lester, R. A., 1038

Le Trosne, Guillaume Francois, 223, 225
Levasseur, Pierre Emile, 820, 841
Levi, Leone, 821
Levy-Briihl, Lucien, 794, 799
Lewis, Sir George Comewall, 404, 433
Lexis, Wilhelm, 392, 850, 852, 927, 958,
961, 1059, 1093, 1095 , 1104
Lichtenberger, Andrd, 140
Lieben, Richard, see Auspitz and Lieben

12l8

INDEX OF AUTHORS

Liefmann, Robert, 1109, 1154
Ligupri, Alphonso Maria de’, St., 102
Lindahl, E. R., 908, 946, 1085, 1173,
1178

Linguet, Simon Nicholas Henri, 389
List, Friedrich, 199, 421, 442, 504-6, 517,
5i9, 572

Liverpool, Charles Jenkinson, 693
Lloyd, H., 315, 705, 954
Lloyd, William Forster, 463, 1055
Lloyd George, David, 770
Locke, John, 91, 116, 117, 119, 120, 184,
197, 264, 290, 298, 299, 308, 310,
316-17, 328-32, 350, 359, 365, 408,
419, 447, 706, 733, 796, 1108 •
Lodge, Henry Cabot, 199
Lom6nie, Louis L. de, and Charles de, 175
Longe, Francis Davy, 669
Longfield, Samuel Mountifort, 464-5,
467,. 480, 484, 613, 641, 648, 656,
658, 664, 674, 677, 682, 733, 737,
9i5, 939, 94L 1033
Lord, Eleazer, 711
Lorentz, H. A., 319
Lorenz, P., 1155
Loria, Achille, 856-7, 890, 935
Lotze, Rudolph Hermann, 446, 448, 796
Lowe, Joseph, 526, 701, 713, 1078
Lowenthal, Esther, 480
Loyd, Samuel Jones, see Overstone
Loyo, G., 210

Lubbock, John William, 705
Lucas, Charles P., 399
Lugo, Juan de, 95, 96, 98, 99, 101
Lundberg, Erik, 966, 1085, 1173, 1183
Lutz, Friedrich, 739, 1123
Luxemburg, Rosa, 880-82, 1132
Ly, Siou Y., 53
Lyell, Sir Charles, 445

Mabillon, Jean, 123
Mably, Gabriel Bonnot de, 139, 140
Macaulay, T. B., 216, 424, 426, 430, 432
Macgregor, David Hutchison, 859
Mach, Ernst, 5, 16, 509, 776
Machlup, Fritz, 1038, 1076
Maclaren, James, 716
Macleod, H. D., 175, 670, 718, 1115
McCulloch, John Ramsay, 157, 381, 470-
71, 476-9, 486-7, 515, 519, 521-2,
559, 581, 585, 595, 599, 657, 669,
683, 703, 726, 733, 737
McDougall, William, 799
McVane, Silas Marcus, 639, 926
McVicker, John, 515
Maddison, Sir Ralph, 364

Maimonides, Moses, 87

Maine, Henry James Sumner, 427, 782,

.. 822

Maitland* Frederic William, 782
Malestroict, Jehan Cherruyt de, 166, 311
Mallock, William Hurrell, 789
Mai thus, Thomas Robert, and Godwin,
140, 579n; and Ortes, 178; and
Smith, 191, 472, 482, 484; and
Quesnay, 234; on human perfectabil-
ity, 257; Marx and, 48on, 481; and
Keynes, 481, 483, 582, 622, 623,
64m, 89on; recognition of maximiza-
tion problem, 481; monetary analysis,
482, 483; general gluts, 482, 538-9;
and Chalmers, 487; and Mill, 530;
and Ricardo, 536n, 538-9, 6250, 677,
10540; model of growth, 566, 570-72;
distribution theory, 568; and Senior,
580-81; value theory, 600, 60 in, 602,
io54n; supply and demand schedules,
602; international trade theory, 610-
11, 733; on Say’s Law, 622, 623, 740;
aggregate demand, 623; savings and
investment, 623, 64m, 724, 740;
capital concept, 634; interest theory,
656; stagnation thesis, 740; money
as numeraire and exchange medium,
1087; consumption function, 1176.
See also Malthusian Theory of Pop-
ulation

Malynes, Gerard de, 251, 314, 344-6, 350,
353, 355, 364 6, 737
Mandeville, Bernard de, 184, 325
Manfra, Modestino Remigio, 178
Mangoldt, Hans Karl Emil von, 503, 519,
556, 607, 646, 679, 893-4, 935,
990-91

Manley, Thomas, 328-9
Mann, Fritz Karl, 204
Mannheim, Karl, 33, 37
Mantoux, Paul, 149, 271, 821
Marcet, Jane, 477, 649, 668
Marget, Arthur W., 276, 317, 322, 698,
705-6, 710, 718, 1020, 1080, 1108,
1115

Mariana, Juan de, 96 .

Mario, Karl, see Winkelblech, Karl George
Marquez, Javier, 165
Marschak, Jacob, 907, 970, 993
Marshall, Alfred, use of ‘economics,’ 21;
conception of Noble Life, 1290; and
Smith, 189, 307-8, 833-5, 837, 838,
892; savings and investment, 325; in-
ternational trade theory, 351, 374,
609, 1106; and Kant, 41 2n, 780; on

INDEX OF

Th unen, 465, 467, 837; acknowledg-
ment of others' work, 474, 839; and
Ricardo, 475, 5^9, 592-3, 594-5,
674°, 678-9, 837, 838, 92m, 934,
1078-9; on Hermann, 503; economic
development theory, 543, 892-3,

1165; and Mill, 570, 747, 837, 838,
892; Malthusian principle, 582, 890;
Say's Law and, 622; monetary theory,
72on, 1075, 1078-9, 1083-4, 1087-8,
1099, 1108-9; business cycle, 747;
taxation, 765, 945, io7on; laissez-
faire, 765, 888, 985, 986; socialism,
765, 83 3n, 888; life sketch, 834-40;
and Walras, 837, 839, 952; eco-
nometrics, 840; economic sociology,
889; statistics, 962, 1093; consumers'
rent, 1061-2, 1070; welfare eco-

nomics, 1069-70

Distribution theory: marginal pro-
ductivity, 920-24, 941-2, 996n,

1032-3, 1042-3; wage theory, 923-4,
940, 943; interest theory, 638-9, 659,
72on, 926, 1083; rent theory, 67 m,
6740, 934, 935, 937; profits, 646,
72on, 893-4, 1045, 1048-9; quasi-
rent, 6340, 647, 67m, 678-9, 894,
995 , 1045

Methodology: partial analysis, 836,
959, 990-98; general analysis, 483,
836, 92on, 994, 995, 996; statics,
836-7, 966, 1161; dynamics, 840;
stationary state, 966; macroanalysis,
997; role of time, 9950, 10290, 1045,
1172; representative firm, 9970, 1045;
merger of business and general eco-
nomics, 945; role of theory, 954n

Production theory: factors of pro-
duction, 557, looon; and Mill’s, 570;
increasing and decreasing returns,
259, 585, 587, loyon; real cost the-
ory, 660, 923-4, 1057; prime and
supplementary costs, 1045; increas-
ing and decreasing costs, 892, 982,
985, 1045, 10700; internal and ex-
ternal economics, 568, 9950, 1045,
1046; monopoly theory, 960, 977-8,
1049; oligopoly theory, 982, 983,
984, 985; monopolistic competition
in, 840, 975, 1150; pure competition,
972, 974, 986; Keynes on, 1045-6;
loose ends in, 1045; substitution,
9170, 995

Value theory: normal price, 189,
592-3; on Smith’s, 307-8; supply-de-
mand theory, 482, 921-2; and Ri-

AUTHORS 12x9

cardo's, 594-5, 837, 919, 92m; mar-
ginal utility theory, 826, 836, 837,
910, 919, 921-4, 1056-7, 1060,

1061-2, 1071; law of satiable wants,
910; oh Jevons’ arid Austrians’, 920-
24; on utilitarianism in, 1056-7; de-
mand analysis, 991-2, 996
Marshall, Dorothy, 271
Marshall, Mary Paley, 834
Marsilius of Padua, 92
Martello, Tullio, 1081
Martinez de la Mata, Francisco, 168, 170
Marx, Karl, idealogical bias in, 35-8, 439;
on semi-socialists, 139; on Petty,
2ion; and Quesnay, 238, 391, 566n;
difficulty of subdividing work, 383-4;
life sketch, 386n; erudition in, 387;
early achievement of essentials, 388-9;
and Smith, 309, 389, 648-9; and
Hegel, 392, 414, 438; on bourgeois
radicalism, 395, 455n, 55gn; soci-
ology, 389, 433, 439, 440; and Ri-
cardo, 390, 595n, 596-8, 649, 654,
681, 6820, 683, 685; on Utopian
socialism, 454-5, 480; and Proudhon,
457; Hodgskin as precursor, 479; on
Malthus, 481, 583, 651; bn Ramsay,
488; on Say, 491, 628n; and Rod-
bertus, 506; and Roscher, 508; on
Mill, 531; effect on Sombart, 818;
Bortkiewicz on, 85m, 933m, and
Tugan-Baronowsky, 1126m See also
Marxist System

Mason, Edward S., 456, 461, 471, 612
Mason, Otis Tufton, 787
Massie, Joseph, 184, 331, 375
Mataja, Victor, 895
Matthias, Johann, 202
Maunier, Rene, 786
Maurer, Georg Ludwig von, 426
Mauvillon, Jakob, 224, 228
Maverick, L. A., 224
Mayo-Smith, Richmond, 1089
Medina, Juan de, 101, 272
Mehring, Franz, 386, 389
Meitzen, August, 810
Melon, Jean Frangois, 174, 299
Mendel, Gregor Johann, 444
Menger, Anton, 480

Menger, Carl, and Galiani, 301; on meth-
odology, 777, 814; and Mill and
Smith, 827, 892; life sketch, 827; and
Marshall, 837; and Bohm-Bawerk,
844, 845, 846-7; and Wicksell, 862;
monetary analysis, 1085-6

1220

INDEX OF AUTHORS

Menger, Carl, and Galiani (Cent.)

Distribution theory: marginal anal-
ysis in, 912-13, 915, 916, 941-2; sub-
stitution in, 9i7n, 99 5 n; wage theory,
940; interest theory, 656m 846, 925;
rent theory, 934

Production theory: capital con-
cept, 846, 899, 901

Value theory: marginal utility in,
301, 813, 827, 837, 848, 910, 912-13,
918, 984, 1035-6, 1060; and Galiani’s,
301; Wieser and, 848; in barter econ-
omy, 911; and Schmoller, 813; on
isolated exchange, 984
Menger, Karl, 587, 588, 1037
Menghin, Oswald, 786
Mercado, Tomas de, 95, 101
Merrier de la Rivirie, P.-P., 223, 225
Mering, Otto, 615

Messedaglia, A., 511, 519, 583, 856-7,
1081

Metzler, Lloyd A., 1009, 1149, 1184
Meunier, Francis, 95
Meyer, Rob., 898

Mill, James, 254, 408, 412, 429, 432, 436,
447, 470-72, 476, 478, 491, 519,
527-8, 536, 559, 560, 570-71, 581,
592, 595> 621, 637, 641, 648, 657,
663, 668-9, 676, 683, 703, 795
Mill, John Stuart, associationist psychol-
ogy, i20, 447, 450, 529m empiricism,
121; savings and investment, 325,

572, 573, 620-21, 641, 642, 643,

659, 7 2 4-5» 747; role in classical

period, 380, 444n, 527, 533; role in
neo-classical period, 849, 887, 889;
philosophical radicalism, 395, 430,
528; and utilitarianism, 408, 411,

430, 457, 528, 775; and socialism,
457 , 53 i, 532 ; life sketch, 527-33;
value judgments, 541; economic soci-
ology, 532, 887, 889; theory of eco-
nomic development, 542, 543, 571,
572, 640-41, 662, 685; on laissez-faire,
548; on justice, 547n; population the-
ory, 571, 581; cost theory, 603-4,

660, 676 n, 917; business cycle analy-
sis, 747

Distribution theory: divorce from
production theory, 543; interest the-
ory, 530, 603, 639, 654, 659, 660,
662, 72on; profits theory, 646, 893,
894; rent theory, 560-61, 604, 671-2,
673n, 675, 676, 677; wage theory,
546, 641-3, 667x1, 669-71, 685

Filiations with: Turgot, 325, 642;

Smith, 189, 545, 642; Ricardo, 475,
478, 487, 529, 530 , 560-61, .570,
603, 604, 654, 676, 677, 710; Mal-
thus, 530, 581; Marx, 531, 747; Say,
529-30, 569, 620-21, 654; Senior,
484, 530, 569, 654; Thornton, 719,
722, 733; Cairnes, 533'4; Rae, 469;
Porter, 52m; Jevons, 826; Marshall,
570, 837, 838, 921, lo83n; Menger,
827; Wicksell, 863

International trade theory: infant-
industry argument, 505; reciprocal
demand, 608-9, 611-15; monetary as-
pects, 731-3; unilateral payments,
738, 1107

Methodology: statics and dynam-
ics, 417, 563; stationary state, 562;
deduction, 452, 537; historical rela-
tivity, 544; equilibrium, 563, 609,
623; isolation and abstraction, 537-8;
common experience, 577; expecta-
tions, 72m, 747

Monetary theory: metallist, 289;
on free coinage, 298; on hoarding,
620, 622, 705; summarizer of previ-
ous work, 689-90; credit in, 699m
704, 7i8n, 72on, 722, 726, 747; dis-
trust of index numbers, 701; cost of
gold and value of money, 702; quan-
tity theory, 704-5, 711; lack of origi-
nality, 706; as bullionist, 710-11,
1083m on monetary management
schemes, 715; in international trade
theory, 731-2, 733, 738; as imper-
fectly systematized, 1080; Marshall’s
and, 1083m See also, above. Dis-
tribution theory, interest theory

Production theory: divorce from
distribution theory, 543; competition
in, 545n, 546, 9769; entrepreneur in,
556-7; 3-factor schema, 560; capital,
561, 63211, 640-45, 659; and Say’s,
Senior’s, Ricardo’s, Marshall’s, 569-
70; law pf diminishing returns in,
581, 672; and Walras’, loion

Value theory: necessary price, 189;
compromise between Ricardo’s and
Say’s, 530; failure to present first,
542-3; customary prices, 546; defini-
tion of value, 589; defects in, 603;
and Ricardo’s, 603, 604; utility and
difficulty of attainment, 603, 912m
cost-of -production theory, 603; sup-
ply-demand theory, 603-4; and inter-
national trade theory, 611-15; elimina-
tion of rent from, 6730

INDEX OF AUTHORS

1221

Works: Autobiography, 528; Es-
says on Some Unsettled Questions,
529; On Liberty, 430, 528; Logic,
449-52, 529, 530; Principles, 3820,
444 n > 449-5i> 52in, 527-8, 530,
541-4; Representative Government,
430

Miller, Harry E., 718, 739, 745
Millerand, Alexandre, 762
Milles, Thomas, 344, 362
Mills, John, 743

Mints, Lloyd Wynn, 718, 729, 1111
Mirabeau, Victor Riquetti, Marquis de,
* 175, 218, 223, 225, 227, 231, 239,

255, 256

Mises, Ludwig von, 63, 288, 701, 745,
844, 989, 1076, 1086-7, 1090, 1099,
1120-22, 1154, 1164
Misselden, Edward, 345-6, 350, 353, 355,
358, 361, 365

Mitchell, W. C., 1092, 1104, 1123-4,
1163-6

Mitscherlich, Eilhard Alfred, 588
Mixter, Charles Whitney, 469, 846
Modigliani, Franco, 1023, 1179, 1180,
1182

Mohl, Robert von, 159, 381
Moivre, Abraham de, 960
Molina, Luis de, 95-9, 101, 103, 105-6,
109-10, 112

Molinaeus, see Dumoulin, Charles
Molinari, Gustave de, 661, 841, 866
Mollien, Frangois Nicolas, Comte, 402
Mombert, Paul, 584
Mommsen, Theodor, 425-6
Moncada, Sancho de, 168
Monroe, A. E., 95, 170, 194, 198, 239,
311

Montanari, Augusto, 179
Montanari, Geminiano, 292, 314
Montchr&ien, Antoyne, 167, 359
Montesquieu, Charles Louis, 135, 136,
137, 184, 232, 253, 297, 389, 434,
537, 706

Moore, Henry Ludwell, 213, 876-7, 956,
958, 961-2, 967, 973, 994, 1133, 1161
Morandi, Carlo, 164

More, Sir Thomas, 206, 207, 305, 326,
979

Morellet, Andre, 123, 138, 389
Moret, Jacques, 957
Morgan, Conwy Lloyd, 797
Morgan, Edward Victor, 690
Morgan, Lewis Henry, 787
Morgenstem, Oskar, 305, 381, 1140

Morley, John Morley, Viscount, 398-9,
403

Morrow, G. R., 183
Mortimer, John, 157
Moser, Johann Jakob, 159
Moser, Justus von, 172
Muller, Adam Heinrich, 421-2, 428
Muller, .Johannes Peter, 446, 796
Mun, Sir Thomas, 196, 283, 314, 337,
350, 35L 353, 356-8, 361, 363-5,

764

Muratori, Ludovico Antonino, 364
Myrdal, Gunnar, 1085, 1117, 1173

Nasse, Erwin, 1104
Nazzani, Emilio, 512
Nearing, Scott, 947
Nef; John U., 148
Neisser, Hans, 1109
Nell-Breuning, Ostwald von, 765
Neuman, John von, 305, 968, 1140
Newcomb, Simon, 865-6, 1108, 1115
Newmarch, William, 520, 524, 690
Newton, Isaac, 5, 20, 30, 118, 185, 990
Neymarck, Alfred, 248
Nichol, A. J., 958
Nicholls, Sir George, 271
Nicholson, J. S., 533, 830, 1076, 1081
Nicolini, Fausto, 300
Niebuhr, Barthold Georg, 426
Nitti, Francesco Saverio, 764
Nitzsch, Karl Wilhelm, 783
Nogaro, Bertrand, 1104
Nordenskiold, Erik, 788
Norman, George Warde, 726, 745
North, Sir Dudley, 184, 196, 231, 328,
363, 365, 369-70, 375*6
North, Roger, 275
Norton, John Pease, 1080
Novalis, see Hardenberg, Friedrich von
Nowak, Jerzy, 349

Obrecht, Georg von, 165
O’Brien, G. A. T., 83, 516, 534, 655, 716
O’Connor, Michael J. L., 514
Oertman, Paul, 70

Ohlin, B., 612, 732, 1085, 1107, 1173,
1178

Oncken, August, 225, 228, 244
Opie, Redvers, 486

Oppenheimer, Franz, 140, 458, 583, 854-6,
890, 935, 965, ii54
Oresme, Nicole, 94, 99, 100
Ortes, G., 177, 178, 255, 259, 272, 293,
586

Ortiz, Luiz, 165, 194, 209

1222

INDEX OF AUTHORS

Osorio, Antonio, 957
Osse, Melchior von, 165
Ostwald, Wilhelm, 388
Otte, Gerhard, 939

Overstone, Samuel Jones Loyd, 699-700,
704, 725-7, 739, 742-6, 1123
Owen, Robert, 455, 506

Paccioli, Luca, 156
Paley, William, 131, 256
Palgrave, R. H. Inglis, 690, 1080
Palmer, John Horsley, 697-8, 744
Palmieri, Giuseppe, 177
Palmieri, Mattheo, 162, 202
Pantaleoni, Maffeo, 510, 512, 829, 856-7,
859, 956, 967, 1082
Paoletti, Ferdinando, 373
Papillon, Thomas, 361
Paracelsus, see Hohenheim, T. B. von
Pareto, Vilfredo, and Sorel, 774n; Mind
and Society, 7590; and Walras, 829,

858, 860-61, 888n, 952, 1062, 1142;
pointed beyond self, 840, 962, 1148,
1160; and Austrian school, 850;
Paretian school, 855, 858; sociology
of, 859; law of income distribution,

859, 961; indifference curves, 859,,
1044; life sketch, 859-61; as peculiar
liberal, 860, 888; as positivist and
laicist, 860; value theory, 860; eco-
nomic man in, 88yn; interest theory,
925, 968; rent theory, 938n, 1050;
impression of originality, 953n; on
statistical implementation of theory,
962; on competition, 972 n, 973, 986;
duopoly, 98m, g82n; theory of so-
cialism, 986, 987; on partial analyses,
991; on cardinal and ordinal utility,
1003, 1062, 1063-4, U42; on mar-
ginal productivity, 1035, 1039; on
interpersonal comparisons, 1071; and
modem theory of consumers’ behav-
ior, 1148; and dynamics, 1160

Parieu, Felix Esquitou de, 1075-6
Parsons, Talcott, 80, 889
Paterson, William, 376
Patinkin, D., 1023
Patten, Simon Nelson, 876
Paulus, Julius, 70, 311
Pearson, Karl, 776, 790, 961
Pecchio, Giuseppe, 512
Peel, Sir Robert, 155, 398, 399, 616,
693-5, 699-700, 711, 718, 723, 725-

Pegolotti, Francesco Balducci, 156
P^reire, Jacob Smile, 295, 321, 462

Pereire, Isaac, 295, 321, 462
Peri, Giovanni Domenico, 157
Persons, Warren M., 1165
Perwuschin, S. A., 1155, 1158
Pesch, Heinrich, S. J., 765
Petrarca, Francesco (Petrarch), 162
Petty, Sir William, as a theorist, 211; un-
originality of, 213; on velocity of
money, 213, 316-17; income analysis,
213; relation of land and labor values,
214; on value, 214; on division of
labor, 214; interest theory, 215, 329;
on produced means of production,
2i7n; and Cantillon, 218; population
theory, 219, 251, 253, 256, 258;
rent theory, 264; wage theory, 267;
metallist theory of money, 290; on
seignorage, 298; protectionism and
unemployment, 350; export surplus
and multiplier, 359; use of term
‘cycle,’ 742m

Petyt, William, 197, 251, 347, 350
Peuchet, Jacques, 138
Pfeiffer, Johann Friedrich von, 228
Phelps Brown, E. H., see Brown, E. H.
Phelps

Philanglus, see Petyt, William
Philippovich, Eugen von, 241, 547, 844,
850, 853, 948

Phillips, Chester Arthur, 1116
Phinney, J. T., 1101
Picard, Alfred Maurice, 949
Picard, Roger, 266
Pierson, Nicolas Gerard, 861, 931
Pierstorff, Julius^ 895
Pietri-Tonelli, Alfonso de, 858, 859
Pigou, A. C., 351, 650, 703, 790, 833,
834, 859, 942, 943-6, 948-9, 956 ,
966, 976, 978, 983, 986, 994, 1045,
1047, 1069-70, 1084, 1090, 1099,
1106, 1116, 1125, 1135, 1144, 1151,
1164

Pinto, Isaac de, 327
Pirenne, Henri, 83
Pirou, Gaetan, 843, 857, 859
Place, Francis, 453, 581
Plato, 54, 55, 56, 57, 59, 206, 207
Playfair, William, 526
Plekhanov, Georgii Valentinovich, 878
Pliny the Elder, 67
Pohlmann, Robert von, 55
Poincar^, Jules Henri, 15, 776, 828, 1055
Poisson, Simeon-Denis, 448, 961
Pollexfen, John, 184, 196, 242, 329, 346-7,
350, 363-4, 719
Pollock, Sir Frederick, 107

INDEX OF AUTHORS

Porta, Giovanna Battista della, 158
Porter, George R., 521
Postlethwayt, Malachy, 157, 184, 372
Potter, Robert, 275
Potter, William, 284, 294
Pound, Roscoe, 794
Pribram, Karl, 85, 412
Price, Langford Lovell Frederick, 1089
Price, Richard, 254, 327
Price, W. H., 345
Priestley, Joseph, 131, 132
Proudhon, Pierre Joseph, 139, 457
Pufendorf, Samuel von, 116, 117, 118,
119, 122, 182, 185, 305, 308

Quesnay, Frangois, and natural law, 138,
228, 229; and Smith, 192, 236; in-
come analysis, 213, 235, 287-8; mon-
etary theory, 216, 234; and Petty, 218;
and Cantillon, 218, 220, 222-3; value
theory, 220, 234, 302; tableau econo-
mique, 222-3, 239-43, 278, 391; life
sketch, 224-5; on natural order, 229;
on agriculture, 229-30; on laissez-faire,
230-31; single-tax, 230-32; as scien-
tific economist, 232; and utilitari-
anism, 233; perfect competition in,
233; harmonism, 234; population
theory, 234, 256n, 257, 266, 274;
wage theory, 234, 266, 569, 664; in-
terest theory, 234; capital theory,
235-7, 323-4, 564, 632, 667; rent
theory, 238; ‘produit net,’ 237-9; on
high prices and prosperity, 287; sav-
ings, 287; as model-builder, 562, 632;
and Marx, 238, 566n; and Ricardo,
569; and underconsumption crisis
theory, 74on; macroanalysis and, 997
Quetelet, Adolph, 525, 960

Rae, John (1796-1872), 237, 468-9, 519,
530, 639, 648, 654, 846, 931, 939
Rae, John {1845-1915), 181
Raguet, Condy, 743
Ramsay, Sir George, 486, 488-9, 556
Ratzel, Friedrich, 788
Rau, Karl Heinrich, 503, 740
Raven, Charles Earle, 461
Raymond, Daniel, 199, 519
Read, Samuel, 486, 488, 556, 560, 639
Refuge, see Du Refuge, Eustache
Renan, Emst, 772
Rhodes, Edmond Cecil, 859
Ribot, Theodule Armand, 799
Ricardo, David, and utilitarianism, 408,
471; life sketch, 470; had no philos-

1223

ophy or sociology, 471; narrowness
of theoretical interest, 472-3; reasons
for success, 473, 478; as builder of
theoretical analysis, 474, 478, 480,
598; analysis as a detour, .474, 560,
568, 673n; guide to Principles, 475;
Ricardian school, 475-80; influence
outside England, 478-9, 849; on gen-
eral gluts and crises, 538-9, 740, 741;
on justice, 547n; population theory,
581, 653, 682-3; technological change,
584-5, 646, 682-5; Say’s Law and,
621, 625

Distribution theory: as relative

share theory, 483, 592; divorce of pro-
duction theory from, 543, 568; class
antagonism in, 553-4; tendencies in
long-run shares, 553-4; model of,
568-70; identification of economics
with, 568-9

Economic development theory:
West and, 476; tendencies in long-
run shares, 553-4; pessimistic theory
of, 570-72; falling interest rate, 652-4;
and Marx’s, 65 3n

Filiations with: Cantillon, 220;

Galiani, 302; 'Smith, 188, 189, 191,
194, 310, 472, 482, 484, 668-9;
Bailey, 486-7, 599, 679; Carey, 517-
18; Cournot, 959; Malthus, 483, 484,
536n, 538-9, 581, 625n, 653; Marx,
390, 596-8, 653n, 682n, 685-7; Mill,
529, 726; Rossi, 509a; Say, 621, 654;
Senior, 484, 486, 576, 637; Sismondi,
493-4; Thornton, 688n, 733, 735,
736-7, 1107; Torrens, 490; Bohm-
Bawerk, 846; Jevons, 902-3; Keynes,
47 3n, 1171; Marshall, 484, 837, 921,
934, 1079; Menger, 827, 934; Ro-
scher, 741; Taussig, 871

Interest theory: money supply and,
332; as bulk of profits, 647; exploita-
tion theory, 649, 65 3n; abstinence,
649n, 660; residual theory, 6490,
652-3; divergence of real and mon-
etary rates, 1118

International trade theory: com-
parative cost, 373-4, 490, 607-8, 612;
free trade, 473, 62 5n; immobility of
labor in, 606; and real value, 610;
and value theory, 611-15; specializa-
tion of production in, 614; interna-
tional finance, 733, 735-7, 1107

Methodology: Ricardian Vice, 473,
541, 618, 653n, 668, 1171; compara-
tive statics, 494-5, 682-3; failure to

INDEX OF AUTHORS

1224

Ricardo, David (Cont.)

specify institutional assumptions, 544;
classes in analysis, 553; stationary
state in, 562-4; macroanalysis, 997-8

Monetary theory: policy recom-
mendations, 473; publications on,
688n; on war inflation, 688; gold
bullion plan, 693, 7i2n, 1079; as a
metallist, 699-700; quantity theory,
703-4, 724, 737; as a detour in mon-
etary analysis, 703n; bullionist argu-
ment in, 708-12; on silver standard,
7i5n; parachute effect in bimetal-
lism, 7i7n; on credit creation, 722,
724; on gold circulation, 1076; bank-
ing theory, 1112

Production theory: divorce of dis-
tribution theory from, 543, 568; en-
trepreneur in, 556; 3-factor schema,
559-60; model of, 568-70; competi-
tion in, 592; marginal firm, 673; cap-
ital theory, 634, 635-6, 637, 668,
682, 745n, 902-3

Profits theory: innovation profits,
646; interest as bulk of profits, 647;
and Marx’s, 682n; population and,
682-3; technological unemployment,
682-5; theory of compensation, 683;
underrating of mechanization, 684;
real value approach, 684-5; savings
and, 685; Marx’s acceptance of,
685-7; marginal profits, 721

Rent theory: and Smith’s, 191; ex-
tensive margin, 259; Anderson’s as
precursor, 263, 264-6, 6760; West
and, 476; Torrens and, 490; Carey’s
criticism, 517-18; Malthus and, 536n,
677; inability to discuss in isolation,
569, 673, 675-6; diminishing returns
and, 584-5, 653, 673, 822m, 1032;
intensive margin, 587; rent concept,
671; elimination of land from value
problem, 673, 675-6, 868; denial of
marginal productivity, 674^ location
and differential fertility, 675; urban
rent, 67 5n; Mill’s defense of, 676;
Longfield’s criticism, 677; quasi-rent
in, 67m, 678-9; Bailey’s criticism,
679; in neo-classical period, 933-4;
Menger’s criticism, 934; Marshall’s
defense, 67411, 934

Value theory: misunderstood

Smith’s, 188, 310; and Cantillon’s
land theory, 220; use vs. exchange
value, 300, 9i2n; Galiani as precur-
sor, 302; overthrow of utility theory,

302, 1054; labor-quantity theory,

310, 559-60, 590-96, 612, 668-9; on
invariant numeraire, 591; real value,
591-2, 598, 610, 684-5; utility and,
592; scarcity and, 592; equilibrium
in, 592; on supply-demand theory,
592, 601; long-run normal vs. market
price, 593; and marginal utility the-
ory, 593; periods of investment and,
594-5, 597, 636, 638; cost-of-produc-
tion theory, 594-5, 600; Ricardo
Effect, 595, 637; and Marx’s 596-8;
and international trade theory, 611-
15; and rent theory, 673, 675-6, 868
Wage theory: and Smith’s, 189;
wage-fund, 266, 681-5; as manual
labor theory, 553; use of market to
value types of labor, 593-4; minimum
of existence theorem, 664-5; effect of
capital increase in, 668
Ricca-Salerno, Giuseppe, 205
Ricci, Umberto, 979, 1156
Rickert, Heinrich, 507, 777, 818
Riehl, Wilhelm Heinrich, 427
Rietz, H. L., 1093, 1165
Ripley, William Zebina, 873
Rist, C., 320, 689, 718, 843, 1104, 1117
Robbins, L., 863, 890, 989, 1046, 1071
Roberts, Hazel van Dyke, 216
Roberts, John, 156
Roberts, Lewes, 156

Robertson, Dennis Holme, 656, 833,
1046-8, 1084, 1116, 1127-8, 1134,
1178; 1183

Robertson, Hector Menteith, 80
Robinson, Joan, 15, 61, 243, 279, 474,
650, 885, 938, 977, 985, 1046, 1048,
1050, 1142, 1149, 1151-2, 1172
Roche-Agussol, Maurice, 1058
Rodbertus, Johann Karl, 478, 504, 506,
705, 740, 750, 933, 1097
Rodriquez Villa, Antonio, 203
Roesler, Carl Friedrich Hermann, 671
Rogers, Arthur George Liddon, 275
Rogers, James Edwin Thorold, 782, 821
Rooke, John, 475, 674
Roos, Charles F., 1160
Roover, Raymond de, 78, 343
Roscher, Wilhelm Georg Friedrich, 95,
210, 284, 290, 381, 421, 423, 442,
459 L 465, 504, 507-8, 519, 535, 540,
543, 546, 699-700, 741, 808-9, 850,
1086, 1176

Rosenstein-Rodan, P. N., 1056

Ross, Edward Alsworth, 793

Rossi, P. L. E., 216, 382, 479, 496-7, 510

INDEX OF AUTHORS

Rossig, Karl, 159

Rotteck, Karl von, 424, 432

Rousseau, Jean-Jacques, T 10, 139, 389

Rowe, John Wilkinson Foster, 941

Roy, Rene, 958

Ruskin, John, 403, 411

Russell, Bertrand, 779

Russell, Henry Benajah, 1076

Ryazanov, D., 387

Sadler, Michael Thomas, 583
Saint-Pierre, Charles Ir6nee Castel, 204
Saint-Simon, Claude-Henri de Rouvroy,
Comte de, 415, 418, 440, 455, 460-
62, 528, 542
Salin, Edgar, 55, 413
Samsonoff, B., 939

Samuelson, Paul A., 39, 912, 968, 1009,
1028, 1040-41, 1053, 1063, 1067,
1069, 1073, 1148-9, 1161, 1176,

1179, 1182-3

Saumaise, Claude de (Salmasius), 106
Savary, Jacques, 156
Savary des Bruslons, Jacques, 157
Savigny, Friedrich Karl von, 423-4
Say, Jean Baptiste, equilibrium theory,
189, 511, 623; Smith and, 189, 491,
492; Cantillon and, 222, 492, 625;
value theory, 234, 249, 302, 600,
602, 1054; and Quesnay, 234; distri-
bution theory, 249, 644; and Turgot,
249, 492, 625; and monetary analy-
ses, 282n; and Ricardo, 47411, 654;
Ricardians on, 491; Marx on, 491,
628; economic liberalism, 492; fol-
lowers of, 496-7, 841; and Rossi,
496-7, 509m, influence in United
States, 515; and Mill, 529-30, 569,
621-2-, 654; definition -of political
economy, 535; entrepreneur in, 555,
557, 645-6; triad of factors, 560, 561;
generalization of land into natural
agents, 56on; economics as experi-
mental science, 576; Marshall and,
622; Malthus and, 622-3; Keynes and,
624; definition of wealth, 626; inter-
est theory, 654; wage theory, 663;
rent theory, 677; monetary theory,
7 ion; on business cycle and crises,
739-40; and Walras, 828, loion
Say, Leon, 248, 841
Sayers, R. S., 690, 711, 716
Scaruffi, Gasparo, 292
Schaffle, Albert, 459, 509, 788
Schams, Ewald, 381
Scheler, Max, 33

12:25

Schelle, Gustave, 225-6, 244, 248, 249
Schlesinger, Karl, 979, 1014, 1037, 1082,
1106

Schlettwein, Johann August, 224, 227

Schmidt, Max Georg, 787

Schmoller, Gustav von, 418, 442, 452,

• 507, 539, 628, 783, 786, 809-14,
816-18, 820, 822, 824, 849, 855
Schneider, Erich, 466, 1028, 1043
Schreiber, Edmund, 83
Schroder, Wilhelm von, 283
Schultz, Henry, 876, 962, 1035, 1040,
1044, 1063

Schulze-Gaevernitz, Gerhart von, 850,

853

Schumpeter, Joseph Alois, 44, i44n,

347n, 8i9n, 87m, 929n, H35n,

ii53n, 115411, n69n, ii73n
Schweicker, Wolfgang, 156
Scialoja, Antonio, 510-12
Scitovszky, T. de, 1072
Scott, W. R., 128, 181, 183-4, 187
Scrofani, Sa verio, 373
Scrope, George Poulett, 486, 489-90, 526,
639, 648, 659, 701, 713
Seckendorff, Veit Ludwig von, 168
See, Henri Eugene, 123
Seeley, Sir John Robert, 432
Seligman, Edwin R. A., 198, 311, 343-5,
362, 464, 475, 478, 486, 488, 490,
514, 519, 599, 873, 946, 954, 1055
Sempere y Guarinos, J-, 165, 168, 326,
5 10

Senior, Nassau Williams-first incumbent
of Oxford economics chair, 382;
work on Poor Law Amendment Act,
401; and marginal utility, 4630, 600,
1054; and Whately, 483-4; Mill and,
484, 530, 569, 654; attempt to unify
theory, 484, 575-88; value theory,
484, 600, 602, 1054; interest theory,
484, 659; and Ricardo, 484, 485,
576, 637-8; Marx’s attack on, 486n,
640; definition of political economy,
535; on economists’ policy recom-
mendations, 540; exclusion of entre-
preneur, 556; 3-factor schema in,
560; abstinence theory of capital,
469, 484, 584, 632, 637-40, 659,
846, 926; four postulates of theory,
575-88, 638, 659; diminishing re-
turns, 584-8, 672; on population,
578, 889; real value of labor power,
596; supply-demand analysis, 602;
wealth concept, 62 5n, 626; produc-
tive vs. unproductive consumption,

1226

INDEX OF AUTHORS

Senior, Nassau William (Cont.)

63 m; rent theory, 672; monetary
theory, 699-701, 702, 722; and Wal-
ras, 758; wage theory, 939n; and
Bohm-Bawerk, 9390
Sensini, Guido, 938

Serra, Antonio, 194, 258, 353-8, 361, 365
Serres, Oliver de, 158
Shaftesbury, 3rd Earl of, 127, 128
Shaftesbury, 7th Earl of, 401
Shaw, William Arthur, 1080
Shirras, G. F., 874

Shove, G. F., 834, 836, 885, 1046, 1048,
11.5-2

Sidgwick, Henry, 408, 433, 53.3, 540,
671, 772, 865-6, 830, 940
Sigwart, Christoph von, 777
Silberling, Norman John, 690
Silio, Guglielmo, 179
Simiand, Frangois, 820
Simmel, Georg, 776, 785, 793
Sismondi, Jean Charles Leonard Simonde
de, 474 , 481, 49 i, 493-6, 535,6, 539,
544, 554, 572, 616, 621, 627, 640,
663, 681, 740-42, 837
Slutsky, Eugen, 1063-4, 1148
Small, Albion Woodbury, 159
Smith, Adam, Wealth of Nations, 38, 52,
60, 63, 169, 184, 185-94, 468-9, 511;
and scholasticism, 94, 182; ethics of,
129-30, 182; Theory of Moral Senti-
ments, 129-30, 182; moral philoso-
phy, 141; inability to unify social
sciences, 142; on corporations, 150,
545; on state management, i53n; as
;■■■' consultant administrator, 161; on
laissez-faire, 172; public finance,
. i64n, 186, 205; and utilitarianism,
180; life sketch 1 , 181-2; income con-
cept, 183; and physiocrats, 184, 236-

7, 323-4; and natural liberty, 1840,
185; and 18th-century psychologism,
186; on mercantilism, 186-7, 335,
337.n, 361-2; division of labor, 187-

8, 214; value theory, 188-9, 300,
307-11, 482, 557-8, 590-91, 6730,
91 2n, looon; labor as numeraire,
188, 310, 482, 1087; equilibrium
theory, 189, 557; capital, savings,
and investment, 191-3, 236-7, 323-4,
324-5, 389, 630, 634, 635, 639, 642,
659, 660, 667, 723; monetary theory,
191, 193, 290, 312, 315, 720, 731;
neglect of 'political arithmetick,’
212; increasing and diminishing re-
turns, 259, 585; on population, 257;

banking, 278, 731; role in defeat of
monetary analysis, 28 2n; cheapness-
and-plenty doctrine, 286, ii29n; on
free coinage, 298; on luxuries, 3240;
international trade theory, 367, 374,
376, 607, 733; inadequate acknowl-
edgment of others’ work, 474; and
cameralist tradition, 501; 3-factor
schema, 554; stationary state analy-
sis, 562-3; wealth as flow concept,
626, 628; unproductive vs. produc-
tive labor, 629-30; in neo-classical
period, 892, 920; entrepreneur in,

555

Distribution theory: 557-8, 567-8;
interest theory, 193, 331, 333-4,

647, 648-9, 654, 658, 660, 720;

profit theory, 190-91, 268, 331, 333-
4; rent theory, 190-91, 264-5, 268,
67m, 672; wage theory, 111, 189-
90, 268-70, 654, 663, 664, 667, 668
Filiations with: Aristotle, 60, 63;
Hutcheson, i28n, 141, 182, 183;

Campomanes, 173; Steuart, 176;
Beccaria, 179-80, 248; Turgot, 248;
Quesnay, 236-7, 323-4; Gioja, 511;
Marx, 389; Mill, 545; Say, 492;

Ricardo, 474n, 673^ Sismondi,

49 3 n; Thornton, 706; Marshall,
833 - 5 , 837; Menger, 827; Walras,
loion; Wicksell, 723
Smith, Henry, 747, 750, 1132
Smith, Vera C., 695
Smithies, Arthur, 949, 1176, 1183
Snyder, Carl, 1096
Soden, Friedrich, 501, 505
Soetbeer, Adolf Georg, 1080
Somary, Felix, 1111

Sombart, W., 792, 805, 815-18, 820,
1154

Somers, Harold M., 1164, 1179
Somerville, John, 1158
Sommarin, Emil, 863
Sommer, Louise, 159
Sonnenfels, Joseph von, 171, 174, 375
Sorel, Georges, 774
Sorokin, Pitirim, 794
Soto, Domingo de, 95, 101, 110, 272
Souchon, Auguste, 54
Spann, Othmar, 85, 412-14, 785, 793,
855, 1139, 1154
Spearman, Charles, 797
Spencer, Herbert, 415, 444-5, 447, 773,
789

Spengler, Joseph John, 254, 584, 890

INDEX OF AUTHORS

1227

Spiethoff, Arthur, 804, 815-17, 1126-7,
1154, 1164
Spinoza, Baruch, 126
Sraffa, Piero, 124, 1046-7, 1150-52
Stackelberg, H. von, 976, 980, 982, 1012,

1044, H 53

Stahl, Friederick Julius, 283, 431
Stangeland, Charles Emil, 254
Steffen, Gustaf Frederik, 793
Stein, Lorenz von, 440, 508, 850
Stephen, Sir Leslie, 116, 123, 132, 407
Stephens, W. Walker, 248
Stem, William, 796
Sternberg, Fritz, 881-2, 1132
Steuart, Sir James, 176, 178, 250, 255,
259, 261, 263, 267, 293-4, 296-7,
346, 349-50, 375, 474, 535, 586, 706
Stevens, S. S., 1058
Stewart, Dugold, 185, 728
Stieda, Wilhelm, 159
Stigler, George J„ 590, 849, 869, 886,
9I0, 913, 916, 94i, 1032-3, 1035,
1038, 1040-41, 1046, 1053
Stolper, W. F., 1158
Stone, Richard, 962

Storch, H. von, 502, 519, 535, 627, 641
Stourm, Rend, 402
Strachey, G. Lytton, 123
Struve, Pierre, 107

Sully, Maximilien de Bdthune, Due de,
169

Sumner, William Graham, 865-7, 1080
Supino,-Camillo, 345, 1111
Siissmilch, Johann Peter, 212, 255
Sweezy, A. R., 1064

Sweezy, Paul, 239, 242, 347, 392, 442,
566, 651, 747, 851, 881-2, 884-5,
976, 1132

Tacitus, Publius Cornelius, 67
Tagliacozzo, Giorgio, 136, 177 , 194, 205,
293, 300

Taine, H.A., 123, 772, 782, 820
Talbot, A., 216
Tarde, Gabriel, 793
Tarello, Camillo, 158
Taussig, Frank William, 471, 479, 636,
668, 732-3, 847, 866-7, 870-71, 904,
940-41, 1107

Tawney, Richard Henry, 80, 166
Taylor, Fred Manville, 874
Taylor, Henry Charles, 874
Taylor, Overton H., 107, 442
Taylor, William George Langworthy,
1116

Tchebycheff, P. L. de, 448

Tchernychevsky, N. G., 633
Teilhac, Ernest, 500, 51 5, 865
Temple, William, 254
Temple, Sir William, 158, 254
Teutophilus, Christianus, 203
Thesaurus, Caspar Antoni us, 100 -
Thiers, Louis Adolphe, 426
Thomas, Brinley, 862, 1085
Thomas, Elbert Duncan, 53
Thomasius, Christian, 117
Thompson, Herbert Metford, 941
Thompson, James Westfall, 83
Thompson, John M., 907
Thompson, Thomas Perronet, 672, 713
Thompson, William, 479, 506, 583, 596
Thorndike, Edward Lee, 796-7
Thornton, Henry, 689, 696, 698, 700,
702, 704, 707-9, 713, 715, 718-24,
730, 733, 735-6, 1107
Thornton, William Thomas, 669
Thiinen, Johann Heinrich von, theoretical
ability beyond Ricardo’s, 465; Ro-
scher on, 465; work not understood,
466; marginal productivity theory,
466, 467, 568, 656n, 674n, 839,
941-2; first to use calculus for eco-
nomic reasoning, 466, 955; location
theory, 466; rent theory, 466, 67 m;
originality of work, 466-7; general in-
terdependence, 467; steady state proc-
ess, 467; wage and interest theory,
467-8, 648, 656n; risk premium in
profit, 6460; influence on Menger, ,
827; Marshall, 837; substitution prin-
ciple, 839, 91711, 995
Tinbergen, Jan, 1144, 1162-3
Tintner, Gerhard, 1028-9, 1072
Tocqueville, Alexis de, 433, 820
Tolomei, Matteo BifE, 373
Tooke, Thomas, 398, 520, 524, 688, 690,
699, 708-10, 712-13, 720, 722, 725,
727, 731, 734, 739, 742-6, 1111-12,
1123

Torrens, Robert, 475, 486, 489, 560,
607-8, 615, 657, 665, 669, 688, 704,
725-6, 728, 733

Townsend, Joseph, 255, 481, 578
Toynbee, Arnold, 821, 822
Trevelyan, George Macaulay, 398
Tucker, Abraham, 128
Tucker, George, 519, 521-2, 711
Tucker, Josiah, 226, 245, 375
Tugan-Baranowsky, Mikhail, 879, 1126,
1130

Tull, Jethro, 157

Turgot, Anne Robert Jacques, Baron de

1228

INDEX OF AUTHORS

Turgot (Cont.)

l’Aulne, and Condillac, i75n; as
polyhistor, 182; and Smith, 192, 248;
not a physiocrat, 243-4; and Gour-
nay’s work, 244-5; life sketch, 245-8;
and Encyclopedistes, 245; and Bec-
caria, 248; diminishing returns in,
259, 260-61, 262n; marginal analy-
sis, 261; role in defeat of monetary
analysis, 282n; theory of market
mechanism, 307; savings and invest-
ment, 324-5, 642, 667, 723; and
Marshall, 325; and Mill, 325; and
Ricardo, 474n; and Say, 492, 560,
625; and Say’s Law, 625; 3-factor
schema in, 560

Distribution theory: 567-8; interest
theory, 328, 332-4; wage theory, 249,
266, 664, 667

Capital theory: 249, 323-4, 564,
642, 667; monetary theory, 249, 319;
value theory, 249, 302, 308
Turner, John Roscoe, 514
Tuttle, Charles A., 895
Tweddle, W. A., 962
Twiss, Travers, 583
Tylor, Sir Edward B., 786, 799

Unwin, George, 151, 153

Ure, Andrew, 542

Urquhart, David, 399

Usher, A. P., 78, 116, 317, 787, 788

Uztariz, Gerdnimo de, 170

Valeriani, Luigi Molinari, 511
Valle de la Cerda, Luiz, 311
Vanderblue, Homer, 183
Vanderlint, Jacob, 367
Van Dillen, Johannes Gerard, 317
Varro, M. Terentius, 71
Vasco, Giovanni Battista, 272
Vauban, Sdbastien de, 203, 204, 2:05, 524
Vaughan, Rice, 291, 294
Veblen, Thomstein, 795, 802, 896, 911
Venn, John, 448
Verhulst, Pierre Francois, 538
Verri, Pietro, 130, 132, 177, 178, 205,
213, 287, 292, 302, 307, 315, 373,
375, 408, 510, 707, 718, 960, 1176
Verrijn, Stuart Coenraad Alexander, 862
Vico, Giambattista (Giovanni Battista),
28, 135, 136, 137 , 3oo, 791-2
Vignes, J. B. Maurice, 204
Villeneuve-Bargemont, Alban, 490, 681
Villerme, Louis Rend, 522-3
Viner, Jacob, 196, 336, 346, 350, 351,
361, 364, 375* 605, 607, 609-10,

613, 689, 701, 705-6, 708, 711, 718,
724, 730, 732-3, 735, 737, 875’
1046, 1048, 1107, 1152
Vinogradoff, Sir Paul, 107, 782
Virgilii, Filippo, 254, 584, 890
Volkmann, J., 1058

Wade, John, 743
Wagemann, Ernst, 1155, 1165-6
Wagner, Adolf Heinrich Gotthilf, 478,
503, 507, 7°9, 726, 802, 851-2, 945,
1081, 1169

Wagner, Valentin Fritz, 718, 1080
Wainstein, A. L., 1155
Waitz, Franz Theodore, 435, 446
Waitz, Georg, 432

Wald, Abraham, 968, 1007, 1009, 1014,
1067

Wales, William, 254
Walker, Amasa, 519

Walker, Francis Amasa, 671, 865, 867,
894, 935, 939, 940, 1076, 1081
Wallace, Robert, 253, 255, 256
Wallace, William, 66
Wallas, Graham, 132, 402, 795
Wallis, W. Allen, 1067
Walras, Antoine Auguste, 828, 999, 1055
Walras, Marie Esprit Leon, first to relate
schemata, 16; Isnard as precursor.
217, 307; discoverer of fundamental
economic problem, 242; on bimetal-
lism, 2980, 717; on ‘advance’ theory,
564; Malthusian principle in, 582,
890; on barter economy, 590, 838-9,
911-12; on marginal utility in Senior,
600; as Senior of neo-classical period,
758; life sketch, 827-9; as semi-social-
ist, 888; on partial analysis, 991; quasi-
rent in, 995; monetary theory, 1079,
1082-3, 1100, m6n; work on index
numbers, 1093; on cycle, ii26n
Filiations with; Smith, 189, 892;
Aupetit, 84on; Barone, 858, 987;
Cassel, 862n, 953n; Cournot, 828,
959, 960; Edgeworth, 839, 8930;
Keynes, 1082; Marshall, 837, 839,
952; Mill, 892; Moore, 877; Pareto,
829, 860, 86in, 888n, 1062; Say,
828; A. Walras, 828; Wicksell, 862.
See also Walrasian System
Walsh, Correa Moylan, 1092
Waterstradt, Franz, 588, 1036
Watson, John Broadus, 797
Wayland, Francis, 515
Webb, Sidney, Beatrice, 271, 823, 832-3,
947

INDEX OF AUTHORS

1229

Weber, Ernst, 446, 779, 796, 1058
Weber, Max, 21, 34, 80-81, 425, 540,
584, 777, 795, 805, 814-19, 848, 891
Weiss, Franz X., 845, 939
Weitling, Wilhelm, 458
Wells, David Ames, 522-4, 865, 867
West, Sir Edward, 259, 265, 470, 474,
476, 486, 489, 569, 570, 585-7, 645,
651-3, 656, 658, 674, 677-9
Westergaard, Harald Ludvig, 212
Westermarck, Edward Alexander, 786,

799

Western, ‘Squire,’ 711-14
Weston, Sir Richard, 157
Weulersee, George, 225-6
Whale, P. Barrett, 694
Whateley, Elizabeth Jane, 483
Whately, Richard, 448, 450, 464, 483-5,
536

Whatley, George, 376
Wheatley, John, 701, 703, 707-8, 710,
713 , 733 , 735-7

Wheeler, John, 154, 306, 337, 339-40
Whewell, William, 5, 448-50, 955
White, Horace, 1081
Whitehead, Alfred North, 779
Wicksell, Knut, population theory, 258,
582, 863, 89on; aggregate demand,
623, 1117; preference for slowly ris-
ing prices, 713; savings theory, 723,
724, 1115; international trade theory,
733; life sketch, 862-3; acknowledg-
ment of predecessors, 872n; as bour-
geois radical, 888; on maximization
of satisfaction by market, 888, 986n;
best formulation of Austrian work,
913, 940; index number work, 1093;
consumption function, 1117, 1176;
on Say’s Law, ni7n; on business
cycle, 1120; theorems applicable to
industry or social economy, 1142
Distribution theory: marginal pro-
ductivity, 1033, 1036; interest the-
ory, 331, 649n, 7090, 720, 863, 929n,
930, 1099, 1118, ni9n; profits, 331;
wage theory, 940

Filiations with: Smith, 892; Ben-
tham, 724; Cournot, 983; Malthus,
724; Mill, 724-5, 863, 892; Joplin,
723; Ricardo, 637, 649n; Thornton,
722, 724; Tooke, 709n; Say, m7n;
Bohm-Bawerk, 847, 907-8, 929n, 930,
952, 1118; Keynes, ni9n, ii78n;
Walras, 952, ioi2n, 1082; Wieser,
913

Production theory: capital theory,
56m, 637, 907-8; diminishing re-
turns, 588n; competition, 972, 986n;
duopoly, 983; production function,
998, 1029, 1030; on constant pro-
duction coefficients, 101 2n
Wicksteed, Philip Henry, 830-32, 940,
1030, 1033, 1035, 1040, 1051, 1057
Wiese, Leopold von, 785
Wieser, Friedrich von, 577, 786, 795,
819, 844, 846, 848, 909, 910, 91316,
935, 940, 942, 969, 986-7, 1058,
1060, 1062, 1090-91, 1093
Wilamowitz-Moellendorff, Ulrich von, 54
Williams, Sir John Bickerton, 253
Williams, John H., 733
Willis, H. Parker, 1104, 1111
Wilson, Glocester, 714a
Wilson, James, 726
Wilson, Thomas, 106, 344
Winckelmann, Johann Joachim, 418
Windelband, Wilhelm, 507, 775, 777, 818
Winkelblech, Karl Georg, 459-60
Wirth, Max, 742
Wiston-Glynn, A. W., 295
Withers, Hartley, 1111, 1115
Wold, Herman, 1007
Wolf, Friedrich August, 135
Wolf, Julius, 765, 1076
Wolfe, Albert Benedict, 582-3
Wolff, P. de, 993
Wolowski, L., 540
Wood, Elmer, 690, 694, 697
Wood, George H., 1092
Wood, Stuart, 666, 869, 941
Worlidge, John, 157
Wright, Carroll Davidson, 867
Wright, Harold, 891
Wulf, Maurice de, 83
Wundt, Wilhelm Max, 5, 777, 796-7

Xenophon, 54

Yarranton, Andrew, 274, 349, 352, 361,
363-4, 368, 372
Yntema, Theodore O., 1x52
Young, Allyn, 875, 986, 1046, 1048, 1093
Young, Arthur, 158, 254, 274, 351, 526
Yule, G. Udny, 213

Zawadski, W., 957
Zauberman, A., 1157, 11 59
Zeuthen, F., 976, 1014, 1150
Zielenziger, Kurt, 159
Zotoff, A. W., 1039

Subject Index

To facilitate use of the subject index, reference is made throughout to the
three important periods of economic analysis in the following manner:

From 1790 to 1870 — Classical Period
From 1870 to 1914 — Neo-Classical Period
From 1914 to Present — Modern Period

The first and third terms correspond to J. A. S.’s usage. For the second
period, it was believed to be preferable to retain the term ‘neo-classical’ be-
cause of its general usage in the profession, in spite of J. A. S.’s explicit rejec-

tion of the term. For his objections, see

Abstinence, in 'advance’ theory of capital,
564-5; in Senior, 638-9, 926; in
Smith, 639; in Mill, 639, 654n; in
Marshall, 639, 923; Marx on, 640;
Bohm-Bawerk on, 926; Fisher and
Jevons on, 927. See also Capital, The-
ories of; Interest, Theories of
Acceleration Principle, 11340
Accounting and Commercial Arithmetic,
156-7, 872, 944-5

'Advance’ Economics, see Advances
Advances, in Quesnay, 236-7, 266, 323-4;
in Smith, 269; in Turgot, 333-4; In
physiocrats and classical economics,
564, 632; vs. synchronization eco-
nomics, 564-5; in Marx, 661; in
wage-fund theory, 667. See also Cap-
ital, Theories of

Aetemi Patris, see Encyclicals, Papal
Age of Reason, see Enlightenment
Aggregate Demand, in Boisguillebert,
2850; as a concept, 617, 11170; for
consumers goods, 623, 1117; in

Keynes, 11760. See also Aggregate
Demand Function, Keynesian Sys-
tem, Macroanalysis

Aggregate Demand Function, and micro-
economic demand function, 623-4.
See also Aggregate Demand, Keynes-
ian System, Macroanalysis

page 919.

Aggregate Supply Function, and micro-
economic supply function, 623-4. See
' also Keynesian System, Macroanaly-
sis

Aggregative Analysis/ see Macroanalysis
Agrarian Revolution, 145; nature of, 149-
50, 157-8, 270; effects of enclosures,
167; More on, 208

Agriculture, literature on, 70-71, 157
Allocation of Resources, tariff and, in
mercantilists, 374; extension of mar-
ginal utility analysis to, 912-13. See
also Austrian School, Distribution,
Theory of; Walrasian System
American Economic Association, 756, 867
Antimetallism, see Monetary Theory, Car-
talist

Anti-Saving Attitude, see Saving
Apprentices, Health and Morals of, Act
(1802), i6yn, 271-2

Associationist Psychology, see Empiricism,
Philosophical; Psychology
Austrian School, discovery of calculus,
i8n, 956n; and Mill’s theory, 570;
introspection and common experience,
577; and German economists, 843,
844, 849; Menger, Bohm-Bawerk,
Wieser as co-founders, 844-9; Auspitz
and Lieben, 849; influence in U.S.,
850; submergence by Pareto’s teach-
ing, 850; effect on Dutch economics,

1231

SUBJECT INDEX

1232

Austrian School (Cont.)

861; emphasis on psychological mag-
nitudes, 887; Sozialpolitik and pro-
gressive taxation, 888; neglect of prof-
it theory, 893; genetic explanations,
90 8n; marginal utility and distribu-
tion, 913; WickselFs work, 913, 940;
problem of equi-requisite factors, 914;
firm and social productivities, 9i5n;
marginal ' value productivity concept,
915; imputation, 916; opportunity-
cost theory, 917; Marshall’s criticism
of, 920-24; theory of rent, 933; de-
terminate equilibrium in, 969^ com-
petition in, 972; indeterminateness
of isolated exchange, 984; Crusoe
economy and socialist theory, 986-7;
on Walras, ioi4n; hedonism in mar-
ginal utility theory, 1056; disutilities
in value theory, 1057; monetary anal-
ysis, 1085-6, 1089; distrust of index
numbers, 1089,. 1094
Automatic Gold Mechanism, see Gold
Mechanism

Balance of Payments, concept in mer-
cantilists, 352; and balance of trade,
353; Serra, Malynes, Misselden,
Mun, 353-8; export surplus as meas-
ure of gain, 358; confusion of wealth
and money, 360-2; Palmer’s rule and,
698

Balance of Trade, Serra on, 195; ‘luxuries,’
3 2 4 n

Mercantilists on, 345-62: power
politics, 346-7; Serra, Malynes, Mis-
selden, Mun, 353-9, 365; erroneous
'propositions, 359-62
Bank Note, development of, 317; sus-
pected overissue in England of 1 830’s,
694; early 19th century, 695; Bank
Charter Act of 1844, 695; in cen-
tral bank theory, 6950; in classical
money and credit theory, 699; bank-
ing school’s position, 727; Walras’
plan to suppress, 1079
Bank of England, and land bank schemes,
295-6

In classical period, 690-2: role in
monetary controversy, 692; ‘failure’
of resumption, 694, 711-12; Bank
Charter Act of 1844, 694.-8, 718,
726, 729; as lender of last resort,
696; as controller of banking system,
696-8; Palmer’s rule, 697-8; Thorn-

ton on note issue, 707; regulating
function and banking school, 727;
currency school on notes of, 727
Banking, 3.19-21; in Smith, 278, 731;
Law’s ventures and, 295; 100% re-
serve plan, 694, 1079; attempt to
divorce from ‘control of currency,’
694; state of by 1800, in England,
694-6; penalty in credit creation, 730;
law of reflux, 730-31; analysis in neo-
classical period, 1110-17

Commercialbill theory of, 71 8n:
Thornton on credit overextension,
721-2; and banking school, 729; doc-
trines of, 729-31; needs-of- trade argu-
ment, 731; adherence to in neo-classi-
cal period, 1111-13; Wicksell’s cu-
mulative process and, 1112-13,
1120 . See also Central Banking
Barter, equilibrium in, 619; Walras’ the-
ory of, 838-9, 911, 1003-4; in mar-
ginal utility theorists, 911; Edge-
worth’s use of indifference curves,
- 1065; in neo-classical period, 1088;
. ‘neutral money’ and, 1088
Battle of Methods ( Methodenstreit ), see
Methodology

Becher’s Principle, see Monetary Analysis
Bills of Exchange, 695
Bimetallism, Scaruffi’s work, 292; in 17th
and 18th centuries, 297-8; on Conti-
nent in 19th century, 405

Schemes in post-Napoleonic Eng-
land, 693, 715-17: M. Attwood as
proponent, 7i4n; Mill on, 715; Cer-
nuschi’s work, 715-16; gold inflow of
1840’s and, 716-17; French, 716-17;
‘parachute effect’ in, 716-17; Ricardo
on, 71 7n

Walras on, 298n, 717; Balfour’s
support of, 77on; cult of, 774; con-
troversy over in neo-classical period,
1076; international monetary confer-
ences of, 1878, 1881, 1892, 1076-7
Bolshevism, see Economics, Russian
Bourgeoisie, in 13th century, 74-5; rise of
by 15 th century, 78-9; spread of
schema of values, 79; submission to
warrior class, 144; decline in power,
145; ascent of, 393-4; political liberal-
ism, 394-5; materialistic rationalism
of, 408; rejection of utilitarianism,
408

In neo-classical period: challenge
to, 761; bourgeois radicalism, 762-4;
attitude of bureaucracy, 763-4; emer-

SUBJECT INDEX

gence of 'new middle class/ 763-4;
allocation to state of controlling role,
763-4; acceptance of spirit hostile to
its civilization, 774, 778. See also
Radicalism, Bourgeois

Bullionists, see Mercantilism; Monetary
Analysis

Business Cycle Analysis, in classical pe-
riod, 738-50: Say’s Law and, 618,
739; one of few original achieve-
ments, 738; in mercantilists, 738;
Sismondi as theorist, 740-1; Roscher’s
eclectic theory, 741-2; crises as phases,
742; 10-year cycle, 742, 1124; rela-
tion to general gluts theories, 742-3;
Overstone and Juglar on periodicity,
742n; Wade’s dynamic model, 743n;
H. Clarke’s anticipation of Kon-
dratieff cycle, 743n; Langton’s antici-
pation of Jevons’ 'autumnal drain,’
743 n; Clarke and Langton on multi-
plicity of cycles, 743; Tooke’s and
Overstone’s new impetus to, 743-6,
1123, 1124; failure of synthesis of
ideas, 746-7; Marx on, 652, 74on,
742, 747-50, 1131-2

In neo-classical period, 1123-35;
Marshall on, 747; Pantaleoni on en-
dogenous fluctuations, 857; Marshall
and Fisher on role of hoarding,
1087-8; all essential facts and ideas
emerged by 1914, 1123, 1164; 'cycle’
ousts 'crisis/ 1123; Juglar’s perform-
ance, 1123-4, 1164; Kondratieff and
Kitchin, 74 3n, ii24n, 1158; estab-
lishment of method, 1125; fluctua-
tions in plant and equipment, 1125;
large amplitudes in constructional in-
dustries, 1125-6; Spiethoff’s work,
1126-7, 11 64; monetary as investment
theories, 1128; investment theories
and starting mechanisms, 1128; price
as investment theories, 1128-9; exoge-
neous vs. endogeneous theories, 1133;
Bohm-Bawerk on, 1134; acceleration
principle, ii34n; failure to synthesize
common agreements, 1135; failure to
see cycles as inherent in capitalism,
1135

In modem period, 1163-9: Pigou’s
work, 1164; Harvard Committee’s
work, 1165-6; Mitchell and the Na-
tional Bureau, 1124, 1164, 1165,
1166; oscillators in, 1167; economy
as resonator, 1167-8; limitations of
macroeconomics in, 1167-8; com-

1233

hog cycle, 1168; shipbuilding cycle,
1169; inventory cycle, n84n. See also
Business Cycle Theories, General
Gluts

Business Cycle Theories, debt-deflation
theory, 1122

Disproportionality theory of crises:
meaning of, 739n, ii33n; of Say,

739- 40; Ricardo on, 740

Harvest theory: W. S. Jevons, H.
S. Jevons, Moore, 742, 743n, 744-5,
1133; in Tooke, 744-5; Moore’s crop
theory, 876-7

Individual event theories, 1134

Innovation theory: and explana-
tion of ‘Great Depression/ 760; Mrs.
England on, 1128

Monetary (and credit) theories:
meaning of, 112m; Say on, 739;
Mill’s credit cycles, 743, 747; Over-
stone on, 745, 746; Norman’s quali-
fied, 74 5n; Marx’s contempt for, 749;
Wicksell’s cumulative process, 722,
1118-20; Mises’ theory, 1120; Hayek
on, 1120; Hawtrey’s theory, 1121;
vagaries of gold used to explain cycle,
1121-2; as variants of investment the-
ories, 1128

'Overproduction’ theory of crises,
273, 739, 747

Random-disturbance theories, 741

Replacement cycle theories: Marx
on, 75on; shipbuilding cycle, n69n

Stalling theories, 1133-4

Underconsumption theories: 3

types defined, 740n; Sismondi, 494,

740- 41; Rodbertus, 506-7; common
element in types, 565; Malthus’ as
oversaving type, 740; Quesnay as
forerunner of nonspending type,
740n; Marx and, 74on, 1132; Ro-
scher on, 741; Mill on, 747; non-
spending type as Keynesian, 750;
Hobson’s, 832n, 1088, 1130-31; over-
saving theories, elements of truth in,
1129-30. See, also Business Cycle
Analysis; General Gluts

Cameral Science, see Consultant Admin-
istrators

Capital, in Roman law, 322-3; monetary
concept, 101, 323; use of ‘stock’ for,
323, 326; and land and labor, 560,
56m, 899

In classical period, 625-44: Lauder-
dale's achievement, 560; structure of

SUBJECT INDEX

1234

Capital (Cont.)

physical capital, 631-7; reasons for
many definitions, 632; as goods,
632-3, 646-7; in Smith, 634, 635; in
Malthus, 634; in Ricardo, 634, 635-6,
637, 653-4, 668, 682, 745n, 902-3;
in Marx, 634-5, 640, 661-2; organic
composition of, 635, 652; constant
and variable, 635, 652; wage and
technological, 635, 641, 642, 658,
680; fixed and circulating, 635-6,
1021-2; Senior’s contributions, 584,
632, 634, 637-40; Mill on, 561, 632n,
634, 640-45, 659; as result of saving,
641-3; saving and consumption, 643;
as accumulated labor, 561, 657; in-
ternational movements of, 732
In neo-classical period, 898-909:
controversies over concept, 898-903;
attempts at quantification, 899-900,
902; Walras on, 999n, 100011, 1002.
See also Capital, Theories of

Capital, Theories of, Quesnay’s, 235-7,
266, 323-4, 667; Cantillon’s, 323,
667; and failure of marginal utility
theory, 920

Abstinence theory: Senior, 484,
638-40; Marx on, 640, 661-2; on be-
havior of interest .rate in time, 662
Advance theory: physiocrats, 235-7,
266, 323-4, 564, 667; Turgot’s, 249,
323-4, 564, 642, 667; in Smith,
191-3, 236-7, 323-4, 332-4, 642; in
classical economists, 564-5; discounts
and 'abstinence’ in, 564-5; and ex-
ploitation. theory of interest, 648-9;
in Marx, 661; in wage-fund theory,
667; dependence on saving, 667
Roundabout theories: in Long-
field, 465; in Rae, 469, 846; in
Wicksell, 56m, 637, 907-8; in Ri-
cardo, 594-5, 636-7; Senior’s round-
about processes, 638; in Menger, 846;
Bohm-Bawerk’s, 2i7n, 465, 469,

56m, 594-5, 633, 636, 637n, 638,
846-7, 871, 902-9; subsistence fund
in, 637n, 903-4; period of produc-
tion, 465, 469, 594-5, 636, 846-7,
905-9; Jevons’, 637n, 902-5, 929
Marx’s theory, see Marxist System;
Walras’ theory, see Walrasian Sys-
tem. See also Capital, Investment,
Savings

Capitalism, and scholasticism, 78-82; at-
tack on feudalism, 78; emergence of
in 15th century, 78; in rise of na-

tional states, 144, 151-4; and warrior
classes, 144; effect of inflow of mone-
tary metals, 144- 5; and breakdown
of Church authority, 145; credit in,
318; Marx and first explicit model
of, 391; Mill on, 532-3; classical
economists on, 544; classical econo-
mists use of medium-sized, owner-
managed firm, 545; word used by
Marxists, 552n, 899n; tendency to-
ward socialism, 763; rapid evolution
of and resistance to, 763. See also
Bourgeoisie

Catallactics, 536n, 911, 940
Catholic Church, see Roman Catholic
Church

Central Banking, bank note in theory of,
69 5n; emergence as controller of
banking system, 696-8; and Palmer’s
rule, 697-8; open market operations,
697, 1078; and banking school, 727;
and currency school, 727; English
practice and Bank Charter Act, 729;
Thornton’s sketch of policy, 729

In neo-classical analysis, 770-71,
1112: interference with automatic
gold standard before 1914, 1078.
See also Bank of England; Credit;
Federal Reserve System; Monetary
Analysis; Monetary Management;
Monetary Theory
Chartism, 453

Cheapness, Fallacy of, 235n, 285, 350
Cheapness-and-Plenty Doctrine, 2350,

274, 285-7, 350, ii29n
Child Labor, 274-5
Chrematistics, 53, 493, 536
Circuit Flow, see Stationary State
Classes, Social, Cantillon-Quesnay schema
of, 239-41, 249; in classical eco-
nomics, 550-54; Marxist,- 430, 440,
551, 552-4; antagonism of, in Ri-
cardo, 553-4; voluntary retreat of,
76m; opposition of those harmed by
capitalist evolution, 763; Schmoller’s
theory of, 813

In neo-classical economics, 886;
and sociological individualism, 888-9 -
Classical Period of Economic Analysis,
1790-1870, meanings of, 379n, 379-
80; backgrounds of, 393-406, 407-62;
scope and method, 534-41; schema
of economic process, 554-70
Classical Situations, meanings of, 51 .

First, 52, 143, 155, 161, 290

SUBJECT INDEX 1235

13 th century scholasticism as a, 87
Second, Mill’s role in, 380
Third, 753-4, 825, 953
Cobweb Theorem^, see Dynamic Analysis
Commodity Theory of Money, see Money,
Theories of, Metallist Theory
Commutative Justice, 60, 61, 62, 93, 94
Comparative Cost, Theorem of, in mer-
cantilists, 373-4; Torrens as discov-
erer of, 490, 607; as analytical con-
tribution, 517; Ricardo’s, 607, 611-
15; and reciprocal demand, 612; and
labor-quantity theory of value, 612;
restatement in terms of opportunity
cost, 612

Comparative Statics, Ricardo’s concen-
tration on, 494-5, 682-3; use for study
of change, 563; Oppenheimer’s coin-
ing of phrase, 8540, 965; Moore’s
work on statistically operative, 876;
and evolutionary state, 964-5
Competition, in neo-classical period, 972-
84: as normal case, 972; Pareto on,
972n; use to make patterns man-
ageable, 972; principle of excluded
strategy, 972-3; substance of pure or
perfect competition evolved, 973
Competition, Free, in "classical’ econo-
mists, 545-6; in Keynes, 1175
Competition, Imperfect, Mill’s recogni-
tion of, 546; Marshall’s awareness of,
975; Sraffa’s work in, 1047, U-5 1 ;
Marshall- Wicksell theorems, 1142;
emergence of from new attention to
firm, 1142; Mrs. Robinson’s perform-
ance, 1151-2; Kahn’s contribution to,
1172. See also Competition, Monop-
olistic

Competition, Monopolistic, Marshall as
pointing toward, 840, 975, 1150;
Cheysson’s product variation, 842n;
surpluses to factors in, 937; Maishall-
Wicksell theorems, 1142; emergence
of from new attention to firm, 1142;
Chamberlin’s performance, 1150-51.
See also Competition, Imperfect
Competition, Perfect, in Boisguillebert,
216; maximizing doctrine of, 233,
765, 888, 985, 986n, 1070; Cour-
not on, 54 5n, 959; Roscher on,'
546; classes and, 554; failure of
Ricardo to specify, 592; in classical
and neo-classical economists, 892
Competition, Pure, Chamberlin’s intro-
duction of, 973,n; Cournot’s devel-
opment of, 973; Jevons’ law of in-

difference and one price in, 973; Wal-
ras’ libre concurrence , 973; Pareto’s
definitions, 973; difficulties in con-
cept, 973-4; Marshall on, 974, 985-6;
Walras on, 985, 1004; Wicksell on,
986n

Complementarity, of factors, 917
Consistency Postulate, 1067-8
Constant Costs, 613, io33n. See also
Euler’s Theorem

Consultant Administrators, heterogeneity
of, 143; special circumstances facing,
148-55

Literature of, 159-67: Polizeiwis-
senschaft, 159-60; Carafa, 162-4;
Bodin and Botero, 164-5; English,
165-7; Spanish, 165
Systems of, 1600-1776, 167-94:
early literature, 167-70; Justi’s wel-
fare state, 170-72; Spanish, 172-3;
French, 174-6; English, 176; Italian,
176-81; Smith and, 181-94
Quasi-systems, 194-9; on public
finance, 199-206; on utopias, 206-8;
unemployment in, 272; and Becher’s
principle, 284; metallist theory of
money in, 290; on gains of trading
parties, 359; influence of Smith,
501-2; entrepreneur in, 555-6
Consumers’ Behavior, Theory of, modem,
1148-9

Consumer’s Rent, Jenkin’s discovery, 837n,
839; conditions on demand curve
allowing use of, 992; as attempt to
make measurement of utility opera-
tional, 1061-2; and welfare economics,
1070

Consumption, limiting factor of output,
178; Boisguillebert on, 216, 284-5;
of landlords, in Cantillon, 221; in
Becher, 283; in Quesnay, 287; Die-
terici’s thesis, 52 3n; productive vs.
unproductive, 63 m, 6420
Consumption Function, see Keynesian
System; Propensity to Consume
Contract Curve, 831, 984
Cost, Theories of, Mill’s, 660, 917; Aus-
trians’ and Jevons’ new, 922-3; Mar-
shall’s real cost theory, 923-4, 1057;
opportunity cost theory, 917, 1044;
need to co-ordinate with production
theory, 1051-2

Cost Functions, Statistical, 842n, 962
Credit, in scholastic analysis, 318; and
velocity of money, 318-21, 70 5n,
1097; function of bank, 319-20; dis-

SUBJECT INDEX

1236

Credit (Cont.)

tinguished from money, 320-21; cre-
ation of, 321-2, 621; in Mill, 699n,
704, 71 8n, 72on, 722, 726, 747
English theory of, in classical pe-
riod, 717-31: relations between prices,
interest, and, 719; monetary theory
of, 719; legal treatment of, 719-20;
neutrality of on money rate of in-
terest, 720; Thornton on, 720-24;
controversy over Bank Charter Act,
725-31; and business cycle, see Busi-
ness Cycle, Theories of. Monetary;
banking school, 726-29; currency
school, 72 5n, 726-8, 1111, 1120;
historical school’s work, 810

In neo-classical analysis, 1110-17:
reluctance to include deposits as
money, 1097; narrowness in concep-
tion of credit, 1113, 1114-15; theory
of credit creation, 1114-17
Crises, see Business Cycles

Darwinian Evolutionism, see Evolutionism
Deamess-and-Plenty Doctrine, 2 35n,
285-7, 350, ii29n

Decreasing Costs, Hadley’s definition, 866;
> Marshall’s analysis of, 892, 982, 985,
1045; Cournot’s formulation of, 976n;
not synonymous with increasing re-
turns, io45n; and profits, 1051
Deism, 1230

Demand Curve, Verri on, 3o6n, 960;
Whewell’s, 448 n; classical econo-
mists’ concept of, 602, 960; Mill’s
statement of, 603; and aggregate
demand curve, 623-4, 11760; for
. labor, Jenkin’s, 664, 8370; in Cour-
not, 839, 959, 976; Auspitz’s and
Lieben’s total and marginal, 849; not
defined before 1838, 976; Marshal-
lian, 991-2, 996; constancy of mar-
ginal utility of money, 991; restric-
tions on use of, 992; joint demand,
in Marshall and Edgeworth, 996;
marginal revenue curve, 115m. See
also Elasticity Concepts
Demand Curve, Statistical, King’s law of
demand for wheat, 212-13; Cheysson’s
work, 842n; Moore’s work, 876, 961;
Fisher’s work, 961; Schultz’s work,
962; importance of for theory, 962
Demography, 525-6, 583. See also Popu-
lation

Deposits, 699, 727, 1097 [312, 321

Devaluation of Currency, 99-100, 298-9,

Diminishing Marginal Productivity, Law
of, 1037

Diminishing Marginal Utility, Law of,
equalitarian implications of, 888; in
Menger, 910; in Marshall, 910; and
progressive taxation, 946; Bemouilli’s
hypothesis, 9460

Diminishing Returns, and populationist
theories, 259; extensive margin, 259,
586; intensive margin, 259, 586-7,
675, 936n; Turgot’s definition, 259-
do, 1036; in agriculture, 261; histori-
cal increasing returns and, 262-3
Development in classical period,
585-8: Senior’s 4th postulate, 584-8;
failure of Smith to include, 585;
minimization of technological prog-
ress in agriculture, 585-6; West’s role
in, 476, 586; in Mill, 581, 672; Edge-
worth’s formulation, 585, 587, 831,
1037-8; in Marshall, 259, 585, 587,
893, io7on; in Bohm-Bawerk, 5870,
588n, 905; as empirical statement,
588; Wicksell on, 588n; in Ricardo-
West theory of falling interest rate,
652-3; scarcity and, 6760; Jones on
Ricardo’s law of, 822n; new law of
opportunity cost and, 917; generali-
zation of, 936, 1032; state of the
arts and, 1032; law of in primary
and secondary senses, 1036; and in-
creasing cost, 1045m See also Rent
of Land, Theories of
Discrimination, Price, 978
Distribution, Theory of, Cantillon’s 3
rentes, 222, 499; Marx on, 543n;
Smith on, 557-8, 567-8, 654n; Tur-
got-Say-Smith model, 567-8

In classical economics, 645-87:
Ricardo’s analysis, 483, 543, 553-4,
568-9, 592, 652-3; classical failure to
see as valuation problem, 543, 680;
Malthus’j 568; Mill’s, 569-70; profits
and interest, 645-62; wages, 662-71;
rent, 671-9; technological advance,
679-87

Bohm-Bawerk’s theory, 846; Wie-
ser as completer of Austrian, 848,
913; Pareto’s law, 859, 961; revolu-
tion in neo-classical period, 909-20;
problem of in socialist economy, 988;
linear homogeneity and constancy of
relative shares, 1042

Marginal product theory: Long-
field’s theory, 465, 91 5n; Thiinen’s
theory, 466-7, 9i5n; freedom from

SUBJECT INDEX

social or political philosophies, 869-
70, 91411; Clark and, 870, 915, 9360;
Menger’s, 912-13, 9 ! 5 > 916, 941-2;
Jevons’, 913, 941-2; problem of equi-
requisite factors, 914; rediscovery of,

914- 15; marginal physical vs. value
productivity, 915; Austrians' theory,

915- 22; problem of imputation, 916;
complementarity and substitutability,
917; opportunity-cost theory, 917;
Marshall’s criticism of Jevons' and
Austrians’ performance, 920-24;
Bohm-Bawerk’s discounted, 939;
Edgeworth on, 940, io32n; as dis-
covery of calculus for economics,
956n; social production functions,
915, 1030; Smithies’ restrictions on
production function, 1030-31; Berry’s
work, io32n; Marshall’s theory, 941-2,
996n, 1032-3, 1042-3; the 'exhaus-
tion theorem,’ 1033-4; linear homo-
geneity and Euler’s theorem, 10330,
1039-45; in Walras’ later work, 1034,
103 5n; Pareto’s criticism of, 1035,
1039; definitions of and controversies
over, 1038. See also Capital, The-
ories of; Costs, Theories of; Entre-
preneur; Interest, Theories of; Profits;
Wages, Theories of

Division of Labor, in Plato, 56; in Aris-
totle, 56; in Smith, 187-8, 214; in
Petty, 214; in international trade
analysis of mercantilists, 373-6;
Schmoller’s theory of classes, 813

Dynamic - Analysis, in Aristotle, 58;
Comte’s introduction of concept,
416-17; Mill’s introduction into eco-
nomics, 417, 563; Sismondi’s, 494-5,
496; elements in pre-i9th century
economics, 496; period analysis, 496,
563; Ricardo’s sequence analysis,
563-4; role of 'vision' in, 5 70; Wade’s
endogeneous model of cycle, 743n;
Marshall pointing toward, 840, 1160;
lack of in neo-classical period, 920;
defined, 963, 1142-3, 1160; con-

trasted with statics, 963; cobweb
analysis, 842n, 963B, 1143; historical
lag behind statics in all sciences, 964;
and evolutionary and non-evolution-
ary states, 964; and physical sciences’
concept, 965; confusion over nature
of, in neo-classical 1 period, 966-7;
Bohm-Bawerk on distinction between
statics and, 967; dynamic equilib-
rium, 970; Walras on, 973, 1002,

1237

102m; importance of, 1143; devel-
opment of, 1146; Pantaleoni’s and
Pareto’s pointers, 116.1; need for to
develop static theory, 1160-61; macro-
dynamics, 1161-9; com-hog cycle,
1168; shipbuilding cycle, 1169; dy-
namization of Keynes, 1183-4. See
also Business Cycle Analysis; Busi-
ness Cycle Theories; Econometrics;
Macroanalysis

Econometrics, Verri, 178

In 17th and 18th centuries, 13-14,
209-49: consultant administrators,

209; 'political arithmetick,’ 210-15,
253; Boisguillebert, 215-17; Cantil-
lon, 217-23; Quesnay’s tableau eeo-
nomique, 239-43, 278, 391

Thiinen as first to use calculus,
466-8; Mangoldt on theory of inter-
national values, 504; Baxter’s income
work, 832; Bowley’s work, 832; Mar-
shall on, 840, 962; Cheysson’s work
on, 842n, 949n; Pareto’s law, 859,
961; Fisher on, $> 7 - 1 , 2 , 961; Moore’s
.importance in, 876-7, 961, 962; Doug-
las’ Theory of Wages, 941, 1042;
failure of statisticians to use theory,
960, 962; Engels’ Law, 961; Schultz’s
work, 962; production, cost, and
supply functions, 962; as alliance of
theory and statistics, 1141; new pe-
riod in economic analysis, 1146
Macrodynamic models in, 1162-3,
1163-9: Tinbergen’s work, 1162-3;
methods in, 1163; Haavelmo and
Frisch, 1163; business cycle research,
1163-9. See also Business Cycle Anal-
ysis; Business Cycle Theories: Cost
Curves, Statistical; Demand Curves,
Statistical; Dynamic Analysis; Macro-
analysis; Mathematics; Statistics; Sup-
ply Curves, Statistical; Tableau 6co-
nomique

Economic Analysis, history of, meaning,
3; defined, 12; logical ideals or norms,
17; applied fields, 22-4; idealogical
bias in, 34-40; and economic thought,

38- 40, 52; progress in, meaning of,

39- 40, 46; beginnings in Greece, 53-
66; logical vs. historical origins of in-
stitutions, 64, 110, 289; 'Great Gap’
in, a.d. 600 - 12 00 , 73-4; 'Ideal Types,’
80, 606, 818; absence in 9th through
12th centuries, 84; paucity in 13 th
century, 90; 16th-century scholastics,

SUBJECT INDEX

1238

Economic Analysis (Cont.)

97; utilitarianism and modem-day,
1 34; separation from unified social
science, 142; chance in, i44n; in
pamphleteers, 161; 18 th century

'quasi-systems' in, 196; fundamental
problem in, 242; professionalization
and specialization of, 380, 1154;
facts entering theory as hypotheses,
576-7; laws and principles, 576-7; in-
trospection, 577; common experience,
577; mathematics in, 603; subjective
vs. objective theory, 919m See also
Economic Laws; Economic Theory
Economic Development, in neo-classical
period, 759-60: United States and
Germany, 759; Austria, Italy, Japan,
Russia, 759; England, 759, 760;
'Great Depression,’ 760; opposition
from social strata harmed by, 763
Economic Development, Theory of, Ri-
cardo’s, see Interest, Rate of; Mill’s,
542, 543, 571, 572, 640-41, 662,
685; Marshall’s, 543, 892-3, 1165;
Malthus’ as hitchbound, 566, 570-72

In classical analysis, 570-74: pes-
simistic type, 570-72, 585-6; optimis-
tic type, 572.-3; Marx’s type, 573-4;
in neo-classical period, 892-3; Bohm-
Bawerk’s second ground for interest
in, 929; Cassel’s balanced progress,
966; and dynamic theory, 1161. See
also , Marxist System, Stagnation
Thesis, Stationary State
Economic History, 12
Economic Laws, and natural law, 26n;
nature of, 34-5; Malthusian principle
as, 257; in classical economists, 537;
and principles, 576-7. See also Eco-
nomic Analysis

Economic Man, 99, 156, 452, 88yn
Economic Sociology, importance in analy-
sis, 20-21, 22; in Aristotle, 58; in
Boisguillebert, 216; in Cantillon,
218-19; utilitarianism and, 409; Car-
lyle’s vision of, 410-11; Diihring’s
theory of, 5o9n

Of classical economists, 544-54:
laissez-faire capitalism in, 531, 544;
institutions assumed, 545-6, 547-8;
the state in, 548-50; classes in, 550-
54

Veblen’s work as, 79 5n; Weber
and emergence of, 819; in neo-classi-
cal period, 870-71, 886-7. See also
Classes, Social; Sociology

Economic Theory, meanings of, 14-16,
253, 474, 585, 954 n > 1141; impor-
tance of, 14-20; hostility toward, reas-
ons for, 18-20, 110, 264-5, 537-40;
BoisguiUebert’s contribution, 215-16;
and abstraction, 43on; Longfield’s
performance, 465; Senior’s attempt
to unify, 484, 575; pivotal position of
value theory, 588; mathematics for,
602; new activity in, 753; subordina-
tion of, in Germany, 804, 843;
Clark’s role in, 918; emergence of
common, about 19 00, 952; Marshall-
Wicksell system, 1142-3; superiority
of modern technique, 1145. See also
Economic Analysis
Economic Thought, 38-40, 52-3
Economics, applied fields of, 22-4; emer-
gence of, 51; emphasis on autonomy
of, 535; professionalization of, 1144-5
Economics, Dutch, quasi-systems in 17th
century, 197-8; in neo-classical pe-
riod, 861-2

Economics, English, importance in 18th
century, 162; 16th century work,
165-7; cartalist theorists in 17th and
18th centuries, 290-91, 294-9; mer-
cantalists, 195-7; predominance of in
classical period, 382-3; centralization
of in classical period, 510; economic
research in classical and neo-classical
periods, 757; Sozialpolitik and the-
ory, 801, 888; economic history and
historical economics, 821-4; the Mar-
shallian Age, 829-40; Marxist influ-
ence in, 8y8n

Economics, French, importance in 18th
century, 162, 174; entrepreneur in,
222; antipopulationism in, 252; and
Ricardianism, 479; in classical period,
490-501, 510

In neo-classical period', 840-43:
Paris group, 765, 841-43; Simiand
and historism, 820; and quantity
theory, 1103

Economics, German, 17th-century writ-
ings, 198; teaching of public admin-
istration, 209-10; lack of Malthusi-
anism, 252; and Ricardianism, 478-9

In classical period, 501-10: Smith-
ian cameralism, 501-2, 503, 549n;
decentralization of, 510; entrepre-
neur in, 555-6

In neo-classical period: liberalism,
765; effect of Sozialpolitik, 802-4;
historical school, 807-24; resurgence

SUBJECT INDEX

of theory, 843, 844, 849; Marxist in-
fluence, 849, 878; elder statesmen,
850; representatives, 850-55; Marx-
ism in, 879-83; and quantity theory,
1103

In modem period, 1154-6: WeZt-
anschauungswissenschaft, 1155; Na-
tional Socialist impact on, 1154-5
Economics, Greek, Oeconomicus, 53;
Chrematistics, 53; centered about
polis, 54-5, 57, 66; Plato in, 54-7;
Perfect State, 55-6, 206-7; division of
labor, 56; money, 56

Aristotle, 57-65; analysis of, 57-60;
origins of state, 59; private property,
59; slavery, 59-60; 'pure' economics,

‘ 60-65

Economics, History of, 4-6, 38m
Economics, Italian, i6th-i8th centuries:
importance of, 162; contributions of,
176-81; public finance literature, 205;
on population, 251; on money, 292-3;
utility in value theory, 300-302
In classical period, 510-14: Ri-
cardianism and, 479; decentralization
of, 510

In neo-classical period, 855-61:
factually oriented, 820; elder states-
men, 856-7

In modem period, 1156-7: under
Fascism, 1156-7.

Economics, Roman, 66-71
Economics, Russian, in modem period,
1157-9: Stalinist period and German
and Italian experience, 1 1 57; research
institutes, 1157-8; Kondratieff’s work,
1158

Economics, Scandinavian, in neo-classical
period, 862-3

Economics, Scientific, historical continu-
ity of, 6; meaning of, 6-11, 12, 21,
1141; evolution of in pamphleteers,
161; Serra and, 194-5; Quesnay and,
232; neglect of marginal utility in
classical period, 463; contributions
of Ricardo, 473-5; and policy meas-
ures, 540-41; and value judgments,
806; systematic form in 18th cen-
tury, 1142. See also Economic Analy-
sis; Economic Theory
Economics, Spanish, in 18th century, 162;
scholastic contributions, 165; lack of
Malthusianism in, 252
Economics, United States, to 1790, 198-9
In classical period: small contribu-
tion to theory, 514; Carey, 516-18

1239

In neo-classical period, 801, 863-
77: scientific tradition in, 801; ‘radi-
calism,’ 761, 801; Sozialpolitik and,
802; influence of Austrians, 850; eco-
nomics as profession, 863-4; early
personnel, 864; Henry George, an
appraisal, 864-5; ‘marginalist school,’
869-70. See also Institutionalism;
Social Science Movement
Economics, Universalist, 85n, 4i2n, 413,
420

Economies, External and Internal, 56^,
995n, 1045-8

Elasticity Concepts, discovered by Cour-
not, 839, 992; in Mill, 992; as par-
tial analysis concepts, 992-4; demand-
price, 992-3; income, 993; partial
price, 993-4; of substitution, 1142,

H49n

Empirical Analysis, Botero’s work, 164-5;
Vauban’s work, 164-5; Verri’s work,
178; in labor economics of 18th cen-
tury, 275; in classical economics, 519-
26; Le Play’s work, 490-91, 840;
Tooke’s History of Prices, 520-21;
Sozialpolitik and German research,
803-4; Tooke’s opposition to bullion-
ist views, 708-9; in England, 1870-85,
829-30; Pantaleoni’s work, 85711;
Taussig’s international trade work,
870; population studies, 890 91; of
profits, 894-5; in labor economics,
947; Giffen’s work, 107 5n; in mone-
tary analysis, 1080; measurement of
velocity of money, 1098; to refute
quantity theory, 1104
Empiricism, Philosophical, 120-21, 123-6,
446-8, 450, 529n; and Mill, 120,
121, 447, 450, 529n; English, in
18th century, 123-6; in- Encyclo-
pedistes, 138; relation to utilitarian-
ism, 407n, 429; and French 19th-
century philosophy, 415; in classical
period, 446-8

Enclosures, see Agrarian Revolution
Encyclicals, Papal, Vix P ervenit, on in-
terest, 102; A etemi Patris, on Summa
Theologica, 74m 774n; Rerum No-
varum, on labor, 7650; Quadragesimo
Anno, corporate state in, 765
Encyclopedistes, 118, 137-8, 245
Engel’s Law, see Econometrics
Enlightenment (Age of Reason), and
scholastic natural law philosophers,
115; complacency of intellectuals.

SUBJECT

Evolutionism, defined, 435-6, 964; Hegel-
ian, 436-8

Marxist, 391, 438-42, 544, 651,
686, 749-50, 1131: as non-material-
istic, 438; theory of social classes,
439-40; economic interpretation of
history, 440-42; as a unitary social
science, 441; historians', 442

Intellectual: Condorcet's and

Comte's, 442-3: Comte’s law of three
stages, 443-4; and evolutionary ma-
terialism, 772n; ‘historical laws,' 812;
influence on historism, 819

Biological: Darwinian, 444-6, 449,
772-3, 788-92

In St. Simon, 462; in Mill, 542;
Croce’s philosophy, 778, 786; sociol-
ogy as, 786; Hildebrand, 808-9; Mar-
shallian theory of, 1165

Exchange Control, 340-45

Expectations, in Thornton, 720; in Mill,

72 m, 747

Extensive Margin, see Diminishing Re-
turns

Fabian Socialism, see Radicalism, Bour-
geois

Factors of Production, produced, 2170,
56m, 633, 901-2, 904; in classical
economics, 492, 554, 557-61, 606-7;
non-homogeneity of, 899-901; triad
of, 557, 560, .561, 901-2; Walras on,
999; limitational, 1030; indivisibili-
ties, 1041-2

Factual Work, see Empirical Analysis

Fascism, Plato and, 55-6; Sorel’s sympa-
thies with, 774n; Italian economics
under, 1156-7

Federal Reserve System, 695n, 697, 1078,
1121

Feudalism, 74-8, 144-6, 270. See also
Roman Catholic Church

Filiation of Economic Ideas, meaning of,

6; philosophical explanation of, 32;
Greek money theories and those of
Middle Ages, 57; Petty-Cantillon-
Quesnay, 218, 22.1; Child-Hume-

Turgot, 245; Smith-Malthus-Mar-
shall, 482-3; Cantillon-Turgot-Say-
Walras, 492; secular stagnation.
Smith - Ricardo - Mill - Keynes - Han-
sen, 964n; macroanalysis, Quesnay-
Ricardo - Bohm - Bawerk - Wicksell -
Keynes, 997-8; Juglar-Mitchell, 11240

Fiscal Policy, in scholastics, 96-7; consult-
ant administrators, 202; Vauban on.

index 1241

204; Gladstonian finance, 402-5;
Lauderdale on debt redemption,
487-8; as revealing character of so-
ciety, 769; in neo-classical period,
769-71, 810. See also Taxation
Foreign Exchange, gold standard and spe-
cie points, 732; in monetary manage-
ment schemes, 1078; Keynes on,
no6n; balance of payments theory
of, 756, 1106; inflation theory of,
736-7, 1106; purchasing-power parity
theory: in Ricardo and Wheatley,
737; in neo-classical period, 1106-7.
See also Exchange Control; Gold
Mechanism; Gold Standard; Interna-
tional Trade Analysis; Specie Points
Free Trade, to 17th century, 342n; and
assumption of full employment,
351; North on, 370-71; in 18th cen-
tury, 370-72; and natural law, 371;
and laissez-faire in 18th century,
371-2; English ip 19th century, 397-9;
in Prussia and German Empire, 397;
Cobden and Bright on, 398; as in-
separable element of policy, 398;
Gladstonian finance and, 403; gold
standard and, 405-6; in Ricardo, 473,
62 5n; Bastiat on, 500; List’s argu-
ments, 505; Carey, 517; in Mill, 52m;
and classical international trade the-
ory, 609-11, 615; outlook for in 1870,
766-7; Paris group on, 841. See also
Laissez-Faire; Liberalism, Economic;
Liberalism, Political; Protectionism

General Price Level, difficulties with in
classical period, 701, 713

Acceptance in neo-classical period,
1089: Austrians on, 1094

Haberler’s subjective, 1094; Di-
visia’s objective, 1094; Keynes's sec-
tional, in Treatise , 1095; in General
Theory, 1144

Gluts, General, Malthus’ theory of, 482;
controversy over, 538-9, 621-5; and
underconsumption thesis, 738-9; and
early work on cycle, 740, 741, 742-3.
See also Business Cycle Analysis; Busi-
ness Cycle Theories; Secular Stagna-
tion Thesis

Gold Mechanism, in Cantillon, 223, 366;
in Hume, 316; in Malynes, 344; na-
ture of, 352n; in later mercantilism,
365-67; in Mill, 710; in classical anal-
ysis, 733-38;’ Ricardo and, 1107

SUBJECT INDEX

1242

Gold Standard, in 19th-century England,
405-6; 'automatic/ defined, 405n; and
Resumption Act of 1819 , 692-4;
change in attitude toward, 694; gold
movements as index of business con-
ditions under, 698; banking and cur-
rency schools on, 727; classical econ-
omists and unfettered, 732; modem
objections to, 732; outlook for inter-
national, in 1870, 766; last article of
liberal credo to go, 770; reluctance to
play game of, 771, 1078; economists
of neo-classical period on, 1075, 1087;
gold-exchange standard, 771, 1075-6,
io77n, 1079; international, at Paris
Conference of 1867, 1076; interest
rates in, 732, 1077; Wicksell and,
1075. See also , Gold Mechanism; In-
ternational Trade Analysis

Government Regulation, in neo-classical
period, 767-8

Gresham’s Law, 29^ 343n
.» Gross National Product, see Income Con-
cepts

Harmonism, Cantillon and, 234; Quesnay,
234; theory of classes, 440; Bastiat
on, 500, 553-4; in Carey, 516, 553-4

Hedonism, Epicurus, 66; and utilitarian-
ism, 66; and 18th-century English
moralists, 129-31; in Beccaria, 180; in
Quesnay, 233; in marginal utility the-
orists, 887-8, 1056. See also Utilitari-
anism

Historical School of Economics, on natu-
ral-law economics, 111-13; criticism
of classical English economists, 402;
. and Comte, 417-18; and historical
school of jurisprudence, 423; older,
504, 507-8, 808-9; List and, 505;
defined, 507; on Mill’s methodologi-
cal position, 538n; alliance of eco-
nomcis and historiography, 781-2;
and decline of theory in Germany,
804; articles of faith, 807, 808; his-
torical method, 807-8; younger, 809-
14; Methodenstreit, see Methodol-
ogy; youngest, 815-20; influence out-
side Germany, 819-20; opposition to
marginalist revolution, 954

Historical School of Jurisprudence, 26n,
14m, 423-4, 426-7

Historiography, 424-6; Kulturgeschichte,
427; in neo-classical period, 781-6,
820

Historism, new interest in 1870, 753,
772-3; in philosophy, 775; in eco-
nomics, 807-24

History, Philosophy of, 134-7, 785-6
Hoarding, in Boisguillebert, 216, 285-6,
317; in Quesnay, 235; in monetary
analysis, 280; in Galiani, 317; Say’s
failure to consider, 619, 620; Mill on,
620, 622, 705; Keynes and Mill con-
trasted, 622

In neo-classical analysis, 1087-8:
Marshall’s law of, 1087; Mises on,
1087; Kemmerer on, 1087, 1098,
1100; Marshall and Fisher on, 1087-8;
Hobson on, 1088. See also Liquidity
Preference; Money, Velocity of
Humanists, see Scholasticism
Hypotheses, 576-7

Ideal Types, see Methodology
Idealogy, neutrality of in science, 10, 41-5;
‘philosophy’ in economics, 30-32;
idealogical bias in economic analysis,
34-40, 657n, 675n, 895-6; Marx’s
bias, 35-8, 385, 439, 440; special
pleading and value judgments, 37-8,
154; of bureaucracies, 37n; in Smith,
38, 265n; in Aristotle, 59-60; in
Quesnay, 232; 3; in early wage analy-
ses, 26yn; and monetary analysis,
282n; crystallized, effects on analysis,
46on; and origins of Malthus’ popu-
lation theory, 578-9; bias in biologi-
cal schools of sociology, 788; bias in
economists’ treatment of Nature vs.
Nurture, 790

Imputation Theory, in Barbon, 330; and
demand for labor, 644; Wieser’s
term, 915; in Crusoe economy, 915;
in Austrians, 915-17; of wages, 942
Income Analysis, in Petty, 213; in Cantil-
lon, 221; in Quesnay, 213, 235, 240-
43, 287-8; in Carey and others, 267;
in real analysis, 277; and monetary
analysis, 278-80, 280-82; in Becher,
283; in Boisguillebert, 284-5; Briscoe
and equation of exchange, 314; in
mercantilists, 348, 349; in Gervaise,
366; in Malthus and Marshall, 483;
Lauderdale on debt redemption,
487-8; Sismondi’s dynamics, 495;
Storch’s venture into, 502; Baxter’s
estimates, 522; Wells’ estimates,
5240; Say’s analysis, 615-21; in Mill,
621-2, 704-5, 711; in classical writers,
627; Tooke's analysis, 709-10; Thorn-

SUBJECT INDEX

ton’s analysis, 723-4; in Ricardo, 724;
variations of, classical theory of in-
ternational finance, 733, 734; Fish-
er’s accounting, 872; Keynes’ analy-
sis, Cournot’s anticipation of, 960;
Walrasian system as, 999; in neo-
classical period, 1117; reasons for,
1143; dynamic, Hansen-Samuelson
equation, 1161. See also Keynesian
System

Income Concepts, Graslin, 175; Petty’s
failure to define, 213; in Quesnay,
241; real income, 2jjn; beginnings of
discussion, 627; 'wealth’ as income in

‘ classical writers, 627-8; gross national
product and Smith, 628; national in-
come and Smith, 628; Ricardo,
628n; Hermann-Schmoller definition,
628; productive vs. unproductive la-
bor controversy, i92n, 628-31; con-
troversy over, 8980

Increasing Costs, Hadley’s definition, 866;
and decreasing returns, 104 5n

Increasing Returns, and populationist the-
ories, 2518; Serra’s definition for man-
ufacturing, 258-9; in agriculture, 259;
Smith on, 259; historical, 262-3;
Carey on United States conditions,
517-18; Senior on, in manufactures,
585; Edgeworth’s work, 585,. 1037-8;
in Bohm-Bawerk, 58711, 588n, 905;
and decreasing costs, io45n; and equi-
librium, 1045-8; Sraffa’s work, 1047-8.
See also Decreasing Costs

Index Numbers, in classical economics,
526, 701; Newmarch’s failure to use,
52on; Edgeworth’s work on, 831,
96 m, 1092, 1093; Fisher’s work on,
871, 1092, 1093; measure of value of
money, 1089; Austrians' distrust of,
1089

Approach to value of money,
1091-5: developments in neo-classi-
cal period, 1091; Walsh’s work, 1092;
Mitchell’s work, 1092; Jevons’ work,
1093; Laspeyres, 1093; Marshall and
chain system, 1093; Haberler, Divisia,
Keynes, 1094-5. See also General
Price Level

Indifference Curve Analysis, Beccaria and,
179; Edgeworth’s contributions, 831,
1064-5; Cheysson’s analysis, 8420;
Pareto and, 859, .860; Fisher’s devel-
opment of, 872, 1065-6; use of to

1243

analyze bilateral monopoly, 984: de-
velopment of, 1 064-6; collective, 1066

Individualism, 85-6, 92, 429, 888-9

Industrial Revolution, 150, 252-3, 693,
712-13

Infant-Industry Argument, see Protection-
ism

Input-Output Analysis, 102m

Institutionalism, and historical school,
43 m, 507, 820; Sombart and, 818;
Hobson’s link with, 823n; and social
science movement, 864; compatabil-
ity of theory of epoch with, 875; op-
position to marginalist revolution,
954

Intensive Margin, see Diminishing Re-
turns

Interdependence, General, see Equilib-
rium, General Economic; Walrasian
System

Interest, Rate of, in macroeconomic sys-
tems; 2780; in Cantillon, 319; desire
for lower in 18th century, 328; low
rate and prosperity, 328; in Ricardo,
653-4; stabilization of, 1077

Behavior through time, theories of:
reasons for historical fall, 651; Marx’s
theory, 652-4; West-Ricardo theory,
476, 553 - 4 , 570-72, 652-4; Mill, 654,
662; productivity theorists on, 658;
Smith’s theory, 658; abstinence the-
ory on, 66 2

Interest, Theories of, in Aristotle, 64-5,
io5n; in Aquinas, 93-4, io5n; in
Cantillon, 319, 72on; beginnings in
later scholasticism, 101-6, 328-9, 646,
648, 720; in Smith, 193, 331, 333-4,
647, 648-9, 654, 658, 660, 720; in
Petty, 215; in Quesnay, 234; interest
and profits, 327-8, 330-32, 645-7,
893, 896, 924, 925; in 17th and 18th
centuries, 329; Barbon’s theory, 329-
32, 647, 648, 720, 924-5; in Turgot,
332-4, 648; Ricardo’s, 332,. 647-9,
652, 653n, 660, 1118; Senior as im-
prover of, 484, 659; Say’s, 654; Fish-
er’s, 647, 72m, 847, 927, 930-31,
932; Thornton’s introduction of into
monetary process, 706-7, 720-24;

money and real rates, 329, 709 n, 719,
1083, 1118; Wicksell’s work in, 331,
649n, 709n, 720, 863, 929^ 930,
1099, 1118, ni9n; marginal utility
theory, and, 920; Pareto’s neglect of
reasons for existence, 925; Walras’
theory, see Walrasian System;

SUBJECT INDEX

1244

Interest, Theories of (Cont.)

Keynes’s theory, see Keynesian Sys-
tem; Liquidity Preference

Abstinence theory: in Ricardo,

649 n, 660; in Mill, 654n, 660; de-
fined, 659; and productivity theory,
659; Marx on, 660-62; Bbhm-Bawerk’s
analysis of, 659, 926-7; Marshall and,
659, 926; as explanation of net re-
turn, 926; in Carver, 926; and time-
preference, 926m See also Capital,
Theories of

Advance theory, see Capital, The-
ories of

Bargaining-power theories, 926-7

Bohm-Bawerk’s premium theory,
90m, 927-32, see also Capital, The-
ories of: and profits, 331, 647; Rae
and, 469, 846; one element in con-
tribution, 846; Menger on future
pleasures, 846; abstinence and time
preference, 926n; a real analysis, 928;
interest as an agio, 928; three reasons
for interest, 928-30; failure of econ-
omists to accept, 930; simplified ver-
sion of, 930-31; not a productivity
theory, 931-2

Exploitation theory: Smith’s lead,
648-9; Ricardo and, 649, 653^ Ri-
cardian socialists, 649; Marx’s theory
outlined, 649-50, see also Marxist
System; and residual theory of in-
terest, 653n; antipodal to productiv-
ity theories, 655n; and Bohm-Bawerk,
925-6

Fructification theory, 332n; impa-
tience theory, 872, 930-32; loanable
funds theory, 329, 64 m, 721; mar-
ginal product theory, 467, 656x1,
65811, see also Distribution, Theories
"of; mark-up theory, 6570

Productivity theories: in Ricardo,
6490; inability to explain interest,
648; restriction to technological cap-
ital, 655; antipodal to exploitation
theory, 6550; and permanent net re-
turn to owners, 655-6; Lauderdale’s
first explicit, 656; Malthus’, 656;
James Mill and McCulloch on, 657;
Smith’s lack of, 658; and abstinence
theory, 659; Bohm-Bawerk on, 655-6,
925; Marshall’s revival, 659, 926; and
Bohm-Bawerk’s premium theory,
931-2 /

Residual theory, in Ricardo, 64911,
652-3

Use theory, 656, 925-6

International Monetary Fund, 1077

International Trade Analysis, in later mer-
cantilists, 367-76: on protectionism,

367- 8; commodities seek best market,

368- 9; Barbon on equilibrium, 369;
tendency toward freer trade, 370-72;
territorial division of labor, 373-6;
in Smith, 367, 374, 376, 607, 733;
Edgeworth’s work, 504, 609

In classical economics, non-mone-
tary aspects, 605-15, 733: novelties,
605; theory of international values,
605-7; comparative costs, 373-4, 490,
607-8, 612; theorem of reciprocal
demand, 608-9, 612; welfare aspects
of, 609-11; primitiveness of, 613-14;
failure to ‘prove’ free trade, 615;
Mill’s capital limit proposition, 64on
Monetary aspects of, '731-8: Mill’s
achievement, 710, 731-2; gold stand-
ard, 732; commodity-trade theory of
international finance, see Gold Mech-
anism; Cournot’s algebra of ex-
changes, 959; Marshall on, 351, 374,
609, 1106; mechanism of interna-
tional payments, controversy on, 1107.
See also Foreign Exchange; Free
Trade; Gold Mechanism; Gold Stand-
ard

Interpersonal Comparisons, 40, 1071

Investment, in Smith, 191-3, 324-5; in
Turgot, 325-6; in Mill, 325, 572,
573, 620-21, 641, 642, 643, 659,
724-5, 747; lagless conversion of sav-
ings to, 325-6, 641-2; public debt
and, 327; in Malthus, 482, 64m; in
Keynes, see Keynesian System; in
Marx, see Marxist System; in Walras,
see Walrasian System. See also Sav-
ings

Iso-Quants, 9i7n, 1043-4

Joint-Stock Companies, 400

Jurisprudence, 26n, 67-8, 202. See also
Historical School of Jurisprudence;
Roman Law

Kameralism, see Consultant Administrat-
ors

Keynesian System (General Theory), role
of vision in, 41-2; equilibrium of ag-
gregates, 243; short-run nature of,
28on; Storch as forerunner, 502; Say’s
Law, 615-16, 619, 622, 624; changes
in money wage rates, 671; and Tooke,

SUBJECT INDEX

710; underconsumption thesis, 75cm;
attempts to Marxify, 885; elimina-
tion of labor disutility, 923, 1057;
as partial and income analysis, 960,
997, 1143; classical frictional unem-
ployment, 9740; and Walrasian equi-
librium, 101 2n; identity of savings
and investment, 1016-17; social pro-
duction functions, 1030; as special
case of Walrasian system, 1082;
Swedish anticipations of, 1085; lack
of index numbers in, io94n; cash-
balance approach and, 1109; Hobson
and, 1130; elimination of price level,
1144; theory of saving, 1144, 1176;
reasons for success of, 1144; Kahn’s
role, 1172

Analytic apparatus of General The-
ory, 2780, 1174-9: as essentially

static, 1174; short-run nature of,
28on, 1174; constancy of plant and
equipment, 11 44, 1174-5; real values
in wage units, 1175; rigid money
wages, 1144, 1175; five endogeneous
variables, 1144, 1175-6; elements of
quantity theory in, ii75n; aggre-
gate demand and supply curves,
623-4, 11760; effective demand,

ri76n; investment function, 278n,
1017-18, 1049, 1144, 1177; liquidity
preference, 278n, 331, 3720, 720,
93m, i023n, 1088, 1119, 1178-9;
consumption function, 2780, 10590,
1117, 1176-7, 1182; problem of equi-
librium in, n8on; impact/of, 1180-
84; dynamization of, 1144, 1183-4.
See also Hoarding; Income Analysis;
Liquidity Preference; Marginal Effi-
ciency of Capital; Multiplier; Secular
Stagnation Thesis

Labor Economics, in neo-classical period,
> 946-8

Labor Legislation, 4012, 494, 768
Labor, Productive vs. Unproductive, i92n,
628-31

Laical Intellectuals, 79-82, 116-22
Laicist Radicals, 528, 772-80
Laissez-Faire, in scholastics, 99; Smith and,
172; Justi on, 171-2; Beccaria on,
180; in Quesnay and Physiocrats,
230-31; Gournay’s phrase, 244n;
Becher and, 2840; Boisguillebert and,
284; and free trade, 371-2; in 19th-
century England, 395; Gladstooian
finance and, 403; gold standard and.

1245

405-6; Sismondi and, 493-4; Bastiat,
500; classical economists on, 531,
544, 548; Say on, 618; currency and
banking schools as adherents, 727
In neo-classical period, 761-73: so-
cialism as a product of, 763; hostile
political forces, 761-5; attacks of econ-
omists on, 765-6; outlook for in
1870, 766-7; regulatory acts occur,
767-8; labor reforms, 768; fiscal pol-
icy, 769-71; violation of principles,
769-70; monetary policy, 770-71;
Spencer and, 773; and economics of
period, 801; Paris group, 765, 841-3;
Pareto, Newcomb, Sumner, 860, 866;
and political individualism, 888. See
also Liberalism, Economic; Liberal-
ism, Political; Manchesterism
Land Banks, 294-6, 321-2
Large Scale Enterprise, 150, 761
Law of Cost, 93

Liberalism, Economic, meaning of, 8,
394; and Quesnay, 232; in autocratic
states, 394n; and development of
19th century, 396; free trade in Eng-
land, 397-9; nationalism as ally of,
399; an agrarian reform, 399-400;
labor legislation and, 401; Gladstone,
403; gold standard and, 405-6; ma-
terialistic rationalism in, 408; Say
and, 492; Ferrara, 513

Defeat of, in neo-classical period,
761-6: attitude of bureaucracy to,
763-4; failure of 'new middle class’
to embrace, 763-4; allocation of con-
trol to state, 763-4, 767-8; attacks of
economists on, 765-6; Paris group,
765, 841-3; outlook for in 1870,

766- 7; anti-Gladstonian liberalism,

767- 8; fiscal policy, 769-71; monetary
policy, 770-71; and laicist liberalism
in philosophy, 772-80; Spencer, 773;
Pareto’s variety of, 860. See also
Laissez-Faire; Liberalism, Political

Liberalism, Political, defined, 8, 394; phil-
osophical radicals and, 395; national-
ism as ally, 399; Ferrara, 513

Defeat of, in neo-classical period,
761-6: loss of hold on electorate,
761; decline in England, 761; ortho-
dox socialism, 761; bourgeois radical-
ism, see Radicalism, Bourgeois; 'new
middle class’ and, 763-4; Christian
socialism, 764-5; economists’ attacks
on, 765-6; Paris group, 765, 841-3;

1246

SUBJECT INDEX

Liberalism, Political (Cont.)

outlook for in 1870, 766-7; laicist, in
philosophy, 772-80; political democ-
racy, 772; Spencer on, 773; Pareto
on, 860; and marginal utility theory,
888. See also Laissez-Faire ; Liberal-
ism, Economic

Liquidity Preference, in aggregative analy-
sis, 278n; Thornton’s statement of,
720; Bohm-Bawerk’ s interest theory
and, 93m; treatment of in rteo-classi-
cal period, 1087-8; feature constitut-
ing theory of, 1088; introduction due
to Keynes, 1088; novelty in Keynes’s,
1144; as a determinant of income,
1176, 1178-9; elements of real in-
terest theory in, 1178-9. See also
Hoarding

Location Theory, in Petty, 2l4n; in Can-
tillon, 219; in Smith, 264; Thunen’s
Isolierte Stoat, 466; West and exten-
sive margin, 586; distance in classical
international trade theory, 6o6n; loca-
tion as differential advantage of land,
674-5; Ricardo, Mill, Edgeworth on
urban rent, 675n, 93 5n; Cheysson’s
work, 84 2n; and oligopoly theory,
981-2

Logic, 27, 448-54

Luxury, 324n

Macroanalysis, and monetary analysis,
278-80; and microanalysis, 279; ag-
gregates and supply-and-demand anal-
ysis, 617-18, 623-4; wage-fund theory
and modem aggregative analysis, 662;
Cournot’s advocacy of, 960; income
elasticity in, 993; Marshall and, 997;
in Quesnay, Ricardo, Bohm-Bawerk,
Wicksell, 997-8; equation of ex-
change and quantity theory as,
1095-6; reasons for, 1143
Macrodynamics, 1161-8: reasons
for success of, 1161; Hansen-Samuel-
son equation, 1161; Frisch’s schema,
1162; Hayek’s non-mathematical
work, 1162; and statistics, 1162; eco'n-
ometric use of, 1162; and business
cycle research, 1163-9; Keynes system
as a molder of, 1183-4; Keynes and,
see Keynesian System. See also Tab-
leau economique

Malthusian Theory of Population, Ortes
and, 178; Beccaria’s theory of popu-
lation, 180; in Smith, 191; in Cam

tillon, 219; in Quesnay, 234; ‘positive
' checks’ in mercantilism, 25m; rea-
sons for emergence, 252; emergence
of, 254-8; as theory of poverty, 257;
optimum population, 258, 582, 89on;
increasing returns and, 258-9; and
minimum-of-existence theory of
wages, 266; as beginning of new eco-
nomics period, 379; effect on Darwin,
445-6; Carey on, 517; adoption of by
Ricardo, 569, 653; Mill on, 571
Criticized, 578-84: as restatement
by Malthus, 578; in first edition of
Essay , 579; in second edition of E s-
say, 579-80; Godwin’s criticism, 579 n;
paradox of its orthodoxy, 581-2; in
Marshall, Bohm-Bawerk, and Walras,
582, 890; in Keynes’ early work, 582,
89on; opponents of, 582-3; Marx
and, 583,- 650, 65m; in wage-fund
theory of wages, 666; in Wicksell,
258, 582, 863, 89on; as postulate of
classical period, 889; not a postulate
of neo-classical period, 889-90; ac-
ceptance of by neo-classical theorists,
890; ‘Malthusianism in reverse,’ 890-
91. See also Demography; Popula-
tion; Vital Statistics
Managed Currency, 321-2
Manchesterism, 398, 765, 888
Marginal Analysis, Turgot and, 261; D.
Bemouilli’s hypothesis, 302-5, 1054,
1089; and law of diminishing re-
turns, 587, 1054, 1089; value and
marginal firm, in Ricardo, 673-4;
Ricardo on marginal cost and pro-
ductivity, 674^. need for marginal
principle, 677; Ricardo’s marginal
profits, 721; Clark as discoverer of,
868-9, 918; Wood’s discovery of,
869m, neutrality of to social philoso-
phy, 869-70

Marginal Efficiency of Capital, in aggre-
gative analysis, 278n; and money rate
of interest, in Thornton, 721; Fish-
er’s development of, 872, 1177-8; and
Marshall’s normal profit, 1049; con-
fusion with interest rate, Keynes on,
1119, 1178; and Wicksell’s real rate
of interest, ni9n; and old marginal
productivity of capital, 1144, ii78n;
as a determinant of income in Keynes,
' 1176; meaning of, 1177-8. See also

Keynesian System

Marginal Productivity Principle, in Long-

ffjltn T- y -~

SUBJECT INDEX 1247

field, 464-5, 67411, 677; in Thiinen,
465-8, 67411; diminishing returns and
emergence of, 587; Ricardo and,
674n; Clark’s injection of value judg-
ments, 870; problem of equi-requisite
factors, 914-15; rediscovery of, 914-
15; marginal physical value produc-
tivity, 915; social productivities, 9i5n,
996n, 998, 1029-30, 1042; Austrian
concept, 915; in non- Crusoe economy,
916; Longfield’s and Thiinen’s vs.
Jevons’ and Menger’s, 941-2; Mar-
shall’s, 941-2; as partial derivative,
1036; marginal efficiency and mar-
ginal productivity, 1144. See also Di-
minishing Marginal Productivity,
Law of

Marginal Propensity to Consume, see
Keynesian System; Propensity to Con-
sume -

Marginal Rate of Substitution, as substi-
tute for marginal utility, 44; Wood
as precursor of, 941; restrictions on
in isoquant analysis, i044n; as rejec-
tion of Gossen’s law, 1066

Marginal Utility Principle, use of marginal
rate of substitution, 44; Galiani and,
301; Fisher’s attempt to measure,
305, 872; D. Bemouilli’s hypothesis,
302-5, 1054, 1089; Cournot’s discov-
ery, 463; neglect of, in classical pe-
riod, 463; Senior credited with, 600;
Jevons’ priority, 826; Menger’s dis-
covery, 827; Marshall as a builder of,
836; Gossen’s First and Second Laws,
910-11, 1054, i°55j io66n; terms
used by theorists to denote, 9 ion,
105 5n; extension by Menger to means
of production, 912-13; Dupuit and
Gossen as forerunners, 9i5n; and
marginal productivity principle, 915;
Walras and, 918; redundancy of,
1003; Gossen’s linear functions,
io56n; cardinal utility, 1060-62; or-
dinal utility, 1062-6

Marshallian School, 833-4, 1099

Marxist System, surplus value, i92n, 390,
506, 649, 651, 652; labor-quantity
theory of value, 302, 309, 388, 390,
506, 554, 559-60, 596-8, 6270, 630-
31, 649, 650-51, 661-2, 673n, 685,
883-5; interest theory, 193, 647-51,
652-4, 66 1 : 2; theory of money, 290,
699-701, 702; wage theory, 390, 650-
51, 66411, 685-6, 9390; theory of
classes, 439, 440, 551, 552-4; diffi-

culty of sub-dividing, 383-4; as prod-
uct of bourgeois mind, 387; economic
interpretation of history, 389, 438-42,
4620; capital-labor relations, 389;
theory of technological unemploy-
ment, 390, 65m, 685, 686; tableau
economique, 391; Hegelian philos-
ophy and, 392, 438; on bourgeois rad-
icalism, 395; evolutionism, 391, 438-
42, 544, 651, 686, 749-50, 1131; as
unitary social science, 441; theory of
exploitation, 479, 596, 647-51, 896;
Diihring’s attack, 509n; theory of dis-
tribution, 54 3n, 566, 569, 650, 6640,
93 3 n, 939 n; sociology, 389, 551;
‘bourgeois' economics, 455n, 559n;
on Proudhon, 457; and entrepreneur,
462, 556n, 646, 896; accumulation
and capital theory, 556n, 583, 59 5n,
634? 635, 652, 661-2, 686, 749-50,
882, 887, 902-3, 927n, 1131; sta-
tionary state, 562, 651, 965-6; arid
Quesnay, 566n; output as datum,
569; theory of economic develop-
ment, 573-4; Malthusian principle
and, 583, 650, 65 m; and Ricardo,
390, 596-8, 649, 654, 681, 682n, 683,
685; on abstinence theory, 640, 660-
62; profits, 462, 556n, 646, 649, 6820,
896; and Smith, 648-9; absolute law
and, 68 5n; monopoly trend, 686;
breakdown of capitalism, 687, 748-9,
882, 1131; on business cycle, 652,
74on, 742, 747-50, 1131-2; method-
ology, 562, 651, 748, 965-6; effect
on Sombart, 818; effect on Bohm-
Bawerk, 846, 927n; Bortkiewicz’s re-
vision of price theory, 85 m; attempts
to Keynesify, 885; theory of social-
ism, 986; decreasing costs, 1051; ef-
fect on Tugan-Baranowsky, 1126m
See also Marxism

Marxism, Gotha congress, 454n; Ricardian
socialists and, 479; Revisionism, 532,
882-3; Fullarton’s work on banldng,
7250; rise of Marxist parties, 762,
774; on imperialism, 764, 882; Engels
and Dietzgen, 775; influence on Ger-
man economists, 843, 849; Bohm-
Bawerk on, 845

In neo-classical period, 877-85: as
sect and school, 878; scientific work
of, 878; German Social Democratic
party, 879; Engels, Luxemburg,
Kautsky, 880; Neo-Marxists, 881-2;
Marxist revival, 883-5; criticism of

SUBJECT INDEX

1248

Marxism (Cont.)

marginal utility, 887; emphasis on
objective facts, 887; profits and in-
terest, 896; exchange economy and
use economy, 9i2n; retention of
Marx's theory of interest, 926. See
also Marxist System

Materialism, and idealism, 3 on; atomistic,
66; philosophical, and deism, 123;
and environmentalism, 434; evolu-
tionary, 772

Materialistic Interpretation of History,
786; Buckle’s theory as, 435; Marx's
theory, see Marxist System; Schmol-
ler on, 811

Mathematics, importance of, i4n, 603,
955-6; 'discovery' of calculus, i8n,
956n; Jevons and, 8z6

Cournot and the mathematical
school, 954-63: mathematical eco-
nomics, defined, 955; elementary na-
ture of before 1914, 955; contribu-
tion of Cournot, 958-63

Meaning of system of simultaneous
equations, 970; autonomy vs. inde-
pendence of a function, 970m, homo-
geneous functions of zero degree,
ioo5n; continuous vs. smooth func-
tions, 10270; linear homogeneous
functions, 103 3m See also Econo-
metrics; Euler’s Theorem; Probabil-
ity, Theory of; Statistics

Mature Economy, 252

Maximizing Behavior, Theory of, 91 2n

Mercantilism, and Colbert, i47n; avoid-
ance of term, 155; Smith on, 186-7,
335, 337n, 360-62; Child’s Discourse
of Trade, 195-7; on population, 251;
and unemployment, 272; contribu-
tions to Keynes, 283n; and free coin-
age, 298; quantity theory of money
and, 314; metallist theory of money
and, 314

„ Literature, 335-76: 19th-century

opinions of, 336; export monopolism,
338-40; exchange control, 340-45;
lack of theoretical analysis, 343-4;
‘primitives,’ 343-4; balance of trade,
345-62; from 1675-1775, 362-76;

and classical theory of international
finance, 733; crises, 738. See also
Neo-Mercantilism.

Metals, Monetary, 144-5, 31 1, 694, 716-17

Metasociology, 120-21, 124-5

Methodology, ‘Ideal Types,’ 80, 606, 818;
and division of problems, 219

In classical period, 536-41: Ricard-
ian Vice, 473, 541, 618, 653n, 668,
1171; validity of procedures, 536-7;
analogy with physical sciences, 537;
use of ‘law,’ 537; induction vs. de-
duction, 537; isolation and abstrac-
tion, 537-8; introspection, 577; com-
mon experience, 577

In neo-classical period: J. N.

Keynes, 777, 824; Simiand, 777, 820;
and philosophy, 779-80; worker’s ma-
terial and methodology, 7850; his-
torical school’s, 807, 808, 812
The Methodenstreit, 814-15: in
classical period, 538-40; ebb of his-
torism, 814; facts in, 814; elements
of in England, 824; methodological
clashes in sciences, 815

SpiethofFs, 816-17; Weber on,
818-19; in England, 823-4; defense
of, 886-9; subjective vs. objective the-
ory, 9i9n; static analysis, see Static
Analysis; dynamic analysis, see Dy-
namic Analysis; stationary state, see
Stationary State; partial analysis, see
Partial Analysis; in cycles, 1125,
1165-6; macrodynamic studies, see
Macroanalysis

Microanalysis, and macroanalysis and
monetary analysis, 279; Ricardo’s
methods of analysis, 472; Ricardian
Vice, defined, 473

Minimum-of-Existence Wages, see Wages,
Theories of

Model-Building, 561-2, 565-6, 632

Modern Period of Economic Analysis,
1914 to Present, World War I not
causal factor, 1145; wealth of statis-
tics, 1146; new developments of old
theory, 1146; development of dynam-
ics, 1146; few new scientific problems,
1146-7; analytically novel problems,
1147

Monetary Analysis, defined, 277-8; and
macroanalysis, 278-80; speeding and
saving, 280-82; defeat of, 282, 287-8
Interlude of, 1600-1760, 283-5:
Becher and, 283-4, 326n; Boisguille-
bert and, 284-7; Quesnay and, 287-8;
in Malthus, 482, 483; neutrality of
money in classical interest theory,
720. See also Real Analysis

Monetary Co-operation, International,
Latin, Scandinavian, and German
Unions, 1076; Paris Conference of
1867, 1076; conferences of 1878,

SUBJECT INDEX 1249

1881, 1892 , 1076-7; Wolf’s interna-
tional gold reserve plan, 1077
Monetary Management, schemes for in
post-Napoleonic England, 713-17:
Thornton, 713, 721-4; tabular stand-
ard, 489, 526, 713, 7*4, 1078; T. P.
Thompson on, 713; Scrope on, 713-
14; Bollman on, 714; Birmingham
Currency School, 714-15; Mill on,
715; and gold inflows of 1840’s, 7 id-
17; French bimetallism, 716-17; bank-
ing and currency schools on, 727
In neo-classical period, 770-71:
awareness of need to control money
market, 770; schemes to divorce cir-
culation from gold, 1077; employ-
ment and, 1077; bimetallism as
scheme of, 1077; government bonds
as a stabilizer, 1078; control of ex-
changes and bank credit, 1078; Jev-
ons’ plan, 1078; Marshall’s plan,
1078-9; Fisher’s 'compensated dol-
lar,’ 1079; Walras’ plan, 1079
In modem period: Keynes paper
standard, 693. See also Bimetallism;
Symmetallism

Monetary Theory, in Plato, 56; in Roman
law, 7on; in la tin scholasticism, 94-5,
99-101; in More’s Utopia, 207; in
Turgot, 249; Cantillon’s, 291, 706
In classical period: Smith’s, 191,
193, 290, 312, 720, 731; Senior’s
contributions, 484; Malthus’, 482;
Nazzani’s work, 512; Ricardo’s, 473,
688n, 693, 699-701, 703-4, 708-12,

, 7i5n, 7i7n, 724, 737, 1079, m2,
1118; issues from Restriction Act to
gold inflation of 1850’s, 688; Mill as
summarizer, 689; problems of Eng-
land during the period, 690-98; Bul-
lion Report of 1810, 692; controversy
over standard, 693-4; Tooke on, 694,
708-10, 712-13; Palmer’s rule, 697-8;
lack of interest in theoretical funda-
mentals, 698-9; theoretical and prac-
tical metallists, 699-701, 702; theory
of value of money, 701-2; and earlier
English work, 706

Bullionists vs. anti-bullionists, 706-
11: Thornton’s analysis, 689, 706-7;
other bullionists, 707-10; Mill on,
710-11, io83n; Resumption Act and,
711

In neo-classical period, 1080-86,
1117: Davidson’s work, 86 2n; no rev-

olution in, -1080; empirical work in,
1080; failure to systematize, 1081;
Walras’, see Walrasian System; Fish-
er’s, 3i4n, 72m, 872-3, 1075, 1079,
1082-3, 1101, 1102-3, 1115; Mar-
shall’s, 72on, 1075, 1078-9, 1083-4,
1087-8, 1099, 1108-9; Wicksell’s,

863, 1085, 1088; Austrians’, 1085-6;
neutral money, 1088-9; supply-de-
mand mechanism and, 1090; in in-
terest and cycle theory, 1117; at-
tempts to extend marginal utility
theory to, 1089

Cartalist theory of, in Plato, 56;
defined, 63; in Quesnay, 234; theoret-
ical and practical, defined, 288; in
17th and 18th centuries, 293-9; and .
devaluation, 298-9; affinity to quan-
tity theory, 313

Cash -balance approach: Locke and,
316; in Walras’ later work, see Wal-
rasian System; as application of sup-
ply-demand, 1090; and equation of
exchange, 1108, 1109; Cambridge
equation, 1108-9

Income approach: in Tooke, 709-
10; and equation of exchange, 1109;
advantages of, 1109-11

Metallist theory: in Aristotle, 56,
62-4, 289, 29on; theoretical and
practical, defined, 288; theoretical in
17th and 18th centuries, 289-93, 318;
Petty on, 290; anti-metallist tradi-
tion, 293-9; and devaluation, 298-9;
stimulus to value theory, 300; impli-
cations of simple, 313; and mercan-
tilists, 314; tendency to delineate
credit, 318; Law and, 321; in classi-
cal economists, 699-701, 702; paper
money, 700; bullionists as, 708; in
neo-classical economists, 1087; Knapp
on, 1091

Quantity theory: in Tomas de
Mercado, 95n, 161; Bodin as 'dis-
coverer’ of, 311-12, 312-14, 9i2n;
implications of, 312-16; quantity the-
orem, defined, 312-13, 703; in mer-
cantilists, 314, 357n; Davanzate, 313-
14; equation of exchange, 314-15,
1099-1106; Beccaria on, 315; Law
and, 321-2; in Serra, 354; analogy
with wage-fund, 666n; interactions
of prices and quantity of money,
69m; Marx on, 702; Senior on, 702-3;
Ricardo on, 703-4, 724, 737; Mill on,
704-5, 711; bullionists on, 708; Wick-

SUBJECT INDEX

1250

Monetary Theory (Cont.)

sell on, 7ion; Thornton’s analysis of
effects of credit on output, 723-4;
Bohm-Bawerk and, 928n; as example
of comparative statics, 9650; and
supply-demand mechanism, 1090;
Fisher’s theory, 1083, 1096, 1097-8,
1100-3; definition of concepts P,
M, V, and T, 1096-8; Wicksell’s M,
1097; and equation of exchange, see
Equation of Exchange; German and
French economists on, 1103; criticism
of, 1 103-4; and purchasing-power par-
ity theory, 1106; elements of in
Keynes, ny6n

State theory, 288n, 1090-91. See
also Credit; Hoarding; Liquidity Pref-
erence; Monetary Management;
Money; Money, Value of; Money,
Velocity of

Money, functions of, 62-3, 297, 1087-90;
role in real analysis, 277; and credit,
320-21, 699, 1097; legal treatment
of, 719-20; discussion of nature of in
neo-classical period, 1086-7. See also
Credit

Money, Quantity Theorem of, see Mone-
tary Theory

Money, Value of, analysis of in 17th and
18th centuries, 300; Law on, 321-2;
theory of value and, 701-2; in neo-
classical period, 1089

Index-number approach to, 1091-5:
Edgeworth’s work, 1092; Walsh’s
work, 1092; Mitchell’s work, 1092;
Fisher’s work, 1092; role of economic
theorists in, 1092-4

Equation of exchange and quantity
approach, 1095-1107; cash -balance
and incorne approaches, 1108-10. See
also Monetary Theory

Money, Velocity of, Petty’s concept of,
213, 316-17; Cantillon’s work, 223,
316-17, 319, 706; introduction into
equation of exchange, 315-17; cash-
balance approach, 316-17; and credit,
318.-21, 705, 1097; in Mill, 705;
Thornton on, 706, 720; in Say, 710;
income velocity and Pigou, 1098; not
habitually considered constant, 1098;
Kemmerer’ s short-run variability in,
1087, 1098, 1100

Monopoly, Aristotle on, 60-61; in early
national states, 150-55: reasons for,
151-4; nature of, 154; in Smith, 189,
264-5, 309; analysis before 1750,

305-6; export monopolism, in mer-
cantilism, 338-40; and the staple,
34on; in classical economists, 545-6,
602; Roscher on, 546; and supply-de-
mand mechanism, 60 in; Cournot’s
theory of, 6o2n, 839, 959, 960, 972n,
973, 976-8; theory of rent in classi-
cal economists, 672; trend toward in
Marx, 686; in American radicalism,
761, 801; in land, Oppenheimer on,
854n; in neo-classical theorists, 892;
monopolistic pricing and entrepre-
neurial gains, 897-8; misuse of con-
cept, 927b; surpluses to factors in,
937; theory of, 975-8; isolated, 976n;
Marshall’s analysis, 960, 977-8, 1049;
maximization of profits over time,
1143; Mrs. Robinson’s concept of,
1151-2. See also Competition, Imper-
fect; Competition, Monopolistic; Dis-
crimination, Price; Oligopoly
Monopoly, Bilateral, see Oligopoly
Monopsony, 6 in

Moral Philosophy, 29, n8n, 130, 141-2
Multiplier, foreign trade, in mercantilists,
350; static nature of Kahn-Keynes’s,
H74 n

Nation, 550

National Economy, 163-4
National Income, see Income Concepts
Nationalism, absence in feudalism, 75-6;
as ally of liberalism, 399; romanticism
/ and, 418-24; List and German,
504-5; in Carey, 516-18
Natural Law, in Roman jurists, 70

Concept of, 107-15: importance
in social sciences, 107; ethico-legal
concept, 108-10; analytic concept,
110-13; natural law and sociological
rationalism, 113-15

In 17th century, 115-22: Prot-
estant scholastics, 116-22; mathe-
matics and physics, 118-19; economics
and political sociology, 119-22; con-
tributions to economics, 122

From 18th century, 122-42: soci-
ology of religion, 123; English em-
piricism, 123-4; science of human na-
ture, 124-6; analytical aesthetics and
ethics, 126-30; self-interest, common
good, and utilitarianism, 130-34, 428-
31; philosophy of history, 134-7; En-
cyclopedistes, 137-8; and Quesnay,
138, 228-9, 232; semi-socialists, 139-
41; moral philosophy, 141-2; and

1251

SUBJECT INDEX

Smith, 184; and principle of popula-
tion, 257; metallist theory of money
in, 290; and free trade, 371; 19th-
century systems of, 430; Hildebrand’s
hostility toward, 507
Natural Liberty, 184-5, 403
Natural Philosophy, 29, n8n, 141
Natural Theolgy, 123
Navigation Act of 1660, 1520
Neo-Classical Period of Economic Analysis,
more complex techniques, 754; de-
velopment of teaching, 754-5; eco-
nomic associations and journals,
756-7; background of, 759-80; gen-
eral economics of the period, 825-85;
as 'neo-classic/ 919-20; basic features
of analysis similar, 952-4
Neo-Mercantilism, 174m 771
Net Product, see Physiocrats
Neutral Money, 277, 278, 1088-9
Non-Competing Groups, 606
Numeraire, Steuart as discoverer of, 297;
labor as, in Smith, 188, 310, 482,
591, 1087; Ricardo on, 591; Walras’
introduction of, 1003, 1005, ioo6n,
1087; Malthus on, 1087

Oligopoly, ‘discovery’ in 1 8th century,
1530; in More, 208, 305, 979n; neo-
classical analysis, 892; Cournot’s treat-
ment, 959, 979-83, 983-5; Chamber-
lin’s work, 982; Marshall on, 982,
983, 984, 985; Edgeworth on, 982,
984; Wicksell’s defense of Cournot,
983; Cournot solution, 983; theory
of isolated exchange as prototype,
983-4; analogous indeterminacy in
federalist socialism, 988
Opportunity Cost, see Costs, Theories of
Originality, Objective vs. Subjective, 290m
367m 578, 639, 838
Overproduction Theory of Crises, see
Business Cycle Theories

Pamphleteers, see Consultant Adminis-
trators

Paretian School, and Italian economics,
855; members of, 858
Pareto’s Law, see Statistics
Partial Analysis, economics started with,
242; Marshall’s Principles , 836; in
Auspitz’s and Lieben’s work, 849;
Barone and, 858; limitations in wage
theory, 942; Keynesian supplementa-
tion by income analysis, 960; Cour-
not and, 959-60, 990

In neo-classical period, 990-98:
principle of negligibility of indirect
effects, 990; Marshall’s development,
836, 959, 990-98; Walras and Pareto
on, 991; demand curve as tool of,
991.-2; elasticity concepts, 992-4
Peel’s Act (Bank Resumption Act of
1844), see Bank Note; Bank of Eng-
land; Central Banking
Period Analysis, 495-6
Philosophical Radicals, and Bentham,
13m, i33n; role in English liberal-
ism, 395; Mill as, 395, 408, 430,
528; naivete of, 396; and utilitarian-
ism, 408; Ricardo and, 471; McCul-
loch as, 476n; on birth control, 58m.
See also Utilitarianism
Philosophy, and economics, 28-32, 411-13,
779; meanings of, 28; Aquinas’ defi-
nition, 28-9; Aristotle’s failure to unify
teachings, 29; Natur-und-Geisteswis-
senschaft, 29; idealism, 300

Greek, 54, 65-6: Skeptics, 65;
Stoics, 65; Epicureans, 65, 66, 89;
Neo-Platonists, 65

Scholastic, 9th through 12th cen-
turies, 84-7: realism vs. nominalism,
84

Scholastic, 13th century, 87-94
English philosophers and utilitari-
anism, 409; 19th-century German,
411-15

In neo-classical period, 772-80:
utilitarian ethics, 772; evolution-
ary materialism, 772; Christian be-
lief and English intelligentsia, 772;
revival of Thomistic thought, 774;
spirit hostile to bourgeois civilization,
774, 778; interest in history of, 775;
utilitarianism and, 775; Neo-Kantism
and Neo-Hegelianism, 775; positivism
and monism, 775-6; philosophical an-
thropology as substitute for, 776;
pragmatism, 778; Bergson’s anti-ra-
tionalism, 778; Croce’s, 778; phe-
nomenology, 778; Russell and Moore,
779. See also Harmonism; Material-
ism; Positivism; Rationalism; Utili-
tarianism

Physiocrats, criticism by Graslin, 175;
Condillac and, i75n; Smith and,
184, 191-2, 193, 236, 323-4, 630,
635; Vauban as forerunner, 204n;
and theory of taxation, 2o6n; Bois-
guillebert as precursor, 216; theory
of state and society, 229; small in-

SUBJECT INDEX

Physiocrats (Cont.)

fluence on policy, 229-30; policy rec-
ommendations, 230-31; single tax,
230-32

Quesnay’s analysis, 232-43: pleas-
ure-pain calculus, 233; maximizing
doctrine of perfect competition, 233;
harmonism, 234; population theory,
234, 256n, 257, 266, 274; theory of
wages, 234, 266, 269, 664; theory
of interest, 234; theory of money,
216, 234; value theory, 234, 302; in-
come analysis, 213, 235, 287-8; the-
ory of capital, 235-7, 266, 323-4, 667;
‘ produit net,’ 221, 237-9, 263; the-
ory of rent, 238, 263; tableau eco-
nomique, see Tableau economique ;
and Turgot, 243-4; 'advances, 7 564,
632

Planned Economy, in early national states,
147, 148; Justi’s, 171-2; Law and
France, 322

In neo-classical theory, 985-6: and
pure competition, 985, 986; Mar-
shall on, 985-6, 990; theory of social-
ism, see Socialism; theoretical tools
to guide planners, 1145
Pleasure-and-Pain Calculus, in Aristotle,
57n; in Enlightenment, 130-34; in
Verri, 178, 1056; in Quesnay, 233;
in Continental economists, 302; and
philosophical problems, 407; jevons
on, 1056; 'disutilities’ in a, 1057. See
also Utilitarianism

'Political Arithmetic!:, 7 see Econometrics
Political Economy, meanings, 21; system
of, defined, 38, 534-5; Wealth of
Nations as, 38, 186; Italian systems,
177-81; rise of a new, 1141
Political Science, utilitarianism and actions
of governments, 429; attempts at so-
ciology of, 431-4; Lenin’s' contribu-
tion, 8y8n. See also Social Contract;
State

Polizeiwissenschaft, 159-60, 503n
Polyhistors, defined, 28-9; Aristotle as, 29;
Leibnitz as, 117; Bornitz as, 168;
Smith as, 182; Beccaria, as, 182; Tur-
got as, 182; Comte on unity of knowl-
edge, 416; Valeriani as, 51m
Poor Law of 1601, 271
Poor Law Amendment Act of 1S34, 271,
401

Population, Beccaria on, 180, 258; Petty
on, 219, 251, 253, 256; in

Quesnay, 234, 2 56n, 257, 266, 274

Principle of, 250-58: problem of,
250-51; populationist attitude, 251-3,
266; growth of factual knowledge,
253-4; Malthusian principle, see Mal-
thusian Theory of Population

Increasing returns and, 258-9; de-
creasing returns and, 259-62; wages
and, 266-70; unemployment, poverty,
and, 270-5; in Ricardo, 581, 653,
682-3; 'populationist movement 7 in
United States, 801-2; studies in neo-
classical period, 890-91; Mombart’s
prosperity theory, 891; in secular
stagnation theses, 891, 11730. See
also Demography; Vital Statistics
Positivism, Comtist, 415-18, 775-6
Positivism, Logical, 54, 449-50, 509
Price, just, 60-61, 93, 98-9, 359-60; market
vs. normal, 189, 220, 309, 592-3, 999,
looon; in real analysis, 277; ''cheap-
ness and plenty vs. dearness and
plenty, 7 2350, 274, 285-7, 35°, H29n;
theory of mechanism of, 305-11;
Tooke’s -History of Prices, 520-21; in
classical period, 589; money prices
as secondary, 589; Marx’s divorce of
price and value, 597; rising vs. stable,
713; prices, interest and credit, 719;
expectations of future and rate of
interest, 720; Wicksell’s cumulative
process, 722, 1118-20; credit creation
and prices, 723-4; in commercial bill
theory of banking, 730; co efficients
of transformation in Crusoe econ-
omy, 987; schemes for stabilizing,
1077-8; competitive, 61, 62, 93, 98,
309, see. also Competition

Theories of: Smith’s codification,
307-11; Valeriani’s, 51m; Mill’s, 546;
determinateness in barter economy,
589-90; Walras’ theory, see Walrasian
System. See also Value headings
Price Revolution, 145, i66n, 311-17. See
also Metals, Monetary
Price-Specie Flow Mechanism, see Gold
Mechanism

Private Property, 59, 92-3, 96, 119, 120,
139 , 532 , 545

Probability, Theory of, and economic be-
havior, 304; Halley’s chances of sur-
vival, 212, 220; Bemouillis, 212; St.
Petersburg game, 304n; literature on,
19th century, 448n; Gaussian law of
error, 525, 960-61; Quetelet, 525-6;
method of least squares, 525, 960-61;
Edgeworth’s work, 831, 96m; Cour-

SUBJECT INDEX

not’s work, 959; J. Bernouilli's the-
orem, 960-61; Poisson’s work, 961.
See also Econometrics; Risk and Un-
certainty; Statistics

Production Function, definition, z6on;
law of variable proportions and, 26on;
and technological change, 6790, 1027;
statistical work on, 962; social, 9i5n,
996n, 998, 1029-30, 1042; macro-
analytic in Wicksell, 998; meaning
of concept, 1027-32; commodity con-
siderations, 1028-9; introduction of
time, 1029; and demand curves for
factors, 1030-31; limitational factors,
1030; Smithies’ restrictions, 1030-31,
1038; real world, 1031-2; classical
'state of arts,’ 1032, 1036; Berry’s and
Edgeworth’s work, io32n; Marshall’s
theory, 1032-3; Wicksteed on, 1033;
Walras’ degenerate, 1034-5; laws of
returns and properties of, 1032, 1036;
first order homogeneity hypothesis,
1039-45; increasing returns, 1045-8;
emergence of and need to co-ordinate
with theory, 1051-2
Produit Net, see Physiocrats
Profits, law of average rate of, 265; interest
as derivative of, 327-8; return on
means of production, 327-8; state
power vs., 346-7

In classical economics, 645-6, see
also Interest, Theories of: in Smith,
190-91, 268, 331, 333-4; West on,
476; defined, 645; Ricardian theory,
610, 646, 682-7, 721; Mill’s analy-
sis, 646, 893, 894

In neo-classical economics: in

Henry George, 865; Clark on, 868;
and interest, 893, 896, 924; empirical
analysis of, 894-5; in Jevons and Aus-
trians, 893; disequilibrium, 893; Mar-
shall on, 893-4, 1045, 1048-9, 1050;
functional theories, 895; 'residual’
gains, 896-7; monopolistic pricing in,
897-8; zero profits (non-historical),
1048-53; Walras’, see Walrasian Sys-
tem; theories of decreasing costs and,
1051

Theories of: depradation, 896-8;
friction, 893; innovation, 894; rent-
of-ability, 504, 893, 894; risk, 101,
105, 106-7, 646, 894, 1049; uncer-
tainty, 893, 1049. See also Entrepre-
neur

Propensity to Consume, '317, io59n
Protectionism, and increasing returns, 258

1253

Mercantilists on, 346-52: infant-
industry argument, 348-9, 505; ques-
tioning of, 367-8; decline of, 370-72,
374 n

Bismarck’s, 3970; economists and,
in 19th century, 397; List and, 505-6;
in Carey, 516-18; unilateral gain
from, 505; Mill’s capital limit and,
6400; demand for from social strata,
763; in neo-classical period, 766-7;
Patten on, 876. See also Free Trade,
Laissez-Faire

Psychologism, 27, 125-6, 127, 578, 887
Psychology, and economics, 27-8; associ-
ationist, see Empiricism, Philosophi-
cal; evolutionist in 19 th century,
447-8; experimental, 796-7; behavior-
ism, 797-8; gestalt, 798; Freudian,
798-9; social, 799; and utility theory,
io57-9

Public Debt, 327. See also Fiscal Policy;
Public Finance

Public Finance, in later scholastics, 96-7;
in 'Wealth of Nations, 164x1, 186,
205; in 14th through 18th centuries,
199-206; Henry George on, 865; in
' neo-classical period, 945-6. See also
Fiscal Policy; Public Debt; Taxation
Public Utility Economics, 949-50

Quadragesimo Anno, see Encyclicals, Papal
Quasi-Rent, 634n, 647, 67m, 678-9, 894,
935, 936, 995, 1045

Radicalism, Bourgeois, and socialism, 395n;
composition of, 762-3; Fabians, 763,
803, 833n; attitude of bureaucracy,
763-4; failure of 'new middle class’
to embrace liberalism, 763-4; alloca-
tion of control position to state, 764;
Wicksell and, 888. See also Bour-
geoisie; Liberalism
Railroad Economics, 948-9
Rationalism, 113, 114-15, 117, 123-4, 4 2 9
Real Analysis, defined, 277; victory over
monetary analysis, 282, 287-8; inter-
est theory, Barbon and, 330; in classi-
cal period, 589, 632-3, 720; neo-
classical economics as, 1088. See also
Monetary Analysis

Relativity, Historical, 8, 13, 34, 109, 111,
229, 554, 776x1, 809, 852
Rent, extensions of concept in neo-classi-
cal period, 935-6, 937, 938n
Rent of Land, Theories of, in later scho-
lastics, 101; in Smith, 190-91, 264-5,

12 54 SUBJECT INDEX

Rent of Land, Theories of (Cont.)

268, 67m, 672; Petty on, 213-14,
264; in Cantillon, 221, 263; Quesnay
and ‘pToduit net,’ 221, 237-9, 263;
and increasing and decreasing returns,
259-66; two theories dominating 18th
and 19th centuries, 264-6; and Bar-
bon’s theory of interest, 329-30;
Thiinen’s, 466; Rodbertus’, 506-7;
Fuoco, 511; Marx’s elimination, 569;
in classical economics, 671-9; Edge-
worth’s, 675n, 8740, 935n; generaliza-
tion of rent concept into costless sur-
plus, 679; of urban land, see Loca-
tion Theory; in neo-classical pe-
riod, 932-8; Pareto’s, 1050

Diminishing return (Ricardo-West)
theory: and. Smith, 191, 194; exten-
sive margin in, 259, 586n; Ander-
son’s theory, 263, 264-6, 6y6n; inde-
pendent discoverers of, 476, 490;
Carey’s criticism; 517-18; Ricardo
and Malthus on, 536n, 677; Mill’s
retention of, 560-61, 604, 671-2,
673 n > 675, 676, 677; as device to
eliminate land from value problem,

569, 673, 675-6, 868; intensive mar-
gin in, 259, 586, $87, 675, 936n;
diminishing returns in, 584-5, 653,’
673, 822n, 1032; concept of, 671;
denial of marginal productivity, 6740;
location and differential fertility,. 675;
and Ricardo’s ideology, 6750; Mill’s
defense of, 676; Longfield’s criticism
of, 677; quasi-rent and, 67m, 678-9;
Bailey’s criticism, 679; Clark and,
868; Fetter on, 874n; survival in neo-
classical period, 933-4; Menger’s criti-
cism, 934; Marshall’s defense of,
674n, 934

Discounted returns theory, 933-4;
monopoly theory, 672, 934-5; oppor-
tunity-cost theory, 604, 6y6n, 679n;
productivity theory, 676-8; surplus
theory, 937-8

Rerum Novarum, see Encyclicals, Papal

Ricardianism, as a school, 470, 475-80;
Ricardian socialists, see Socialism;
never dominant in English econom-
ics, 480, 598-9; opinions on Say, 491;
Rodbertus and, 506-7; Rossi’s diluted,
509n; Mill and, 475, 478, 487, 529,

570, 654, 677; Cairnes not a Ricard-
ian, 533n; in Marshall, 594-5, 674n,
8377 838, 92m, 934, 1078-9; treat-
ment of Ricardo’s value theory,

595-6; farmer in, 645; Jones on, 82 2n
Rights of Man. 110, 111-12, 138
Risk and Uncertainty, business, in D.
Bernouilli, 304; and entrepreneurial
function, 556n; in Cantillon, 646; in
Thiinen, 646n; in Hawley, 894;
Knight’s definitions of, 894; and er-
roneous decision-making in cycle the-
ory, 1133-4. See also Probability,
Theory of

Roman Catholic Church, in feudalism,
75; freedom of opinion for clergy,
76-7, 82; and laical intellectuals, 80;
political opposition to, 82; society
and, in Aquinas, 91-2; views on in-
terest, io2n, 105-7; enmity of En-
cyclopedists, 138; breakdown of in-
ternational authority, 145; alleviation
of unemployment, 270; revival of
power, 19th century, 395; attraction
of for romanticism, 420; in German
Center party, 764; on defensive in
neo-classical period, 764-5. See also
Encyclicals, Papal; Scholasticism
Roman Law, in economic analysis, 67-71;
Corpus juris civilis, 68, 69, 70, 88;
natural law, 70, 108; and Protestant
scholastics, 116; in scholastic analy-
sis, 318; concept of ‘capital’ in, 322-3;
papyrology and, 783
Romanticism, 418-21, 422-5, 443-4
Royal Economic Society, 756
Royal Statistical Society, 210, 521

St. Petersburg Game, see Probability, The-
ory of

Saving, .in Smith, 191-3, 236-7, 324-5,
389, 630, 634, 635, 639, 642, 659,
660, 667, 723; in monetary analysis,
280; .Quesnay’s attitude, 287; Bois-
guillebert’s attitude, 287; Turgot,
324-5, 667, 723; lagless conversion
into real capital, 325-6; and the wage
fund, 325, 572, 573, 641, 642-3, 659,
724-5; public debt and, 327; identi-
fication of decisions to save and in-
vest, 641; Malthus on, 482, 622-3,
64 m, 724, 740; and demand for
labor, 666-7; Sismondi on, 681; in-
crease in, effects on technological ad-
vance, 685; voluntary, 723; forced,
724-5, 1115; oversaving theories, see
Business Cycles; favorable view by
neo-classical economists, 945; in Wal-
ras, see Walrasian System; in Keynes,

SUBJECT INDEX 12 55

see Keynesian System; planned and
current, 1183. See also Capital; In-
vestment

Say's Law of Markets, Ricardo and, 474n,
621, 625; ambiguously expressed in
Say, 492n, 616, 618; Sismondi on,
494, 740; in Mill, 329, 621-2, 705;
in international and domestic trade,
616-17; and theory of crises, 618, 739-
40; place in general equilibrium the-
ory, 618; not an identity, 618-19;
Say’s treatment of money, 620-21
Controversy over, 621-5: and gluts,
622; Marshall’s position, 622; Mal-
thus’ objection toj 622-3, 740; Keynes
and, 623-4; in tradition of Turgot
and Cantillon, 625; accumulation and
interest rate, 654; Lauderdale on, 740;
Roscher’s reduction to identity, 741;
Wicksell and, 1117m See also Hoard-
ing

Scholasticism, and secular law of Church,
26n; reasons for interest, 65; and
feudalism, 74-8; and capitalism, 78-
82; Humanists, 79-80; Renaissance
science evolving from, 81; and laical
scholars, 82; sociology, 82-7, 428; 9th
through 12th century, 83-7; 13th cen-
tury, 87-94; 14th to 17th centuries,
94-107; natural law, 108-15; equalitar-
ianism, 121-2; and utilitarianism,
132-3; Spanish contribution, 165; in-
fluence on Petty, 215; influence on
Quesnay, 228-9; association of pros-
perity and low prices, 286; metallist
theory of money in, 290, 318; on
credit institutions, 318; recognition of
entrepreneur, 555; interest theory,
101-6, 328-9, 646, 648, 720; revival
of Thomistic thought in neo-classical
period, 774; social science of as a
single unit, 783

Science, history of, 4-6; economics as,
6-11, 16-17; definitions of, 6-11; ex-
act, defined, 7n; pure, defined, 7n;
applied, defined, 7n; empirical, de-
fined, 8; as philosophy, 28; sociology
of, see Sociology of Science; emer-
gence of scholastic, in 13 th century,
87; statics and dynamics in, 964.
See also Economic Analysis

Science, Personnel of, 44-5, 79-82

Scientific Analysis, meaning, 4; Aquinas
in, 8n; ‘theorem’ defined, 15; ‘prin-
ciple’ defined, 1 5n, 577; Haw’ defined,
i5n, 577; ‘hypothesis’ defined, 15,

577; scienticism, 17, 31, 211; ‘vision,’
role of, 41-2; ‘experimental,’ mean-
ings of, 124-5, 127, 43 2n; deduc-
tion and induction, 45, 537
Scientific Development, Mechanisms of,
44-5, 8m, 141, 288, 304-5, 366n,
444n, 480, 602, 674^ 1081, 1141
Scientific Endeavor, Motive Forces of,
44-5, 66, 102, 1150
Seignorage, 298

Sensationalism, see Empiricism
Sensualism, see Empiricism
Sequence Analysis, 741, 1160, 1161
Single Tax, 203-4, 230-32, 865
Social Contract, 59, 119, 126
Social Credit, 458

Social Science Movement,' 456, 864
Social Science, Unified, 58, 117-18, 133,
142, 415-18, 428, 441, 516, 783
Socialism, semi-socialists in 18th century,
139-41, 453; utopian socialism, 206,
454-5, 480, 531, 532; non-rational
acceptance of, 281; bourgeois radicals
arid, 39 5n; in France, 453; German
, labor movement, 453; First Interna-
tional, 453-4; associationist, 454-7;
anarchism, 457-60; St. Simonian, 460-
62, 532; Ricardian, 480, 583, 649;
evolutionary, Mill as, 457, 531-2; and
private property in land, 531; mod-
em, on classes, 55 m; in neo-classical
period, 762-3; Christian, 764-5; Mar-
shall and, 765, 833n, 888; Paris
group’s opposition, 841; Barone’s
theory of, 858, 987-9; bourgeois econ-
omists and theory of, 888, 986; ex-
Marxists and exploitation interest
theory, 926; Austrians’ Crusoe econ-
omy and, 986-7; Pareto's work, 986,
987; indeterminacy of federalist, 988;
theory and foundations of -scientific,
1145

Sociology, and economics, 25-7; meaning
of, 25-6; logical vs. historical origin
of institutions, 64; feudal society,
74-5; scholastics’, 82-106; objective
vs. subjective civilizations, 85-6;, so-
ciological rationalism, 113-15; of lai-
cal scholastics, 119-22; of religion,
123; science of human nature, 124-6;
of Condorcet, 1 3 5-6; of Montesquieu,
136; of Vico, 137; Marx’s, 384-5,
389; Comte’s contributions, 416-17;
contributions of romanticism, 422; in
historiography of 19th century, 426;
in classical period, 428; abstract, 428-

SUBJECT INDEX

1256

Sociology (Cont.)

31; historical, 428; of government and
politics, 431-4; environmentalism,
434-5; evolutionism, 435-46; social
science movement, 456; St. Simon’s
conception of social change, 462;
Ricardo’s lack of a, 471; classes, in
classical economics, see Classes, Social
In neo-classical period, 783-96: rec-
ognition as a science, 783; imperfectly
autonomous, 784; internecine war-
fare, 784; ‘headquarters’ sociology
and applied fields, 784-5; prehistori-
cal-ethnological, 786-8; biological
schools, 788-92; autonomous, 792-5;
Weber’s interpretation of, 818-19;
Wieser’s, 848; Pyeto’s, 859; Sum-
ner's contributions, 867; sociological
individualism, 888-9

Sociology, Historical, see History, Philos-
ophy of

Sociology of Science (and Economics),
meaning, 3, 33; vision, 45; antagonism
of monastic orders, 840; neglect of
Mendel’s work, 444m; need for dis-
covery of Rae, 469; practical prob-
lems and analysis, 514
Sophists, 54, 59

Sozialpolitik, in classical period, 399-402;
counter-current to liberalism, 765-9;
and analytic work, 801-3; herein far
Sozialpolitik, 756, 803-5; historical
school and, 811; in Italy, 820; Ash-
ley and, 822n; acceptance of by
English and Austrians, 888
‘Special Pleading,’ 11, 37-8, 154, i95n,
3o6n

Specie Points, 343n, 3650, 732
Speculation, Theory of, 197-8
StaatsTomane, see Utopias
Staatswirtschaft, see National Economy
Staatswissenschaft, 21-2, 159
Stagnation Thesis, illustration of role of
vision, 570; Mill and, 571; Malthus,
Sismondi, and Lauderdale, 740; pop-
ulation principle in, 891, ii73n; and
stationary state, 964^ Keynes as
father of, 1172-3; Hansen’s leader-
ship, 1172-3; Keynes-Hansen-Ricardo-
Mill theses, ii73n
Staple System, 152, 154, 34on, 342
State, in Aristotle, 59; in scholasticism,
92, 96; in laical scholastics, 119-20;
rise of national, 143-8; Quesnay’s the-
ory of, 228-9; Marxist theory of, 433;

in classical economics, 548-50; bour-
geois radicals, and, 764

Static Analysis, Comte’s introduction of
concept, 416-17, 563; Mill’s intro-
duction of concept in economics, 417;
Mill’s definition of, 563; vision in,
570; Marshall’s analysis, 836-7; de-
fined, 963, 1142; and dynamics, 963;
historical precedence of, 964; arid
evolutionary and non-evolutioriary
states, 964; and physical sciences’
concept, 965; Walras and Marshall
on stationarity and, 966, 108m;
Bohm-Bawerk on, 967; neo-classical
theorists and limitations of, 967;
static equilibrium, 970; Walras as
creator of, 1082; Marshall-Wicksell
analysis as, 1143, 1161-2; Samuelson
on need' of dynamics for, 1160-61;
Keynes’ system as, 1174-5. See also
Comparative Statics; Dynamic Anal-
ysis

Stationary State, in Plato, 55-6; in Ques-
nay, 243; and population problem,
250; in 18th-century France, 252; and
Thiinen’s steady state, 467; in classi-
cal economics, 562-4, 571, 965; Ri-
cardo’s stationary process, 563; as
hitchless model, 565; vision in analy-
sis of, 570; Marx’s surplus value in,
651; Clark’s model of, 868; defined
and developed, 964-5; simple repro-
duction in Marx, 966; Marshall’s use
of, 966; Cassel’s extension of, 966;
-x Walras and Marshall on statics and,
966, ioi8n

Statistics, importance in analysis, 13-14;
definitions of, 2 ion; Hermann’s work,
503; Gioja’s work, 511; Nazzani’s
work, 512; collection and interpreta-
tion in classical period, 521-4

Methods in classical period, 524-6:
Gaussian law of error, 525, 960-61;
method of least squares, 525, 960-61;
divorce from pure economic theory,
525; divorce from economic theory,
525; Quetelet’s contributions, 525-6;
presentation methods, 526; index
numbers, 526; lack of method in
Mill’s Principles, 542
, In neo-classical period, 960-62: at-
tempts to evaluate value of man,
626n; biometrics, 790-91; Cheysson’s
work, 8420; Bortkiewicz, 851; Lexis,
852, 961; Pantaleoni’s work, 8570;
Fisher’s work, 871, 961, 1092;

SUBJECT INDEX

Moore’s work with comparative stat-
ics, 876, 961; and economic theory,
960, 962; J. Bemouilli’s theorem,
960-61; Poisson’s work, 961; Edge-
worth’s contributions, 831, 96m,
1092; Engels’ and Pareto’s Laws, 859,
961; Giffen’s work, i075n; price in-
dex numbers in neo-classical period,
1091-4; Juglar’s performance, 1123-4
Advance of in modem times, 1141;
wealth of facts in modem period,
1146; Harvard Economic Commit-
tee, H55n, 1165-6; cyclical-residual
method for decomposing time series,
1165; Mitchell and the National
Bureau, 1160. See also Econometrics;
Mathematics

Substitution Principle, lack of in classical
analysis, 590, 68on; capital and labor,
in Barton, 682; Thiinen as originator
of,. 839, 91 7n, 995; Menger as first
to formulate, 9170, 99 5 n; in Mar-
shall, 839, 9i7n; by 1914, 944n;
elasticity of substitution, 993-4; as
route from partial to general analy-
sis, 995

Supply Schedules, classical economists and,
602; Mill’s literary statement of, 603;
and aggregate supply curve, 623-4,
ii76n; original with Cournot, 839,
994; Auspitz’s and Lieben’s total and
marginal, 849; Marshall’s industrial,
994; joint supply in Marshall and
Edgeworth, 996; Marshall’s inclusion
of external and internal economies
destroyed static nature of, 1046
Supply Schedules, Statistical, 8420, 962
Supply-and-Demand Mechanism, com-
patible with any theory of value,
wages or money, 601, 663, 702; in
monopoly,- 60m; classical theorists
and, 602; and Mill, 603, 608; and
propositions about aggregates, 617-
18; use by classical economists in
wage theory, 663; as unifier of classi-
cal rent theory, 672; in Mill’s, Ri-
cardo’s, and Senior’ s analyses of
money, 702; Jenkin’s theory of
wages, 942; in neo-classical monetary
theory, 1090

Surplus Value, see Marxist System
Symmetalism, 1079

‘Synchronization’ Economics, 564-5, 868,
929-30, 1022. See also Advances
Systems, meanings of, 29n, 38-9; in 15th
and 16th centuries, 161-7; between

1257

1600 and 1776, 167-94; quasi-systems,

194-9 -

Tableau economique, Cantillon’s work,
222-3, 240; iQuesnay’s, 239-43, 278;
391; in Marx, 391

Tabular Standard, 489, 526, 713, 714,
1078

Tariffs, see Protectionism
Taxation, Palmieri’s theory of, i62n; de-
velopment of modem, 200-201; lit-
erature on 16th through 18th cen-
turies, 201-6; Vauban’s single tax,
203-4; physiocrats’ theory of, zo6n;
in Gladstonian finance, 404; Rod-
bertus' proposal, 506; Marshall and,
765, 945, loyon; introduction of
progressive income, 769, 849, 888,
1070; Jenkin’s application of con-
sumers’ rent, 837n; Henry George’s
single tax, 865; inheritance, 945; for
income redistribution purposes, 945;
justice in, 945-6; of monopolized
commodities, 959; Edgeworth’s the-
ories of, 1070; as crasher of motive
forces in capitalism, 11730. See also
Fiscal Policy; Public Finance
Technological Change, increasing and de-
creasing costs, 518; Senior and, 585-6;
Marx’s analysis, 573, 685-7; in classi-
cal economics, 679-87; effects on
wage-fund in Ricardo, 680-85; in
Tooke’s cycle theory, 745; in Over-
stone’s upswing of cycle, 745; destruc-
tion of production function by, 1027
Teleology, 58n
Theory of Games, 3040
Time-Preference, see Interest, Theories of.
Premium Theory

Unemployment, and agrarian revolution,
208, 270; in medieval society, 270;
technological, 270, 273, 685; gov-
ernmental measures to combat, 271-2;
mercantilist concern with, 272, 349-
50; scholastics on, 272; in ‘Great De-
pression^ 759-60; frictional, in neo-
classical theorists, 944, 11770; ex-
planations of by neo-classical writers,
1135

Unity-of-Science Movement, 776
Universalism, 85-6, 784n
Universities, 59-60, 77-8, 82,' 382, 754-5
Usury, 65, 103-4, io6n
Utilitarianism, and Epicureanism, 66; in
Aquinas, 92; emergence in 18th cen-

SUBJECT INDEX

Utilitarianism (Cont.)

tury, 130-34; as natural law philos-
ophy, 132-4, 142, 428-9; Beccaria
and, 132, 180, 408; Smith’s cool-
ness toward, 180; Quesnay as founder
of, 233; precursors in 17th to 18th
centuries, 302; alliance with econom-
ics, 303, 408, 766, 830-31, 1056-7;
policy recommendations of adherents,
336; Manchesterism, 398; not a
philosophy in technical sense, 398;
Mill and, 408, 411, 430, 457, 528,
775; materialistic rationalism and,
408, 429; and English bourgeoisie;
408; Ricardo and, 408, 471; and
classical economic sociology, 409;
and English philosophers, 409; Car-
lyle’s hostility, 409-11; and roman-
ticism, 418-19; 'abstract’ sociology,
428-31; inability to explain action of
governments, 429; and associationist
psychology, 447; and associationist
socialism, 457; influence on Thomp-
son, 479; ethics in neo-classical pe-
riod, 775; Edgeworth as, 408, 780,
830-31, 1056; Jevons as, 408, 831,
1056; and marginal utility theory,
1056-7

Utopias, 55, 206-8

Value, in Aquinas, 93; paradox of, 98,
300-302, 309, 912, 1054; definitions
of, 301; analysis of, 543; pivotal posi-
tion of, 588; relativity of values,
589; Marx’s divorce from price, 597

Value, Theories of, Petty’s, 214; Cantil-
lon’s, 214, 219, 302n; Quesnay’s,
220, 234, 302; Turgot’s, 249, 302,
308; Galiani’s, 300-302; Beccaria’s,
302, 306, 308; Smith’s, 188-9, 190,
300, 302, 307-11, 482, 590-91, 673^
9i2n, looon; Senior’s, 463^ 484,
600, 602, 1054; Mill’s, 189, 530,
542-3, 546, 589, 603-5, 611-15, 673^
9i2n; in classical period, 589-90; de-
fined, 590; Ricardians vs. non-Ricard-
ians, 599; scarcity concept, 601-2; as
analysis of economic choice, 631;
classical economists’ extension to
value of money, 701-2; revolution in
neo-classical theory, 909-20

Cost theory: in Smith, 188-9, 190,
309; in Cantillon, 219, 302n; Fer-
rara’s, .513; elements of in Ricardo,
594-5, 600; attempt to relate to

supply-demand theory, 602-3; in Mill,
603

Labor theory: scholasticism and,
91, 98n; confusion of in Smith, 188-9,
309-11, 590; Galiani, 302; labor-
quantity theory in Ricardo, Marx,
and Smith, 310; Longfield on, 465;
and supply-demand theory, 482; Car-
ey’s improvement of, 518; 3 -factor
schema, 559-60; of Ricardo, 188,
220, 300, 302, 310, 559-60, 590-96,
596-8, boo, 611-15, 637, 64611, 652-3,
668-9, 673, 674-6, 868, 9i2n, 1054;
of Marx, see Marxist System; Mar-
shall on, 594-5, 92m, 934; compara-
tive cost as exception to, 612; arid
exploitation theory of interest, 649-
50; as covering special case, 9i2n;
not a theory of prices, 9i2n; Mal-
thus on, io54n

Marginal utility theory: Fisher on,
303, 872, 1065-6, 1148; in Cournot,
463,' and labor-quantity theory, 593;
in classical period, 599-600; Edge-
worth’s role, 872, 912, 1061, 1064-5;
revolution in neo-classical period,
918-20; Marxists’ criticism of psy :
chologism, 887; and political liberal-
ism of adherents, 888; Malthusian-
ism in, 890; Bohm-Bawerk’s, 249,
91 m, io56n, 1057, 1060; Menger’s,
301, . 813, 827, 837, 848, 910-11,
912-14, 918, 984, 1055-6, 1060;

Pareto and, 860, 1003, 1062, 1142,
1148; in Marshall, see Supply-and-
Demand Theory below; barter, 911-
12; as more general theory than pred-
ecessors, 912; unifier of economics,
913; Jevons’, 301, 826, 837, 911-12,
913, 918, 952, 1055-7, 1071; Mar-
shall on Jevons’ and Austrians’, 920-
24; as discovery of calculus, 956n; in
Walras, see Walrasian System; mod-
em development of, 1055-7; and utili-
tarianism, 1056-7; psychology and,
1057-9; cardinal utility, 1060-62; or-
dinal utility, 1062-6; defined, 1062;
consistency postulate, 1067-8; at-
tempts to extend to theory of money,
1089

Supply-and-demand theory: Smith’s
and Malthus’ use of, 482, 600, 60 in;
and labor-quantity theory, 48 2n;
Marshall’s, 307-8, 467, 482, 592-3,
594-5, 660, 826, 836, 837, 840, 910,
919, 920, 921-4, 960, 975, 977-8,

SUBJECT

982-4, 991-2, i056;7, 1060-62, 1071,

; 1150, - 1172; vRicardo on, 592/ 601;

'■ ' Says, 234, 249, 302, . 600^,602, 1054; -
.. Hermann, Senior, Malthus,. Lauder-
dale on, 600; compatibility with, any
. : -value (theory, ;* 601 ; : difficulty, 'of .classi-
. - cal economists with, 602; and cost
of production, ; 602- 3 ; Mill’ s ; develop-
merit of, 603; halfway ^between . real-
cost and marginal utility theories, 613
Utility’ : theory: iri later scholastics,

••••■. 98, 1054; in :16th arid a 8th century
. i Italy, 300-302, 306, 1.054; ascendancy *
of until Smith, 302, 309; Say's analy-
;■ sis; and, 492, 600, 1054; Condillac's'

1 utility, 1054; Ricardo on, 1054;
v ^ Senior on, 1054; Malthus and y 105411
Value, .Ercchange/ ih Aristotle, .'61; in later
m scholasticism, 98-9; Smith and, 188,
n: - 3*00,; 91211; classical . period on, i 589;

; classical period and utility, 600;
scarcity r in; ( 626; , as transformation
coefficient, . 911; and use . value in
... v neo-classical theorists, 911-12
Value, Intrinsic, .62, 63 , ,

Value, Objective;. 61, 62, 93
Valufe/. Subjective,: 61, 302-3 ; .

Vaiub Judgments, .3X8, < 57, 102, y 1 29n,
535, 540-41, 804^7, 811, : 870 I
Variable Proportions, Law of, 259-61,

... 726211, 917x1 ■

Verein lfiir Sozialpolitik; see SoziaLpolitik
Vision; as pre-analytiq step; 41-2, 114,

: 561/2;/ Antoine of Florence, 95; in
‘ Anderson, 2639; List’s national, 504;

. ' Carey’s national, 516-18; .in static
yxi and -stationary’ state analysis; 570; role
in analyzing change, 570; in, Jevons,
826; in Bohm Bawerk, 1847; in
' Wieser, 848;. in Patten, 876; of eco-
nomic process in neo-classical period/ ,
892-3;; in Keynes, 1171-2 " ' '•

Vital Statistics, 2 ion, 212, 220, 253-4.

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